9:10am
Saint Paul
“People don’t respond to discounts any more.
“Especially if Corporate is paying the bill.
“And remember: money isn’t real anyway.”
Lots to unpack from this quote (from memory) I heard at an online marketing conference earlier this year, which caused a lot of people to react with heart emojis.
Let’s start at the end:
Is money “real?”
I was talking about this with my son Sam the other day, as we browsed a Gold and Silver catalog from GOVMINT.
“Dad, the catalog says this gold coin costs $4400, but the website says it’s $5300. Can we buy it from the catalog and then sell it to someone?”
Aah, my little entrepreneur.
But I had to explain that bullion prices aren’t tied to our money like it used to be.
“See this line at the bottom?” I pointed. “‘Prices subject to change.’”
Today, our money’s value is based on fiat:
The government says money is valuable, and because it serves as an easy way to make exchanges, we all play along.
Check this out:
One US Dollar bill takes 3.2¢ to produce; the $100 bill costs a bit more for the anti-counterfeit measures involved, about 9.4¢ each.
Meanwhile, the metal in a penny costs 3.69¢. A nickle, 13.78¢.
So based on raw input, a nickle is worth nearly 50% more than a $100 bill.
But no one is making that trade.
Because we all play along.
In Myanmar, they only accept crisp US $20s. If it’s wrinkled or ripped or folded, it’s not valued. Citizens there store their US currency in vinyl booklets like we store baseball cards.
(Seems like a good plan: show up with crispies and trade each for 5 of their wrinkled bills. Lemme know if it works.)
That’s not the only reason money’s not “real.”
As a store of value, currency’s value decreases with inflation.
And inflation largely happens because the money supply increases.
Yes, the government prints more money.
But banks create money too:
You deposit $100. They’re required to keep… well, today, they’re required to keep 0% on hand. So they put that “money” into your “account” (which is numbers on a computer). Then they can lend that $100 to someone else, who uses it for economic activity.
Suddenly, because your “money” is both in your account and out on loan, the supply has doubled.
Even before digital banking, this was a thing, of course.
And today, more and more financial transactions happen digitally.
If you buy something on Amazon, you don’t have to touch money.
Other than looking at your bank balance––which you likely do only online––when is the last time you proactively “balanced your account?”
We’ve abstracted away the concept of budgets and payments in exchange for convenience and credit card points.
(We’re really good at that, you know: letting valuable skills atrophy in exchange for convenience.)
And today, so long as you can pay the rent, most of our purchases of nearly everything we want can just live as credit card debt.
Which, as another level of abstraction, makes everything pretty much free. Until the piper comes calling, I guess.
This is getting long today, so I’m going to leave it here for now.
Because while money may not be real, I still play the game where I want some. So I have work to do.
In the next post, I’ll pick up on the first half of today’s opening quote, which is more about “marketing” than today’s Econ lesson.
Have a lovely weekend,
Jeffrey