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USA Real Estate Blog

Financial Industry Rants & Sins, Vol 22

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In a prior career path, I worked in the mortgage industry. At the height of the boom in 2006, I couldn’t sell mortgages if I paid clients. I really sucked at it.

One of the first things that confused me was the difference between a condo and a co-op. I mean, both looked like apartments, both had a monthly fee subject to annual increases, both had a board, both could be rented or bought, and you still had to pay for electricity like the apartment I was renting at the time.

For all intents and purposes, they were both exactly the same. Save for one little feature, which was the difference between owning the property (condo) versus owning the shares that granted usage rights to the property (co-op).

The same is true of money and cash. At this point I bet you’re saying to yourself, “He’s nuts! They’re the same thing.” The truth is that they are mostly the same, but like the difference between a condo and a co-op, real money and the cash in your pocket have one small difference.

Cash is what we usually call money. But cash, which is actually currency (dollar bills and coins), is not really money. At least not in our time. Close to 100 years ago is the last time cash was money, and almost 50 years ago was the last time you could redeem your cash for money.

Many books have been written about the emergence of money, barter systems, salt trade, and the like. We are going to skip all that and just define the characteristics of currency and contrast it with real money. You’ll notice throughout my writings that I use cash and currency interchangeably, but rarely use the term money. Let’s see why.

Cash has six properties — it’s a unit of account, a medium of exchange, it’s conveniently portable, it’s durable, it’s fungible, and it’s divisible. What does all that mean? Well let’s start with fungible. That means that each unit is interchangeable with the next. This one dollar bill can be interchanged with that one dollar bill or even with four quarters. And my dollar buys the same amount of stuff as your four quarters. Conveniently portable means it’s convenient to carry it. A cow is portable, but it’s not convenient. Neither are lead pipes or sacks of salt. All are worth something and can be moved around, but there’s no convenience.

Divisible means that I can get change. If I go to the store to buy a bag of carrots for $1.99 and hand the cashier $5.00, I’ll receive $3.01 in return with the carrots. Durable means it lasts. Ok, paper currency sometimes tears and metal coins wear out after hundreds of years. You have a good point. The mint just takes the old units back and either prints new bills or coins new coins. And if the coins are made of metal, they can be melted and recoined. But the metal coins are pretty darn durable. Ever hear of a ship wreck from the 13th century that nets the finder some old coins that are pretty much in tact?

A medium of exchange is something that is tradeable for anything else. Just like cash is. See, if I need 2 lbs of ground beef and go to the butcher to procure it, he might need a pair of shoes that I can trade for the beef, or he might not. But cash is something that everyone agrees on (medium of exchange), because it has all these properties we list plus it’s a unit of account. This means the number that is printed on it is the number everyone uses. So I can’t come to you and claim to be able to purchase those carrots for $1.99 by using a single dollar or two quarters. I actually have to give the full $1.99

So that’s it for currency. It’s pretty easy to understand, and money is too.

But most people don’t understand the difference, including…your accountant (shh!) or the person at the local tax-prep franchise. Your doctor. Your economics professor in college. All pretty smart people. Even Wall Street types generally don’t understand the difference, and those who do are unfairly ridiculed for being “backward thinking,” “barbaric,” and “out of touch”, even though they’re likely to be the richest guy on the Street.

So here’s why most people are so confused. Currency and money are exactly the same thing! Except that they aren’t. There is one little detail that differentiates real money from cash or currency. That detail is that real money is a store of value over long periods of time. Can you think of something that held its value for a long time?

How about a house? The value of a house is the roof, the plumbing, the HVAC system, the electricity, etc. If your parents paid $40,000 for their house over 30 years ago, and now they are trying to sell it for $400,000, has the real value of the house changed, or just the price in dollars? If you said just the price, you’re right. But a house doesn’t hold all the properties of currency, and that’s why it isn’t used as money.

The only thing we have today that qualifies is gold. Silver is used as a secondary monetary metal, and so are platinum and palladium. All three of those (silver, platinum, and palladium) are highly used in industry and are considered to be a bridge between monetary metals and industrial or base metals. But gold is the only one that has been in use as money for a long period of time, as in thousands of years.

So that’s it. Money is currency with the added benefit that it stores value.

If you think the dollar fits the bill (pun intended), ask your grandparents what they paid for gas. Mine paid a nickel a gallon, and buy 12 get one free. This morning I paid $2.859. If the dollar held its value, I would have bought 13 gallons for the same 60 cents. On the other hand, the gold of the Egyptian Pharaohs is still being used today and purchases about the same amount of stuff today as it did back then.

Cash is not money because it doesn’t hold all seven properties we mentioned above. Our cash, and the cash in every single country in the world today, is what we call a fiat currency. It’s currency because of government fiat, meaning the government said so. In other words, “My gun is bigger than yours and I said so.” And the government thumbs its nose at you.

Cash in the United States used to be redeemable for gold, which we call a gold standard. It gradually ended, beginning during the depression years, and the final nail in the coffin came during the Nixon administration. We’ve been on a fiat currency ever since. The cash in your wallet buys stuff because your favorite uncle said so.

One more point about fiat currency. And here we’ll use another analogy, baseball cards. Any eight-year-old who collects the cards will understand this, so you can too. Ever wonder why is that the 1909 Honus Wagner is worth millions, but the 2015 Derek Jeter is worth just a few pennies? It’s something called scarcity. The rarer something is, the more valuable it is (like water vs diamonds). Therefore, the higher price we attach to it. That’s why the Mona Lisa is worth over $100 million. And because millions of copies of the Jeter were printed, but only a few copies of the Wagner still exist, the Wagner is worth millions but the Jeter about 10 cents.

And so it goes with the currency in your pocket. The more the government prints, the less it is worth. Since it is worth less, it requires more of it to buy the same amount of food, clothes, gas, and everything you need. In fact, the only reason cash or currency has any value is only because of the confidence that people have in the currency being accepted by the next person. Eventually ALL fiat currencies go from becoming worth less to becoming worthless. Think Weimar Germany or Hungary or think about Zimbabwe. Think about what is going on now in Venezuela. Even here in America, the continental was fiat and went to zero. In fact, no fiat currency in the history of the world has ever lasted, and this time is no different.

If you like what I have to say, even just one word, please click on the “follow this author” button and also the please “like” this article. That will help other people to see my work, and it will cause me to have a profound feeling of gratitude as well.

Disclaimers: The contents of this article are solely my opinion, and do not represent the opinion of this website or its owners. You are cautioned to do your own research before making any investment decisions of your own. This is neither intended to be, nor should it be construed, as an offer or solicitation to buy or sell securities, or any other investment product available. I reserve the right to act upon my own advise at any time, including in regard to any security, insurance, or investment of any type herein. Please consult your own tax and legal professionals regarding your estate and assets before making any decisions.

Circular 230 Disclaimer: To ensure compliance with requirements imposed by the IRS, we inform you that any U.S. federal tax advice contained in this communication (including any attachments) is not intended to be used, and cannot be used, for the purpose of (I) avoiding tax-related penalties under the Internal Revenue Code or (ii) promoting, marketing or recommending to another party any transaction or tax-related matters addressed herein.

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