Wednesday, 13 July 2011

Money versus real value

Money versus real value

In practice, money has a specific real value for a month at a time in an internal economy or monetary union during low inflation and deflation. It changes every time the CPI changes. A monetary note or monetary coin has its nominal value permanently printed on it. Its nominal value does not and now cannot change.

Today national monetary units are mostly created in economies subject to inflation. The Japanese economy is regularly in a state of deflation. The Japanese Yen increases in real value inside the Japanese economy during deflation.

Money refers to a monetary unit used within the economy or monetary union in which it is created. This does not refer to the foreign exchange value of a monetary unit which is not the subject of this book. The foreign exchange value of a monetary unit refers to its exchange value in relation to another monetary unit normally the monetary unit of another country or monetary union.

The real value of money would remain the same over time only at sustainable zero per cent annual inflation. Money would thus have an absolutely stable real value only at sustainable zero per cent annual inflation. This has never happened on a permanent basis in any economy in the past. Now and then countries achieve zero annual inflation for a month or two at a time. But never for a sustainable period of a year or more.

Real value is the most important fundamental economic concept although it is the lesser studied and understood compared to the study of money. Money and real value are, unfortunately, not one and the same thing during inflation and deflation. Money and other monetary items always have lower real values during inflation and higher real values during deflation under any accounting model.

Money is an invention. Its existence can be terminated while real value is a fundamental economic concept, which exists, while we exist. The Zimbabwe Dollar´s existence was terminated in November 2008 when Gideon Gono, the Governor of the Reserve Bank of Zimbabwe issued instructions to shut down the activities of the Zimbabwe Stock Exchange which resulted in the end of trading in Old Mutual shares on the ZSE. This stopped the last exchangeability of the ZimDollar with the British Pound since the Old Mutual Implied Rate (OMIR) was being used as an implied exchange rate between the two currencies. That stopped the existence of the ZimDollar. No exchangeability means no value for a monetary unit.

Economies have already functioned without money. Barter economies operated without a medium of exchange. Cuba in the past bought oil from Venezuela and paid part in money and part by the provision of the services of sports coaches and medical doctors. Corn farmers in Argentina stored their corn in silos and paid for new pick–up trucks and other expensive mechanized farm implements with quantities of corn – the unit of real value Adam Smith described more than 230 years ago as a very stable unit of real value.

There will always be real value while the human race exists. The need for a medium of exchange, which is money’s first and basic function, is equally true. Money is one of the greatest human inventions of all time. It ranks on par with the invention of the wheel and the Gutenberg press in terms of importance to human development. Without money modern human development would have been very slow indeed.

Non–monetary items are all items that are not monetary items.

Nicolaas Smith

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