“Zero Money”: First Principles Thinking About Monetary Value
Change the Money, Change the World (2)
Preamble (Paragraphs 6 to 9 of 18) The first principle of scarcity
Using the framework provided in the previous post, we may see how the degradation of the value of money comes about. At the highest register of objective function, money as a unit of account tracks the nominal value of money in the medium utilized. The nominal value of prices of goods and services, which in turn determines wage rates, fluctuates at the register of money as a medium of exchange. The nominal value of prices and wages fluctuate in accord the market forces that are infinitely complex, and so not within the knowledge of any individuals or parties or sitting national government, let alone a private business such as the Federal Central Bank. It entails a minimal to maximal amount of human hubris to nonetheless impose any governance in assuming a knowledge superior to the power of natural market forces. The results of governance, of minimal to maximal hubris, can be seen in how problematic are the negative outcomes. The idea of money metaphorically described as “Zero Money”, supports a minimalist intervention, particularly by not violating the first principle of scarcity for maintaining value. This violation occurs by expanding the supply of the monetary medium. This is how degradation of value occurs, how much degradation depends on the degree of expansion of supply from a baseline amount. “Zero Money” contemplates the first principle of scarcity in money maintaining a self-correcting balance of market forces free from impositions of governance.
I will present a thought experiment about an economy run on “Zero Money”. First is the transition of the subjective idea of money to its objective substantiation. Selection of a medium begins with a consideration of what objectively will have value. At this point, first principles thinking stipulates a medium of money has natural value in its scarcity. The medium that is most scarce provides the maximum value as a unit of account. So such a selected medium is then introduced for monetary exchange. After that, market forces define the nominal value for prices and therefore wages, both denominated in the money medium of a naturally maintained scarcity. With a unit of account per our thought experiment, the stability of scarcity of the medium is necessary in evaluating the performance of the medium used as a medium of exchange. Otherwise, the initiated evaluative function no longer exists, there is no reliable signal for prices and wages. Performance is measured in outcomes of the circulation of money in the marketplace in terms of productivity. In any economic paradigm, productivity provides an opportunity for monetary accumulation, either for spending or for placing into a store of value; this choice is a matter of time preference. Since the governance in this thought experiment is restricted to maintaining scarcity of the medium, that medium placed in storage would maintain its purchasing power by appreciation or depreciation relative respectively to deflation and inflation determined by market forces in the marketplace.
The positive outcome of stable value projected by the thought experiment derives from having eliminated the potential for hyperinflation from violating the scarcity of the monetary medium. At the same time, however, is the need to be prepared for black swan events in the marketplace. Needed is a resource of money other than inflating the monetary medium supply. That strategy has been removed from the table in the thought experiment. The solution is exercising time preference by storing accumulated medium sufficient as a reserve to bridge a gap in productivity. This was unavailable during the Covid 19 pandemic. Instead, periodic recessions had already repeatedly been responded to by massive increase in the money supply by government mandate, in cooperation with the private entity known as the Fed. The decades long culture of a debit and credit inflationary policy disincentivized savings for bridging black swan events. Money printing, already compounded by the 2008 financial crisis, and crises before that, required another exponential input of fiat dollar value because there was no sufficient resource in stored value.
We accept as a store of value some medium for money. This medium has a value correlation with money utilized in exchange in the marketplace. If the medium supply is maintained, not expanded, the value correlation of the money stored and the money in the marketplace would be directly coupled. Historically, this coupled correlation has not remained the case. An expansion of supply has been repeatedly introduced to the marketplace as an act of governing hubris. The best prior example of maintaining a nearly stable supply was having a gold standard. Because gold’s value is based on its natural scarcity, and resistance to technological increase in its supply, gold did function as a reliable hedge against inflation. The value of gold is partly based on its durability and fungibility (being recognizable and verifiable as gold), but more importantly, there is little gain in its supply causing its devaluation. The expansion of the supply of gold as a percentage of gold in storage lowers its value very little each year. Furthermore, gold requires significant expensive work for its production. Also, gold as sound money provides equilibrium to a gold backed currency used as a medium of exchange. This enables natural ungoverned correction of inflationary and deflationary events when kept as a store of value. Gold is the best past example of approximating “Zero Money” maintaining positive outcomes in the natural fluctuation of market forces. Prices of goods and services may become somewhat imbalanced with wages given inflationary and deflationary events, but gold as a medium remains very stable as a unit of account. Gold, or tokens of gold redeemable 1:1 for gold, used for exchange, is balanced to its stored value. A coupled unit of token gold is never more or less valuable than a unit of physical gold.