Everything has a value, but that value fluctuates depending on which people are trying to get rid of it or acquire it. We trust, however, that by exchanging things, we can establish a relatively stable value for things. We further trust that once we’ve built this relationship of trust and created a stable system describing the relative value of things, that things will remain stable—no one will pretend something is worth more than it is.
We need a measuring stick for the relative value of things, and we use money for that measureing stick, but we could use anything. The numbers don’t have to be on paper. They only have to be digital, as long as everyone trusts that the measurements are fair.
Value changes through markets, where people buy and sell. This helps establish the relative value of things. Money, or any scale at all, let’s us display the relative value in a helpful way. Most people like money because they can see it, but in the future people will trust numbers in cyberspace just as much as physical money. In fact, I’d be surprised if money was used for even half of all transactions these days. Most of this exchange stuff already exists in cyberspace only.
When people cheat, then it can cause everyone to lose trust that money expresses relative values properly. We’ve had a lot of cheating lately. We’ve got the mortgage loan cheaters, and the derivatives cheaters, and Enron and a whole slew of others. As a result, people no longer trust that money is measuring the relative value accurately.
WHen people stop trusting, the economy declines. People stop buying stuff and selling stuff because they don’t believe its relative value is measured properly. No buying, and companies lay people off. We have a negative spiral, as people are laid off and therefore there is even less buying.
The government steps in and pumps money into the system. Remember—all money is made up. It’s just an idea. So the government can pump more money into the system, and then people can buy more stuff, stopping the negative spiral and, we hope, starting a positive spiral.
Of course, there are a lot of wusses out there who think inflation is the big problem and that pumping more money into the system will cause huge inflation. Never mind that there is huge excess capacity waiting to be put to work. We won’t have inflation until the economy heats up something fierce and that doesn’t look like it’s happening any time soon.
Right now, we’re in a holding pattern. Everyone is cautious, waiting to jump—either on the boat or off—depending on whether it looks like the boat will go some place lucrative or whether the boat looks like it’s about to sink. Of course, there are a lot of people in both camps, so the economy can’t move right now.
What we need is an infusion of trust. But no one really knows how to do that. You need major consensus for trust to develop, and people are too divided. In fact, they are whispering vituberative things about the other parties, and putting obstacles in the way of any positive motion one way or the other.
So we dither and dather, hoping for movement somewhere, and mostly seeing ourselves walk around each other endlessly waiting for someone to take leadership in a way we can all be confident of. I don’t think we live in a time where such leadership is possible. So I think we’ll just be futzing around in one place until gradually, everyone in lockstep (since we’re all cowards), we start moving.
More than you asked. Probably way above your head, too. But it’s a good question, and I’m not going to talk down to anyone. Hope you learned something from this.
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