Thursday, February 28, 2019

Consistent value in various contexts is the source of money's properties

An ideal money has the same value in all relevant contexts or "dimensions".  The numerous properties ascribed to money are just referring those contexts.

The purpose of a thing is more fundamental to defining it than its properties. For example, ask a person where the chair is in a picture of a forest and he'll know it's the log or stump, but an A.I. won't be able to find legs or a back. Consider the purposes of money authors have mentioned:
  • Medium of exchange
  • Unit of account
  • Store of value
Less frequently mentioned:
  • Deferred payment (a unit of debit or credit)
  • Legal tender (e.g. a unit of account in contracts)
Value is inherent to all of these, and stability in value is obviously also important. If you add "consistent" or "stable" before them it makes sense and sounds idealistic or even redundant.

Here are 15 properties I was able to find, taking the liberty of adding the word "value":
  • Stable value in time
  • Stable value in different locations
  • Divisible value
  • Fungible value (aka "Uniform")
  • Portable value
  • Durable value
  • Acceptable value (aka "Convenient")
  • Trustworthy value ( aka "Confidence")
  • Liquid value (this is vague and encompasses most of the others)
"Consistent value in every way" seems to be an accurate summary. I found two properties which are kind of oblique or re-enforce the others..
  • Limited in Supply  (re-enforces stable value and trustworthy value)
  • Long history of acceptable value (re-enforces trustworthy / confidence in value)
There is another property:
  • Has value in itself
This might be a circular reference, or it breaks money out of a different circular reference "money has value because we agree it has value". This property is saying it should have value because we can use it for something besides exchange. It refers to something like copper, silver, food or vodka (a unit of exchange when the USSR was falling apart). Coins have had this property off and on. For maybe 2 or 3 decades, the copper in a penny was worth about a penny. Then there are silver and gold coins.  So the trades in these types of money are also barter.

Barter, energy, and cryptocurrencies
Continuing on about this final property: it always has taken a lot of energy to get silver and gold. Similarly, POW cryptocoins waste energy to "prove their worth". But the worth in metals is also like stored energy (literally, metals can be burned to get a lot of energy out, but being able to use them saves energy). Especially silver: it's biggest use right now is in solar cells. Buying silver is akin to buying potential energy.  The "inherent" value in a barter-type money is the amount of economic "energy" (possibly literally) it can produce or save, but all the other properties only demand that the "value" is the amount of energy it can control through mutual agreement.  If you could bottle up electrical energy in different quantities that could be easily extracted by anyone and could transfer it over the internet, that would probably be the perfect money.

Importance of stable value to contracts
Contracts (including wages and prices) are just an agreement between economic players. In order for an economic system to be intelligent, it seems a constant value is as important as keeping the definition of a kg of wheat constant.

Currency quantity should track GDP
If the "real" GDP of the currency being used increases, then the amount of currency in circulation must increase in order to maintain stable value. This is if the GDP is increasing from the economy getting more efficient, or if production increases, or if the currency is being demanded by previously "external" economic actors like the rest of the world increasingly using your currency. GDP increases from simply printing more currency (inflation) has to be subtracted from the "real" GDP.  If the real GDP is trying to grow and the currency is not increased with it, it slows the growth rate by strangling trade. Increasing the amount of currency ahead of time can help the GDP to grow, but if too much currency is produced, inefficient decisions are made with the excess currency, leading to a future reduction in GDP.  For example asset prices can artificially rise while inflation is kept low so it can seem like everything is fine, but this leads to a boom-bust cycle in assets.

The "real" GDP can be viewed as a net energy that is acquired and used over time. It is used to sustain (maintain) and increase itself (the economy). But the net energy is not necessarily physical joules (or how efficiently they are used, hence "net"). We may place higher value on things that can't be measured with physical energy. For example, we may print more money to increase the apparent GDP (since the money quantity is higher) that actually reduces "real" (joule-based) GDP. An example of this is wanting an even distribution of joule-based wealth more than total joule-based wealth. In other words "efficient" use of the joules may not be a physical conversion efficiency. But I will assume "real" GDP refers to net work energy in joules.

To keep constant value the quantity of the currency needs to be in proportion to the amount of power (energy per time) the infrastructure can produce, provided the currency's velocity (turnover rate) is constant. So the quantity of money divided by the time it takes the money to "turnover" (its 1/velocity) should remain proportional to the productive power of the infrastructure, which indicates the currency is in units of joules. That is, (money qty)*(velocity) = (net work energy in joules) / (time). But since constant value depends on (money qty)*(velocity) it does not strictly connect money to constant value as in coins with inherent value. The solution is to make money proportional to the infrastructure that creates the GDP. That infrastructure is an engine that has a net work output per time.  It took energy to create the infrastructure, so it's like a potential energy. So money can retain units of joules like the infrastructure and yet be directly connected to a joules/time.

The amount of currency in circulation should "lead" that power. For example, if a new discovery is going to increase efficiency and needs a large capital investment, an amount of currency needs to be created immediately in proportion to the expected benefits of the discovery and loaned to those who will profit from the discovery.  If the discovery increases real GDP as expected and thereby the loaned (created) money is repaid, the issuing authority (like a government) can spend it without inflation. If the venture fails and it's not repaid, there is inflation. Doing it this way pulls marginally unemployed infrastructure into action and/or causing slight temporary inflation that "steals" relative power from other sectors to get the discovery up and going quickly. Intellectual property, culture, and resource depletion affect the efficiency of the infrastructure's production and the efficiency of its use, so knowing the changes in the "power" for the purpose of increasing or decreasing the currency to keep constant value is not easy. We can make an initial error in estimating the true watts of production for the purpose of determining the amount of coin to issue, but it's OK is we are consistent in that error consistent (initial accuracy can be bad, but long term precision should be good). We only need to know that the amount of coin is staying proportional to the power of production, provided the velocity has not changed.  "Net work energy" is clearly defined in physics but we may not want to turn the net work output of our GDP infrastructure into fun heat energy. Evolution indicates we "want" to create more infrastructure that will capture more energy in the future to build more sustainable infrastructure, more quickly. A currency-issuing authority that guides its market in that direction the best is the one who will have the dominant currency. We might want more fun heat energy, but in the end the infrastructure that seeks to expand itself will dominate, pushing for a currency issuing authority that assists it in controlling assets (including people) to this end, eliminating liabilities (including people) along the way. China's rise and strict control of trade and currency is not an accident. USSR's fall in 1989 was a wake up call that economics is important, causing them to intelligently guide macroeconomics. The square caused the government to fear its people which is the opposite of the U.S. government which acts with ignorant impunity as a result of the wealth that resulted from winning the currency war. We've printed an excess for free foreign labor as fast as the increasing world GDP could absorb it, greatly slowing inflation, but reducing our own infrastructure.

A lot of currency is created as banks follow rules set out by governments to create it out of thin air using the asset and the credit-worthy borrower's promise to repay as assets in the banks books that offset the thin-air money.

Economics as an A.I.
Economic systems economize limited resources with competing (evolving) agents. Part of programming interacting A.I. agents is to create a currency that gives access to CPU time and memory space (I'll assume CPU time is primary concern). The quantity of the currency turnover per time must be proportional to CPU calculations per time. Each calculation requires energy and expansion of the A.I. system would mean gaining access to (creating or stealing) more CPUs (infrastructure). So a perfect parallel can be made between a specific type of A.I. and economics.

Slow inflation may be practical, violating constant value
How to increase and decrease the quantity of currency to assist the survival and expansion of the infrastructure is not obvious. It may be necessary to violate constant value. For example, there's a long history of erasing past debts as a way remove the "1%" from having too much power (see Michael Hudson's "The Lost Tradition of Biblical Debt Cancellations").  A 2% annual inflation puts pressure on large holders of the currency to invest the capital in the economy directly or via loans, or lose their value if they don't. 

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