Mdia p3-06-money-150420

MULTI DIMENSION IMPACT ACCOUNTING
File: MDIA-p3-06-MONEY-150420.odp Peter Burgess (c) All rights reserved
MDIA
MONEY

WORK-IN-PROGRESS.
SLIDESET STILL IN DEVELOPMENT.
UPDATES WILL BE POSTED OVER
THE NEXT SEVERAL WEEKS

“Money makes the world go round”
… Well … maybe!

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

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

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

What is Money now?
It is still an essential part of the process of
making transactions … the medium of
exchange role.
As a store of value money it is a disaster.
But it has become a way to measure
wealth and economic performance. For
some, this is a wonderful system of
measurement … but with dangerous flaws.

How much money is there?
There was a time when the amount of
money was limited by a physical constraint,
specifically the amount of gold.
In modern times, this limit has been
removed.
Now we can create money made up of
cash and three sets of '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

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 real 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 there are real efficiencies being
enabled and not just financial engineering.

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 assessed as having 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, money profit and money
wealth, then we need to have a way to
measure impact and to account for impact.

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!

Moving forward … Request
for collaboration
Money is part of a complex socio-enviro-economic
system. While it works … it does not work as well as it
should, nor as well as it could. The work of MDIA is to
enable this complex system to work better.
MDIA needs to be a team effort. Join in and help to
make the world a better place. Please get in touch.
Peter Burgess … peterbnyc@gmail.com

Mdia p3-06-money-150420

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