More and more money just in case. Educational about money and monetary systems

 

My editorial on You Tube

 

Here comes the next, hopefully educational piece in Fundamentals of Finance. This time it is about money. Money strictly speaking. This is probably one of the hardest. Money is all around us, whether we have it or not. How to explain something so pervasive? I think the best way is to stick to facts, in the first place. I take my wallet. What’s inside? There is some cash, there is a debit card, and two credit cards. Oh, yes, and there is that payment app, SkyCash, on my phone. All that, i.e. cash + credit cards + debit card + payment app, is the money I am walking around with.

How to explain things which seem really hard to explain? One possible way is to ask THOSE questions. I mean those stupid, out of place questions. One such question is just nocking at the door of my consciousness. Are all these forms of money in my wallet just different forms of essentially the same thing, or are they rather essentially different things which just take a similar form? I mean, if this is all money, why is there not just one form of money? Why are there many forms? Why don’t I use just cash, or just a payment app? See? If anyone was in any doubt as for whether I can ask a really stupid question, here is the answer. Yes, I can.

Now, I need the really hard answer, I mean the answer to that stupid question. I observe things and try to figure something out. I observe my credit card, for example. What is that? It is a technology that allows me to tap into a credit account that a bank has allowed me. Which means that the bank studied me, and compared me to a bunch of other people, and they decided that I have a certain borrowing capacity, i.e. I am able to generate sufficient a stream of income over time to pay back a certain amount of credit. When I use a credit card, I use my future income. If this is a technology, there must have been need for its massive use. We usually make technologies for things that happen recurrently. Banks recurrently assess the amount of credit they can extend to non-bank people, and they take care of securing some kind of technology to do so. Here comes an important distinction in plastic, namely that between a credit card and a debit card. A debit card is a technology that allows me to tap into my own current bank account, which is different from my credit card account. I trust the bank with recording a certain type of transactions I make. These transactions are transfers to and from my current account. The bank is my book keeper, and, as far as a current account strictly spoken is concerned, it is a smart book keeper. I cannot make more transfers from my current account than I receive onto it. It is book keeping with a safety valve. Banks recurrently keep the record of financial transactions that people enter into, they take care of preventing negative balance on those transactions, and the temporary bottom line of such transactions is the current balance on the same people’s current accounts.

 

Good, now comes cash money. Those notes and coins I have in my wallet are any good for payment because a special bank, the Central Bank of my country, printed and minted them, put them in circulation, and guarantees their nominal (face) value. Guaranteeing means that the Central Bank can be held liable of the total nominal value of all the notes and coins in circulation. This means, in turn, that the Central Bank needs to hold assets of similar liquidity, just to balance the value of cash guaranteed. When I use cash, I indirectly use a fraction of those liquid assets held by the central bank. What kind of assets has a similar liquidity to money? Well, money, of course. The Central Bank can extend credit to commercial banks, and thus holding claims on the money those banks hold. The Central Bank can also buy the cash money guaranteed by other central banks, mostly those reliable ones. We have another behavioural pattern: governments form central banks, and those central banks hold some highly liquid assets, and they use those highly liquid assets to back a certain amount of cash they put in circulation.

Now, there is that beast called « FinTech » and all them Payment Apps we can use, like Apple Wallet. I can use a payment app in two ways: I can connect a credit card to it, or I can directly hold a monetary balance in it. Anyway, I need to register an account, and give it some liquidity. When I pay through connection with my credit card, the Payment App is just an extension of the same technology as the one in the card. On the other hand, when I hold a monetary balance with a payment app, that balance is a claim of mine on the operator of the app. That means the operator has a liability to me, and they need to hold liquid assets to balance that liability. By the way, when a bank holds my current account, the temporary balance on that account is also my claim on the bank, and the bank needs to hold some highly liquid assets to balance my current balance with them. Here comes an even more general behavioural pattern. Some institutions, called financial institutions, like commercial banks, central banks, and operators of FinTech utilities, are good at assessing the future liquidity in other agents, and hold highly liquid assets that allow them to be liable to third persons as for holding, and keeping operational, specific accounts of liabilities: current accounts and cash in circulation.

Those highly liquid assets held by financial institutions need to be similar in their transactional pattern to the liabilities served. They need to be various forms of money. A bank can extend me a credit card, because they have another bank extends them an even bigger credit card. A central bank can maintain cash in circulation because it can trust in the value of other currencies in circulation. Looks like a loop? Well, yes, ‘cause it is a loop. Monetary systems are made of trusted agents who are trusted precisely as for their capacity to maintain a reliable balance between what they owe and what they have claims on. Historically, financial institutions emerged as agents who always pay their debts.

 

Good, this is what them financial institutions do about money. What do I do about money? I hold it and I spend it. When I think about it, I hold much more than I spend. Even if I count just my current wallet, i.e. all those forms of liquidity I walk around with, it is much more than I need for my current expenses. Why do I hold something I don’t immediately need? Perhaps because I think I might need it. There is some sort of uncertainty ahead of me, and I more or less consciously assume that holding more money than I immediately need can help me facing those contingencies. It might be positive or negative. I might have to pay for sudden medical care, or I might be willing to enter into some sudden business deals. Some of the money I hold corresponds to a quantity of goods and services I am going to purchase immediately, and another part of my money is there just to assure I might be able to buy more if I need.

When I focus on the money I hold just in case, I can see another distinction. I just walk around with some extra money, and I hold a different balance of extra money in the form of savings, i.e. I have it stored somewhere, and I assume I don’t spend it now. When I use money to meet uncertainty, the latter is scalable and differentiated. There are future expenditures, usually in a more distant future, which I attempt to provide for by saving. There are others, sort of more diffuse and seemingly more immediate, which I just hold some money for in my current wallet. We use money to meet uncertainty and risk, and we adapt our use of money to our perception of that uncertainty and risk.

Let’s see how Polish people use money. To that end, I use the statistics available with the National Bank of Poland as well as those published by the World Bank. You can see a synthetic picture in the two graphs below. In the first one, you can see the so-called broad money (all the money we hold) in relation to the GDP, or to Gross Domestic Product. The GDP is supposed to represent the real amount of goods and services supplied in the country over 1 year. Incidentally, the way we compute GDP implies that it reflects the real amount of all final goods and services purchased over one year. Hence, that proportion between money supplied and GDP is that between the money we hold, and the things we buy. You can see, in the graph, that in Poland (it is the same a bit all around the world, by the way) we tend to hold more and more money in relation to the things we buy. Conclusion: we hold more and more money just in case.

In the second graph below, you can see the structure of broad money supplied in Poland, split into the so-called monetary aggregates: cash in circulation, current account money, and term deposits in money. You can see current account money gently taking over the system, with the cash money receding, and deposits sort of receding as well, still holding a larger position in the system. It looks as if we were adapting our way of using money to a more and more intense perception of diffuse, hardly predictable risks.

 

I am consistently delivering good, almost new science to my readers, and love doing it, and I am working on crowdfunding this activity of mine. As we talk business plans, I remind you that you can download, from the library of my blog, the business plan I prepared for my semi-scientific project Befund  (and you can access the French version as well). You can also get a free e-copy of my book ‘Capitalism and Political Power’ You can support my research by donating directly, any amount you consider appropriate, to my PayPal account. You can also consider going to my Patreon page and become my patron. If you decide so, I will be grateful for suggesting me two things that Patreon suggests me to suggest you. Firstly, what kind of reward would you expect in exchange of supporting me? Secondly, what kind of phases would you like to see in the development of my research, and of the corresponding educational tools?

Smart cities, or rummaging in the waste heap of culture

My editorial

I am trying to put together my four big ideas. I mean, I think they are big. I feel small when I consider them. Anyway, they are: smart cities, Fintech, renewable energies, and collective intelligence. I am putting them together in the framework of a business plan. The business concept I am entertaining, and which, let’s face it, makes a piece of entertaining for my internal curious ape, is the following: investing in the development of a smart city, with a strong component of renewable energies supplanting fossil fuels, and financing this development partly or totally, with FinTech tools, i.e. mostly with something like a cryptocurrency as well as with a local platform for financial transactions. The whole thing is supposed to have collective intelligence, i.e. with time, the efficiency in using resources should increase in time, on the condition that some institutions of collective life emerge in that smart city. Sounds incredible, doesn’t it? It doesn’t? Right, maybe I should explain it a little bit.

A smart city is defined by the extensive use of digital technologies, in order to optimize the local use of resources. Digital technologies age relatively quickly, as compared to technologies that make the ‘hard’ urban infrastructure. If, in a piece of urban infrastructure, we have an amount KH of capital invested in the hard infrastructure, and an amount KS invested in the smart technologies with a strong digital component, the rate of depreciation D(KH) of the capital invested in KH will be much lower than D(KS) invested in KS.

Mathematically,

[D(KS)/ KS] > [D(KH)/ KH]

and the ‘>’ in this case really means business.

The rate of depreciation in any technology depends on the pace that new technologies come into the game, thus on the pace of research and development. The ‘depends’, here, works in a self-reinforcing loop: the faster my technologies age, the more research I do to replace them with new ones, and so my next technologies age even faster, and so I put metaphorical ginger in the metaphorical ass of my research lab and I come with even more advanced technologies at even faster a pace, and so the loop spirals up. One day, in the future, as I will be coming back home from work, the technology embodied in my apartment will be one generation more advanced than the one I left there in the morning. I will have a subscription with a technology change company, which, for a monthly lump fee, will assure smooth technological change in my place. Analytically, it means that the residual difference in the rates of depreciation, or [D(KS)/ KS] – [D(KH)/ KH] , will widen.

On the grounds of the research I did in 2017, I can stake three hypotheses as for the development of smart cities. Hypothesis #1 says that the relative infusion of urban infrastructure with advanced and quickly ageing technologies will generate increasing amounts of highly liquid assets, monetary balances included, in the aggregate balance sheets of smart cities  (see Financial Equilibrium in the Presence of Technological Change Journal of Economics Library, Volume 4 (2), June 20, s. 160 – 171 and Technological Change as a Monetary Phenomenon Economics World, May-June 2018, Vol. 6, No. 3, 203-216 ). This, in turn, means that the smarter the city, the more financial assets it will need, kind of around and at hand, in order to function smoothly as a social structure.

On the other hand, in my hypothesis #2, I claim that the relatively fast pace of technological change associated with smart cities will pump up the use of energy per capita, but the reciprocal push, namely from energy-intensity to innovation-intensity will be much weaker, and this particular loop is likely to stabilize itself relatively quickly in some sort of energy-innovation standstill (see Technological change as intelligent, energy-maximizing adaptation Journal of Economic and Social Thought, Volume 4 September 3  ). Mind you, I am a bit less definitive on this one than on hypothesis #1. This is something I found out to exist, in human civilisation, as a statistically significant correlation. Yet, in the precise case of smart cities, I still have to put my finger on the exact phenomena, likely corresponding to the hypothesis. Intuitively, I can see some kind of social change. The very transformation of an ordinary (i.e. dumb) urban infrastructure into a smart one means, initially, lots of construction and engineering work being done, just to put the new infrastructure in place. That means additional consumption of energy. Those advanced technologies embodied in the tissues of the smart cities will tend to be advanced for a consistently shortening amount of time, and as they will be replaced, more and more frequently, with consecutive generations of technological youth. All that process will result in the consumption of energy spiralling up in the particular field of technological change itself. Still, my research suggests some kind of standstill, in that particular respect, coming into place quite quickly. I am thinking about our basic triad in energy consumption. If we imagined our total consumption of energy, I mean as civilisation, as a round cake, one third of that cake would correspond to household consumption, one third to transportation, and the remaining third to the overall industrial activity. With that pattern of technological change, which I have just sketched regarding smart cities, the cake would go somehow more to industrial activity, especially as said activity should, technically, contribute to energy efficiency in households and in transports. I can roughly assume that the spiral of more energy being consumed in the process of changing for more energy-efficient technologies can find some kind of standstill in the proportions between that particular consumption of energy, on the one hand, and the household & transport use. I mean, scrapping the bottom of the energy barrel just in order to install consecutive generations of smart technologies is the kind of strategy, which can quickly turn dumb.

Anyway, the development of smart cities, as I see it, is likely to disrupt the geography of energy consumption in the overall spatial structure of human settlement. Smart cities, although energy-smart, are likely to need, on the long run, more energy to run. Yet, I am focusing on another phenomenon, now. Following in the footsteps of Paul Krugman (see Krugman 1991[1];  Krugman 1998[2]), and on the grounds of my own research ( see Settlement by energy – Can Renewable Energies Sustain Our Civilisation? International Journal of Energy and Environmental Research, Vol.5, No.3, pp.1-18  ) I am formulating hypothesis #3: if the financial loop named in hypothesis #1, and the engineering loop from hypothesis #2 come together, the development of smart cities will create a different geography of human settlement. Places, which will turn into smart (and continuously smarter) cities will attract people at faster a pace than places with relatively weaker a drive towards getting smarter. Still, that change in the geography of our civilisation will be quite idiosyncratic. My own research (the link above) suggests that countries differ strongly in the relative importance of, respectively, access to food and access to energy, in the shaping of social geography. Some of those local idiosyncrasies can come as quite a bit of a surprise. Bulgaria or Estonia, for example, are likely to rebuild their urban tissue on the grounds of local access to energy. People will flock around watermills, solar panels, maybe around cold fusion. On the other hand, in Germany, Iran or Mexico, where my research indicates more importance attached to food, the new geography of smart human settlement is likely to gravitate towards highly efficient farming places.

Now, there is another thing, which I am just putting my finger on, not even enough to call it a hypothesis. Here is the thing: money gets hoarded faster and more easily than fixed assets. We can observe that the growing monetization of the global economy (more money being supplied per unit of real output) is correlated with increasing social inequalities . If, in a smart and ever smarter city, more financial assets are being around, it is likely to create a steeper social hierarchy. In those smart cities, the distance from the bottom to the top of the local social hierarchy is likely to be greater than in other places. I know, I know, it does not exactly sound politically correct. Smart cities are supposed to be egalitarian, and make us live happily ever after. Still, my internal curious ape is what it is, i.e. a nearly pathologically frantic piece of mental activity in me, and it just can’t help rummaging in the waste heap of culture. And you probably know that thing about waste heaps: people tend to throw things, there, which they wouldn’t show to friends who drop by.

I am working on making science fun and fruitful, and I intend to make it a business of mine. I am doing by best to stay consistent in documenting my research in a hopefully interesting form. Right now, I am at the stage of crowdfunding. You can consider going to my Patreon page and become my patron. If you decide so, I will be grateful for suggesting me two things that Patreon suggests me to suggest you. Firstly, what kind of reward would you expect in exchange of supporting me? Secondly, what kind of phases would you like to see in the development of my research, and of the corresponding educational tools?

[1] Krugman, P., 1991, Increasing Returns and Economic Geography, The Journal of Political Economy, Volume 99, Issue 3 (Jun. 1991), pp. 483 – 499

[2] Krugman, P., 1998, What’s New About The New Economic Geography?, Oxford Review of Economic Policy, vol. 14, no. 2, pp. 7 – 17