mdia p3-06-money-150420
TRANSCRIPT
MULTI DIMENSION IMPACT ACCOUNTING
File: MDIA-p3-06-MONEY-150420.odp Peter Burgess (c) All rights reserved
MDIA
MONEY
MULTI DIMENSION IMPACT ACCOUNTING
WORK-IN-PROGRESS.SLIDESET STILL IN DEVELOPMENT.UPDATES WILL BE POSTED OVER THE NEXT SEVERAL WEEKS
Money makes the world go round
Well maybe!
MULTI DIMENSION IMPACT ACCOUNTING
Money is the root of all evil
Not really!
MULTI DIMENSION IMPACT ACCOUNTING
Money is a stupid measure
YES absolutely!
MULTI DIMENSION IMPACT ACCOUNTING
What is Money?
There was a time when this would have been a good answer
Money is a Medium of Exchange and a Store of Value
but no more
MULTI DIMENSION IMPACT ACCOUNTING
What is Money now?
It is still an essential part of the process of making transactions the medium of exchange role.
As a store of value money it is a disaster.
But it has become a way to measure wealth and economic performance. For some, this is a wonderful system of measurement but with dangerous flaws.
MULTI DIMENSION IMPACT ACCOUNTING
How much money is there?
There was a time when the amount of money was limited by a physical constraint, specifically the amount of gold.
In modern times, this limit has been removed.
Now we can create money made up of cash and three sets of 'instruments'
MULTI DIMENSION IMPACT ACCOUNTING
Cash
'M1'
'M2'
'M3'
MULTI DIMENSION IMPACT ACCOUNTING
Cash is the paper money and coin that is in circulation
'M1' is a measure of the money supply that includes all physical money, such as coins and currency, as well as demand deposits, checking accounts and Negotiable Order of Withdrawal (NOW) accounts.
MULTI DIMENSION IMPACT ACCOUNTING
'M2' A broader money classification than M1, that includes assets that are highly liquid but not cash. A consumer or business typically won't use savings deposits and other non-M1 components of M2 when making purchases or paying bills, but it could convert them to cash in relatively short order.
'M3' is a measure of money supply that includes M2 as well as large time deposits, institutional money market funds, short-term repurchase agreements and other larger liquid assets.
MULTI DIMENSION IMPACT ACCOUNTING
The following slide shows what has happened to M1, M2 and M3 from 1959* to 2007
MULTI DIMENSION IMPACT ACCOUNTING
* My formal training in economics ended in 1961 Peter Burgess!
MULTI DIMENSION IMPACT ACCOUNTING
SunSunEOPFinancialCapitalHumanCapital Man BuiltCapitalNaturalCapitalSunSunSunBOPFinancialCapitalHumanCapital Man BuiltCapitalNaturalCapitalSunCOMPONENTS OF US MONEY SUPPLY
The next slide shows the remarkable change in the balance sheet (assets) of the Federal Reserve Bank in the United States since 2007
MULTI DIMENSION IMPACT ACCOUNTING
MULTI DIMENSION IMPACT ACCOUNTING
SunSunEOPFinancialCapitalHumanCapital Man BuiltCapitalNaturalCapitalSunSunSunBOPFinancialCapitalHumanCapital Man BuiltCapitalNaturalCapitalSunUS FEDERAL RESERVE ASSETS
And this slide shows the changes around the time of the financial crisis in 2007 and 2008
MULTI DIMENSION IMPACT ACCOUNTING
MULTI DIMENSION IMPACT ACCOUNTING
SunSunEOPFinancialCapitalHumanCapital Man BuiltCapitalNaturalCapitalSunSunSunBOPFinancialCapitalHumanCapital Man BuiltCapitalNaturalCapitalSunUS FEDERAL RESERVE ASSETS
What do these changes mean?
I understand how a ship stays afloat ...I understand how airplanes fly But making sense of 'high finance' in banking is something else.
MULTI DIMENSION IMPACT ACCOUNTING
How strong is the US dollar?
The US dollar is as strong as the markets want it to be.
Until there is a panic and the markets change their mind, at which point it has hardly any value and there will be chaos!
MULTI DIMENSION IMPACT ACCOUNTING
Financial engineeringIt is possible to make real performance look better than it is by how numbers are presented. But this is cosmetic and not real.
The world has not been well served by a financial services sector that has embraced financial engineering in ways that were unimaginable 50 years ago.
MULTI DIMENSION IMPACT ACCOUNTING
Transaction processingMoney is an essential tool for efficient transaction processing.
Money is a lubricant for the real economy. It is not the engine nor is it the fuel.
All the profit reported in the financial sector had its origin as profit in the real economy!
MULTI DIMENSION IMPACT ACCOUNTING
Profit in the financial sectorAll the profit reported in the financial sector had its origin as profit in the real economy!
M&A, restructuring and so on have a place in the life of the economy but only to the extent that there are real efficiencies being enabled and not just financial engineering.
MULTI DIMENSION IMPACT ACCOUNTING
Money is a stupid measureBut money is now the dominant measure of everything in the modern economy.
And if a transaction does not have a money component, then the transaction is assessed as having no value.
This is insane.
MULTI DIMENSION IMPACT ACCOUNTING
Gold standardThere was a time when paper money was just a convenient representation of the gold that backed it.
In those days paper money really did mean something.
MULTI DIMENSION IMPACT ACCOUNTING
Fractional reserve bankingThis is the name for the banking practice of have more money in circulation than the reserves that are backing it.
Statistically it works but essentially it is a way of creating money value out of thin air. It is the reason why 'runs on the bank' have the potential to do immense damage to the real economy.
MULTI DIMENSION IMPACT ACCOUNTING
Mark to marketMark to market accounting is a practice that has been adopted in the banking industry to allow their balance sheet reporting to take advantage of market moves to the upside. Sadly it also applies to market moves to the downside.
It is an example of a bad accounting standard allowed by rule makers no matter how unprincipled it is.
MULTI DIMENSION IMPACT ACCOUNTING
How much is money worth?It depends on the market.
Yet money is meant to be a measure. This cannot be right. There is something wrong with this set up.
The length of a journey does not change when a large number of people are traveling. Distance is a measure with a standard unit of measure with fixed value.
MULTI DIMENSION IMPACT ACCOUNTING
Multiple moneysThere is the US dollar, there is the Euro, there is the Indian rupee and hundreds of other moneys or currencies.
The exchange rates between currencies is changing all the time. The exchange rates reflect market conditions supply and demand.
Not really a good measure of anything!
MULTI DIMENSION IMPACT ACCOUNTING
Alternative currencies
There are many examples of alternative currencies.
One of these is the 'Wir' in Switzerland. This is a community currency that has been in existence since the 1930s.
It facilitates local transactions and is not linked in complex ways to the operations of the official currency, the Swiss Franc.
MULTI DIMENSION IMPACT ACCOUNTING
Alternative currencies (2)
There are many examples in the United States, most operating on a small scale.
One of the oldest is Utica Hours.
Another is Berkshares.
These are used for local transactions and encourage local commerce.
MULTI DIMENSION IMPACT ACCOUNTING
Alternative currencies (3)
There are many laws that define what is allowed in the field of currency, but it is apparent that there is demand for tools beyond what we actually have.
Rewards programs like Frequent Flier Miles are something that has value without being money.
Stores use similar initiatives to encourage store loyalty. Value is given but not in the form of money.
MULTI DIMENSION IMPACT ACCOUNTING
A unit of impact value
In order for impact to be treated with the same seriousness that we treat money transactions, money profit and money wealth, then we need to have a way to measure impact and to account for impact.
MULTI DIMENSION IMPACT ACCOUNTING
Storing impact value
There should be a way for impact value to be stored in a 'bank' for future use, just as we can store money in a savings account.
People who do good and don't get paid for it have nothing to show for it. This is insane but it is what we have!
MULTI DIMENSION IMPACT ACCOUNTING
Moving forward Request for collaboration
Money is part of a complex socio-enviro-economic system. While it works it does not work as well as it should, nor as well as it could. The work of MDIA is to enable this complex system to work better.
MDIA needs to be a team effort. Join in and help to make the world a better place. Please get in touch.
Peter Burgess [email protected]
MULTI DIMENSION IMPACT ACCOUNTING