and states and for many of us. For example a number of states, local governments, companies, nonprofit
organizations, and people have suffered income losses and don’t have much savings relative to their losses. They
will have to cut their expenses or get money and credit some other way. Others will get money or very cheap credit
that may never have to be paid back from the government. The government, and not the free market, will
determine who gets what.
At the time of this writing the income levels of a number of people, companies, nonprofit organizations, and
governments have plunged to be below their expense levels by amounts that are large in relation to their net worths
so they will be forced either to slash their expenses, which is painful to do now, or to risk running out of their
savings and having to default on their debts. Governments that have the power to do so are creating money and
credit to give to many but not all of them to help ease the debt burdens and help finance the expenses that are
denominated in their own currencies. This configuration of circumstances has happened throughout history and has
been handled in the same way so it’s easy to see how this machine works. That is what I want to make sure that I
convey in this chapter.
Let’s start with the real basics and build from there.
What is money?
Money is a medium of exchange that can also be used as a storehold of wealth.
By medium of exchange, I mean that it can be given to someone to buy things. Basically people produce things in
order to exchange them with people who have other things that they want. Because carrying around non-money
objects in the hope of exchanging them for what one wants (i.e., barter) is inefficient, virtually every society that
has ever existed has invented money (also known as currency) to be something portable that everyone agrees is of
value so it can be exchanged for what we want.
By a storehold of wealth, I mean a vehicle for storing buying power between acquiring it and spending it. While
people can store their wealth in assets that they expect will retain their value or appreciate (such as gold, gems,
paintings, real estate, stocks, and bonds), one of the most logical things to store it in has been the money that one
will use later. But they actually don’t hold the currency because they believe that they can hold something a bit
better and always exchange the thing they’re holding to get the currency to buy the things they want to buy. That is
where credit and debt come into the picture.
When lenders lend, they assume that the money they will receive back will buy more goods and services than if
they just held onto the money. If done well, the borrowers used the money productively and earned a profit so that
they can pay the lenders back and keep some extra money. When the loan is outstanding it is an asset for the lender
(e.g., a bond) and a liability (debt) for the borrower. When the money is paid back, the assets and liabilities
disappear, and the exchange is good for both the borrowers and lenders. They essentially split the profits that come
from doing this productive lending. It is also good for the whole society, which benefits from the productivity
gains that result from this.1
So, it’s important to realize that 1) most money and credit (especially the fiat money that now exists) has no
intrinsic value, 2) it is just journal entries in an accounting system that can easily be changed, 3) the purpose of that
system is to help to allocate resources efficiently so that productivity can grow, rewarding both lenders and
borrowers, and 4) that system periodically breaks down. As a result, since the beginning of time, all currencies
have either been destroyed or devalued. When currencies are destroyed or devalued that shifts wealth in a big way
that sends big reverberations through the economy and markets.
More specifically, rather than working perfectly the money and credit system swings the supplies, demands, and
values of money in cycles that in the upswings produce joyful abundance and in the downswings produce painful
restructurings. Let’s now get into how these cycles work building from the fundamentals up to where we now are.