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Tuesday, 30 September 2014

Money is not a store of value

The statement that "money is a store of value"  is supposed to mean that money is a store of constant real value over time or a perfectly stable store of constant purchasing power over time. 

However, the statement that "money is a store of value" is not entirely true and valid. In fact, it is a partly false, partly deceiving and partly misleading statement. 

Money is not a store of perfectly stable real value during low and high inflation or hyperinflation.

The world money supply is mainly in a state of inflation.

Money is, on the other hand, a store of increasing real value during deflation. See the Japanese economy. 

In principle, the generally accepted statement that "money is a store of value" is never completely true during inflation and deflation. 

Why? 

Because money is a decreasing store of real value during inflation and an increasing store of real value during deflation.

The CPI is not perfectly stable on a sustainable basis over time. 

The longest period I have seen the CPI perfectly stable was during a period of two months. That certainly does not qualify as "perfectly sustainable over an indefinite period of time" or "perfectly stable over a sustainable period of time.

Money is only a perfect store of constant purchasing power (real value) over time when it is either inflation or deflation-indexed on at least a daily basis, i.e., when it is inflation or deflation-adjusted in terms of the change in the general price level - i.e., at least daily in terms of the Daily CPI.

Examples of money in a state of being "a store of real value" is when it is maintained in the form of government daily inflation-indexed bonds, e.g., US Treasury Inflation-Protected Securities (TIPS). 

Money in the world economy is only a perfect store of constant purchasing power in the USD 3 trillion + maintained perfectly stable in real value in the global government daily inflation-indexed bond market plus the 25% + of the Chilean money supply that is inflation-indexed on a daily basis plus all mortgage bonds (monetary items) in Colombia which are inflation-adjusted on a daily basis in terms of their Daily Real Value Index. 

Summary: Money is not a store of value.

Shares (a variable real value non-monetary item) are - generally - a store of increasing variable real non-monetary value over the long term

Nicolaas Smith Copyright (c) 2005-2014 Nicolaas J Smith. All rights reserved. No reproduction without permission.