How to Win With Money
Money. We all use it. Most of us devote our lives to earning it. Hardly any of us understand what it is. If we study it in school, we will not learn what we would have learned forty years ago. Back then, we were taught money is 1) a store of value, 2) a unit of account and 3) a medium of exchange. That definition has changed. Now, even the highest officials of government will tell you, “You want to know what money is? Money is what you buy things with.”
So, money has lost its definition. That means if we want to learn the importance of money we are going to have to go deeper than trying to define it. We will have to learn what money does. What money does is like what oil does in an engine. With enough oil those thrusting parts of the engine will work well together. Let the engine run just a few minutes without oil, and the engine will fall victim to friction. It will seize up. Somehow flood it with too much oil, and you will have the same result.
What function in our economy gives money its “oil” character? What makes it smooth over the rough spots, the friction, between sellers and buyers? There are two parts to the function that makes money “oil” the economy. One part is about the amount of money circulating, through either private or government spending. The other is, “What's for sale?” How much is the national product increasing. The more for sale, the more money can flow. The less for sale, the less money should flow. If that function gets out of balance you have either inflation or recession.
If more money than is justified circulates, sellers sniff out that fact. They realize the prices they are charging do not give them a fair percentage of the total amount of money circulating. If not enough money circulates, buyers have a hard time affording what they need. One problem raises prices; the other forces sellers to reduce prices.
If government spends money carefully, balancing its budget, the “value” of money tends to stay about the same. If government spends more money than the creation of new products and services can balance, then each unit of currency tends to lose. What shall we say money loses? We cannot say it loses its value, because money today has no intrinsic value. It loses its practicality. You could say it loses its “price.”
An economist would explain:
1.Monetary policy deals with the activities of Central Banks: the amount of money created.
2.Fiscal policy is about government spending: responsible use of money, and
3.Economic policy results from the interaction of Central Banks and Governments: the impact of money on society.
Decades ago money was defined by the weight of gold and silver. Today money is defined by the “weight” of the increase in goods and services available for sale. If the government spends more than that increase, it is forcing prices to rise. If government spends less than that increase, we would all have a heart attack.
The point: there is a law of money when money is not measured in gold and silver. That law is this: MONEY LOSES VALUE EVERY DAY. So, if you save it you lose it. If you spend a dollar today, you will not have it to spend tomorrow. If you save a dollar today, it will be worth ninety cents tomorrow.
How can you win the battle? Convert your money to what has value. What has the greatest value? People! Invest in people and you cannot lose.
-- Richard Palmquist
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