Why Money is a Stupid Measure for Socio-Economic Performance

MONEY
A STUPID MEASURE
File: TVA-p3-00-MONEY-151020.odp Peter Burgess (c) All rights reserved
TRUE VALUE ACCOUNTING

CONTEXT
This slideset is a Work-in-Progress
and will be updated from time to time.
It is part of a series that aims to
describe the extremely complex
socio-enviro-economic system that
we live in, and how better metrics will
make this system work better.

“Money makes the world go round”
… Well … maybe!
MULTI DIMENSION IMPACT ACCOUNTING

“Money is the root of all evil”
… Not really!

“Money is a stupid measure”
… YES … absolutely!

What is Money?
“Money is a Medium of Exchange and
a Store of Value”
There was a time when this would
have been a good answer … but no
more

MONEY as the Unit of Measure for
socio-enviro-economic performance
is a major source of systemic
dysfunction …
More on money and the financial economy …
http://www.truevaluemetrics.org/DBadmin/DBtxt001.php?vv1=list0100-MainNav#4

GDP growth, corporate profit and
stock market rise are metrics that
might be good for investors, but
ignore almost all the things that really
matter …

And MONEY is not a very good STORE
OF VALUE as is apparent from the
following graphics about the value of the
dollar over time …

So … every time something big
happens, the money measure that we
routinely use changes in size … there
has to be a better way!

In the modern world, money is the
most important metric for policy
formulation, decision making and
performance measurement … yet it is
changing size all the time ...

Worse … macro-economic measures,
conventional accounting, and
financial analysis ignore far too many
things that really matter …

Money only measures a tiny part of
the socio-enviro-economic system
The next slide is a very simplified representation of the
idea of State – Flow – State applied to ALL elements of
the complex global Socio-Enviro-Economic System.
The second slide shows what the conventional money
metrics measure … just a tiny part of everything that
matters.
* BOP – EOP … Beginning and End of Period

STATE - BOP STATE - EOPPERIOD ACTIVITES

What is Money now?
Money is still a convenient part of the
process of making transactions … the
medium of exchange role.
As a store of value money it is a disaster.

Burgess Comment
It is perhaps better to think of money
as a lubricant in the economy, but
neither the engine nor the fuel. The
banking and finance sector, including
Central Banks do not seem to
embrace this important limitation.

What else is Money?
Money is a measure … but not a good one.
Money has become a way to measure
wealth and economic performance. For
some, this is a wonderful system of
measurement … but it has very dangerous
flaws.

How much money is there?
There was a time when the amount of
money was limited by a physical
constraint, as, for example, the amount of
gold backing the money.

In modern times, such limits have been
removed. Now money can be created in a
variety of ways. Money consists of cash
and several sets of paper and many forms
of virtual/computer 'instruments'

Cash
'M1'
'M2'
'M3'

Cash is the paper money and coin that
is in circulation.

'M1' is a measure of the money supply
that includes all physical money, such as
coins and currency, as well as demand
deposits, checking accounts and
Negotiable Order of Withdrawal (NOW)
accounts.

'M2' A broader money classification than
M1, that includes assets that are highly
liquid but not cash. A consumer or
business typically won't use savings
deposits and other non-M1 components
of M2 when making purchases or paying
bills, but it could convert them to cash in
relatively short order.

'M3' is a measure of money supply that
includes M2 as well as large time
deposits, institutional money market
funds, short-term repurchase agreements
and other larger liquid assets.

The following slide shows what has
happened to M1, M2 and M3 from
1959* to 2007
* My formal training in economics ended in 1961 … Peter Burgess!

SunSun
EOP
Financial
Capital
Human
Capital
Man Built
Capital
Natural
Capital
SunSunSun
BOP
Financial
Capital
Human
Capital
Man Built
Capital
Natural
Capital
Sun
COMPONENTS OF US MONEY SUPPLY

The next slide shows the remarkable
change in the balance sheet (assets)
of the Federal Reserve Bank in the
United States since 2007 (since the
Bush era Great Recession)

SunSun
EOP
Financial
Capital
Human
Capital
Man Built
Capital
Natural
Capital
SunSunSun
BOP
Financial
Capital
Human
Capital
Man Built
Capital
Natural
Capital
Sun
US FEDERAL RESERVE ASSETS

And this slide shows the changes
around the time of the financial
crisis in 2007 and 2008

What do these changes mean?
I understand how a ship stays afloat ...
I understand how airplanes fly …
But making sense of 'high finance' in
banking is something else.

How strong is the US dollar?
The US dollar is as strong as the markets
want it to be.
Until there is a panic and the markets
change their mind … at which point it has
hardly any value and there will be chaos!

Financial engineering
It is possible to make economic
performance look better than it is by how
numbers are presented … but this is
cosmetic and not real.
The world has not been well served by a
financial services sector that has
embraced financial engineering in ways
that were unimaginable 50 years ago.

Transaction processing
Money is an essential tool for efficient
transaction processing.
Money is a lubricant for the real economy.
It is not the engine nor is it the fuel.
All the profit reported in the financial
sector had its origin as profit in the real
economy!

Profit in the financial sector
All the profit reported in the financial
sector had its origin as profit in the real
economy!
M&A, restructuring and so on have a
place in the life of the economy … but
only to the extent that real efficiencies are
being enabled and not just financial
cosmetics.

Money is a stupid measure
But money is now the dominant measure
of everything in the modern economy.
And if a transaction does not have a
money component, then the transaction
is ignored as if it has no value.
This is insane.

Gold standard
There was a time when paper money was
just a convenient representation of the
gold that backed it.
In those days paper money really did
mean something.

Fractional reserve banking
This is the name for the banking practice
of have more money in circulation than
the reserves that are backing it.
Statistically it works … but essentially it is
a way of creating money value out of thin
air. It is the reason why 'runs on the bank'
have the potential to do immense damage
to the real economy.

Mark to market
Mark to market accounting is a practice
that has been adopted in the banking
industry to allow their balance sheet
reporting to take advantage of market
moves to the upside. Sadly it also applies
to market moves to the downside.
It is an example of a bad accounting
standard allowed by rule makers no
matter how unprincipled it is.

How much is money worth?
It depends on the market.
Yet money is meant to be a measure. This
cannot be right. There is something
wrong with this set up.
The length of a journey does not change
when a large number of people are
traveling. Distance is a measure with a
standard unit of measure with fixed value.

Multiple moneys
There is the US dollar, there is the Euro,
there is the Indian rupee and hundreds of
other moneys or currencies.
The exchange rates between currencies is
changing all the time. The exchange rates
reflect market conditions … supply and
demand.
Not really a good measure of anything!

Alternative currencies
There are many examples of alternative
currencies.
One of these is the 'Wir' in Switzerland.
This is a community currency that has
been in existence since the 1930s.
It facilitates local transactions and is not
linked in complex ways to the operations
of the official currency, the Swiss Franc.

Alternative currencies (2)
There are many examples in the United
States, most operating on a small scale.
One of the oldest is Utica Hours.
Another is Berkshares.
These are used for local transactions and
encourage local commerce.

Alternative currencies (3)
There are many laws that define what is allowed in the
field of currency, but it is apparent that there is
demand for tools beyond what we actually have.
Rewards programs like Frequent Flier Miles are
something that has value without being money.
Stores use similar initiatives to encourage store loyalty.
Value is given, but not in the form of money.

A unit of impact value
In order for impact to be treated with the
same seriousness that we treat money
transactions that result in money profit
and money wealth, then we need to have a
way to measure impact and to account for
it that is just as rigorous.

Storing impact value
There should be a way for impact value to
be stored in a 'bank' for future use, just as
we can store money in a savings account.
People who do good and don't get paid for
it have nothing to show for it. This is
insane … but it is what we have!

REMINDER
This slideset is A WORK-IN-PROGRESS. It will be
upgraded periodically. It is part of a series of more than
100 slidesets. Navigation to these is available here:
FEEDBACK is welcome. Please email to Peter Burgess …
peterbnyc@gmail.com … with a catchy phrase in the
subject line so that it gets attention, and please identify
the specific slideset(s) involved.
http://www.truevaluemetrics.org/DBadmin/DBtxt001.php?vv1=N1-Slidesets-p3

THANK YOU
Some links and contact information:
Email Peter Burgess … peterbnyc@gmail.com
Peter Burgess LinkedIn profile
https://www.linkedin.com/in/peterburgess1
Link to TrueValueMetrics.org website
http://www.truevaluemetrics.org/
Link to navigation to other resources:
http://www.truevaluemetrics.org/DBadmin/DBtxt001.php?vv1=list0100-MainNav#1

Why Money is a Stupid Measure for Socio-Economic Performance

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