How to think about money in 2021

Money is much more complex than just being the currency that whatever country you live in issues. It comes in many forms and, with cryptocurrencies and other digital currencies, there are more choices today than ever. This is great, but it also means that there is more risk and a higher learning curve to figuring out your options.

It’s not something you should ignore. Money is the most pure representation of your time and work that exists. Think about that. If you value them, it’s worth thinking about what you use to store their value. Whatever it is, the most important consideration is if it will retain its value over time.

1. Story

The fitness of all money, above all, is based on a shared story. The strength of the story is the most fundamental factor in determining the health of any type of money. The reason everyone accepts US Dollars is that we all believe everyone else will do the same thing and we think there are good enough reasons for that to keep happening. If for any reason we stop believing that, US Dollars become nothing but paper or numbers on a computer screen.

Gold, silver and a few other forms of money have the advantage of having an intrinsic value outside of the story we tell about them. This makes them much less susceptible, but not completely immune, to the story behind their value being undermined. Precious metals have their own problems, but story is certainly their strong point.

2. Stewardship

In addition to story, the stewardship of money, meaning the person or organization that controls its supply, is important. In the case of US Dollars, the US Government and the Federal Reserve are the stewards. They decide when more money is created and to whom and under what terms that new money is distributed.

When a steward decides to create more money, no matter what the reason or how valid it is, it lowers the value of all existing money.

Mmm, cookies

A simple, but illustrative way to understand this is to imagine that there are 10 cookies for sale and 10 friends who’d like a cookie. Unfortunately, there are only 5 cookie coins available and each one is worth 2 cookies. In a stroke of inspiration, you decide to simply make 5 more cookie coins.

At that moment, two things have happened. The first is that each of the original cookie coins are now only worth 1 cookie. They lost value because while there are new coins, there are still the same number of cookies. The second is that there is now more flexibility in the system since there are enough coins for each person to have one. What’s important here though, is how the 5 new cookie coins are distributed.

If 5 friends started with the original 5 coins, and each gets one new cookie coin there’s very little change. They’re all just as rich (and not richer) with 2 cookie coins each than they were with just one. If, however the 5 new coins are given to the 5 friends who had none, they’re now richer while the 5 original cookie coin owners are poorer–before they could afford 2 cookies each, now they can only afford one. You might think “well that sounds equitable” and in a sense, it would be, but it is of course more complicated than that. Say the 5 original cookie coin owners earned their coins by working all morning in the hot sun while the 5 who had no coins sat around the pool telling jokes.

The point of the cookie coin story isn’t about what’s fair. The point is that when the steward of money meddles with the supply there are consequences for everyone in the system. Some will be winners, some will be losers.

The big risk is that if too many people are losers for too long, the all important story behind the money breaks down, and we’ve already discussed what can happen then.

3. Suitability

In addition to the story and stewards of money, we need to consider suitability. Suitability is the technical side of money. It’s:

  • how easily and cheaply it’s transferred from person to person and place to place within and across borders
  • how private it is
  • its ability to be used in interactions with the government, primarily meaning to pay taxes
  • its liquidity, or how easily and quickly it can be used to purchase the things people want to buy
  • it’s durability; how easily can it be physically or digitally lost or destroyed

All these are important considerations but be warned not to mistake suitability for being more important than story and stewardship. It doesn’t matter how amazingly perfect and awesome a potential money is if it can’t get popular support or it’s mismanaged.

Conclusion to part 1 and what’s up next

We’ve now seen what kind of considerations come into play when choosing where to store your time and energy. Next we’ll consider what our options for money are and how they compare to each other in light of the above criteria.

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