The Price of Money

In “The Price of Money: How to Prosper in a Financial World That’s Rigged Against You,” Rob Dix provides insights to help you make wiser financial decisions by demystifying the complex world of money. As prices soar on everything from coffee to cars, and savings shrink while governments seemingly print money at will, the current economic landscape can be daunting. This book delves into these changes and offers strategies to help you not only navigate but thrive in today’s financial environment. Here are some of the key ideas mentioned in the book:

Key Idea No. 1: What is Money?

Money is a big part of our lives, helping us buy things, measure value, and save for the future. But have you ever wondered what money really is and how it works in our world? At its core, money serves three primary functions: it facilitates trade, measures value, and stores value.

To understand these functions, let’s imagine a simple scenario where you grow carrots. You sell some of these carrots to a neighbor and receive coins in return. You then use one of these coins to pay another neighbor for a haircut. In this scenario, the coins are doing a lot more than just sitting in your pocket.

Firstly, the coins make trading much easier. Instead of bartering your carrots directly for a haircut, which could be complicated and time-consuming, the coins allow you to trade with anyone who accepts them. This universal acceptance of money simplifies transactions and makes it possible to engage in a wide variety of trades without the hassle of direct exchange.

Secondly, money acts as a measure of value. By pricing goods and services in coins, it becomes straightforward to compare their worth. You don’t have to figure out how many carrots equal a haircut or a chicken. Instead, everything is given a price in coins, making it easy to evaluate and decide on purchases.

Thirdly, money serves as a store of value. When you sell your carrots and get two coins, but only spend one, you can save the other for future use. This means you are preserving the value you created by growing the carrots, which you can later use to buy something else you need or want.

Now, let’s explore the question of what can be considered as money. In principle, any item can serve as money as long as enough people agree to exchange their goods and services for it. However, in practice, some forms of money work better than others. Consider gold, which has been used as money for thousands of years. Gold possesses six characteristics that naturally make it suitable for the role of money:

• Fungibility: Gold is easily tested for purity, ensuring that each unit is identical, which makes trading easier. This is known as “fungibility.”
• Durability: Gold is highly durable and doesn’t react with other elements, making it last forever without losing quality.
• Divisibility: Gold is divisible. It can be melted down into different quantities, allowing for transactions of all sizes.
• Portability: Gold can be molded into convenient shapes like coins, which are easy to carry around.
• Recognizability: Gold is recognizable. It can be easily verifiable to show that it meets an official standard.
• Scarcity: Gold is scarce. There’s a limited amount of gold that can be extracted from the ground, and as time goes on, it becomes harder to find.

Ancient humans made a wise choice by selecting gold as money due to these qualities. Among these factors, scarcity is crucial. Money needs to be scarce to preserve its value. Imagine living in a world where leaves are used as currency, and your boss pays you by simply picking up a handful of leaves. Since gathering leaves requires no effort on their part, you’d rightfully feel cheated. Money must possess a scarcity that reflects the scarce time and effort individuals invest in producing valuable goods and services.

Money’s true value comes from people agreeing to use it and trusting it. It’s a social tool that makes trading easier, helping our economy grow and thrive. Today, we mostly use national currencies like dollars or pounds. These currencies are valuable because people trust them and governments back them up, making them reliable and widely accepted.

Understanding how money works and what makes it valuable helps us navigate the financial world better. So next time you use money, think about how it connects us all and keeps our economy moving.

Key Idea No. 2: Why Things Get Expensive Over Time?

Have you ever wondered why everything seems to get more expensive over time? It’s a phenomenon most of us notice, but not everyone understands. The answer lies in the value of money itself, particularly the paper money, rather than the products we’re buying.

To grasp this, let’s first look at what money is supposed to do. Money has three main jobs: it needs to be something everyone accepts to buy goods and services (medium of exchange), it should help us keep track of prices (unit of account), and it should allow us to save for the future (store of value).

For money to effectively track prices, its value needs to stay relatively stable. But the value of the dollar and pound changes over time. This makes us question if the paper money is a good store of value. When prices go up, we often think it’s because products have gotten more expensive. But what if it’s the dollar and pound losing value instead?

It’s a mind-bending concept, but stick with me. Let’s compare prices using gold instead of dollars to see this in action. Gold has been used as money throughout history, making it a good benchmark. When we look at house prices in gold, we notice something surprising. While house prices have skyrocketed in dollars, they’ve remained relatively stable in gold. The same pattern appears with other goods like food, which has actually become cheaper when measured in gold. This suggests that the rising prices in dollars and pounds aren’t due to the products themselves but to the paper money losing its value.

So, why does the dollar’s value keep dropping? One big reason is inflation. Inflation is when prices go up over time, making money worth less. As the money loses value, things cost more, and we can’t buy as much with the same amount of money.

Inflation can be influenced by various factors such as government policies, supply and demand dynamics, and changes in the cost of production. For example, if the government increases the money supply by printing more money, it can lead to inflationary pressures. Similarly, if the cost of raw materials or labor increases, businesses may pass on those costs to consumers in the form of higher prices.

It’s important to note that a certain level of inflation is considered normal and even desirable in an economy. It indicates a growing economy and allows for adjustments in wages and prices. However, when inflation becomes excessive and uncontrollable, it can have detrimental effects on the economy, leading to reduced purchasing power, reduced savings, and economic instability.

Key Idea No. 3: Who Controls the Money Supply?

Money today isn’t tied to anything physical and can be created in any amount. That’s why someone needs to decide how much money is enough, and that’s where central banks come in.

Central banks are the backbone of a country’s financial system, and understanding their role and functions is crucial for anyone interested in economics or finance. Central banks, such as the renowned Federal Reserve in the United States, possess a unique power to create and destroy money, which affects the whole economy.

By managing the money supply, central banks can influence how much money is circulating in the economy. This is essential for controlling inflation and maintaining price stability. Too much money can lead to high inflation, eroding the value of currency and savings. On the other hand, too little money can slow down economic activity, leading to higher unemployment and sluggish growth. Central banks strike a balance by either creating or destroying money as needed.

Interest rates are another powerful tool at the disposal of central banks. By raising or lowering these rates, they can affect borrowing costs. When interest rates are low, borrowing becomes cheaper, encouraging consumers and businesses to spend and invest more. This can boost economic activity and job creation. Conversely, when interest rates are high, borrowing costs increase, which can help cool down an overheating economy and control inflation.

The independence of central banks is vital for the effectiveness of their monetary policy. When central banks operate free from political pressure, they can make decisions based solely on economic considerations. This autonomy helps maintain credibility and fosters public trust in the financial system. It is essential for central banks to be accountable for their actions, and for the public to stay informed and engage in constructive economic discussions.

Understanding the role and functions of central banks not only empowers individuals to make better financial decisions but also allows them to engage meaningfully in economic discussions. Central banks, with their complex yet crucial responsibilities, are fundamental to the health and stability of any economy.

Key Idea No. 4: An Explosion of Borrowing

Banks play a crucial role in our economy by creating money through lending. The amount they lend is directly influenced by how much people want to borrow, which is, in turn, affected by the Central Bank’s base rate.

This delicate balance of lending and borrowing is fundamental to economic growth. When people and businesses borrow money, they can invest in new opportunities, expand operations, and drive innovation. However, it’s important to recognize that excessive borrowing can lead to financial instability. So, striking a balance is key.

Businesses borrow money for a variety of reasons. Small and medium-sized businesses typically rely on banks for loans to purchase stock, invest in equipment, acquire other businesses, hire more employees, or manage their day-to-day expenses.

On the other hand, larger companies often raise capital by issuing bonds to investors like pension funds and private lenders. This distinction is significant because, while company borrowing contributes to the overall debt picture, it isn’t the primary driver of money creation. When banks lend, they create money, but when non-bank entities lend, money simply moves from one place to another.

Individual borrowing, often referred to as household debt, plays a significant role in shaping the economy. People take out loans for various reasons, such as enhancing future earnings through student loans or making investments like buying property. Borrowing can also be used for day-to-day spending, which doesn’t always provide long-term benefits.

The way people borrow is also influenced by their wealth. Poorer individuals often take on debt to cover essential expenses, while wealthier individuals are more likely to borrow to acquire assets, including property. This difference in borrowing patterns is also reflected in interest rates. Poorer individuals typically face higher interest rates due to their lack of collateral, whereas wealthier borrowers can secure lower rates by offering assets as security.

To ensure a sustainable and fair economic future, responsible borrowing is essential. Encouraging people to borrow wisely, within their means, and for productive reasons can lead to personal financial stability and economic growth. Promoting financial literacy through education and awareness helps individuals make informed borrowing decisions.

Key idea No. 5: Making Money Work for You

Understanding money and how it works is incredibly powerful, but it’s important to remember that we don’t know everything. We can guess where the financial system is heading, but predicting exactly when and how things will change is almost impossible.

Because of this uncertainty, it’s smart to think long-term when making investment decisions. Trying to predict short-term changes and constantly adjusting your investments usually leads to mistakes and losses. Instead, think about where things might be in the next decade or more and invest with that in mind. Even if you don’t get the timing perfect, being “right enough” can still lead to success. Here are some tips to help you on your financial journey:

• Invest wisely: Inflation can erode the value of your money over time. To combat this, focus on investments that have historically outpaced inflation rates, such as stocks, real estate, and commodities. These assets have the potential to provide higher returns and preserve your purchasing power.
• Borrow Responsibly: Borrowing can help you grow, but too much debt can harm your finances. Before taking out loans or using credit, make sure you can pay it back and understand how it affects your overall financial situation.
• Diversify Your investments: Spread your money across different types of investments and industries to reduce risk. This way, if one investment doesn’t do well, it won’t hurt your entire portfolio. Consider a mix of stocks, bonds, real estate, and other options based on how much risk you’re comfortable with and your goals.
• Stay informed: The financial market is always changing, so keep up with trends and news. Read reliable financial sources, follow market updates, and watch economic indicators. This will help you make better decisions based on accurate information.
• Be patient: Successful investing requires patience and a long-term perspective. Avoid making impulsive decisions based on short-term market fluctuations. Instead, focus on your investment goals and stick to your strategy, even during periods of market volatility. Remember that time in the market is often more valuable than timing the market.

In conclusion, understanding the concept of money empowers us to make better-informed decisions. Instead of worrying about events beyond our control, let’s focus on actionable steps. To delve deeper into these concepts and unleash your full potential, I encourage you to check out “The Price of Money.”