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Money is the dominant metric in the modern economy. Many important things are valued using the money measure, even though money is a dangerously flawed metric. Something better is needed in ofrder for the socio-enviro-economic system we inhabit to be successful and sustainable. Money should be complemented by other metrics that are better for people and planet.

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  1. 1. MONEY A STUPID MEASURE File: TVA-p3-00-MONEY-151020.odp Peter Burgess (c) All rights reserved TRUE VALUE ACCOUNTING
  2. 2. CONTEXT This slideset is a Work-in-Progress and will be updated from time to time. It is part of a series that aims to describe the extremely complex socio-enviro-economic system that we live in, and how better metrics will make this system work better. TRUE VALUE ACCOUNTING
  3. 3. “Money makes the world go round” … Well … maybe! MULTI DIMENSION IMPACT ACCOUNTING
  4. 4. “Money is the root of all evil” … Not really! MULTI DIMENSION IMPACT ACCOUNTING
  5. 5. “Money is a stupid measure” … YES … absolutely! MULTI DIMENSION IMPACT ACCOUNTING
  6. 6. What is Money? “Money is a Medium of Exchange and a Store of Value” There was a time when this would have been a good answer … but no more MULTI DIMENSION IMPACT ACCOUNTING
  7. 7. MONEY as the Unit of Measure for socio-enviro-economic performance is a major source of systemic dysfunction … TRUE VALUE ACCOUNTING More on money and the financial economy …
  8. 8. GDP growth, corporate profit and stock market rise are metrics that might be good for investors, but ignore almost all the things that really matter … TRUE VALUE ACCOUNTING
  9. 9. And MONEY is not a very good STORE OF VALUE as is apparent from the following graphics about the value of the dollar over time … TRUE VALUE ACCOUNTING
  12. 12. So … every time something big happens, the money measure that we routinely use changes in size … there has to be a better way! TRUE VALUE ACCOUNTING
  13. 13. In the modern world, money is the most important metric for policy formulation, decision making and performance measurement … yet it is changing size all the time ... TRUE VALUE ACCOUNTING
  14. 14. Worse … macro-economic measures, conventional accounting, and financial analysis ignore far too many things that really matter … TRUE VALUE ACCOUNTING
  15. 15. Money only measures a tiny part of the socio-enviro-economic system The next slide is a very simplified representation of the idea of State – Flow – State applied to ALL elements of the complex global Socio-Enviro-Economic System. The second slide shows what the conventional money metrics measure … just a tiny part of everything that matters. MULTI DIMENSION IMPACT ACCOUNTING * BOP – EOP … Beginning and End of Period
  18. 18. What is Money now? Money is still a convenient part of the process of making transactions … the medium of exchange role. As a store of value money it is a disaster. MULTI DIMENSION IMPACT ACCOUNTING
  19. 19. Burgess Comment It is perhaps better to think of money as a lubricant in the economy, but neither the engine nor the fuel. The banking and finance sector, including Central Banks do not seem to embrace this important limitation. TRUE VALUE ACCOUNTING
  20. 20. What else is Money? Money is a measure … but not a good one. Money has become a way to measure wealth and economic performance. For some, this is a wonderful system of measurement … but it has very dangerous flaws. MULTI DIMENSION IMPACT ACCOUNTING
  21. 21. How much money is there? There was a time when the amount of money was limited by a physical constraint, as, for example, the amount of gold backing the money. MULTI DIMENSION IMPACT ACCOUNTING
  22. 22. In modern times, such limits have been removed. Now money can be created in a variety of ways. Money consists of cash and several sets of paper and many forms of virtual/computer 'instruments' MULTI DIMENSION IMPACT ACCOUNTING
  24. 24. Cash is the paper money and coin that is in circulation. MULTI DIMENSION IMPACT ACCOUNTING
  25. 25. '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
  26. 26. '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. MULTI DIMENSION IMPACT ACCOUNTING
  27. 27. '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
  28. 28. 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!
  29. 29. MULTI DIMENSION IMPACT ACCOUNTING SunSun EOP Financial Capital Human Capital Man Built Capital Natural Capital SunSunSun BOP Financial Capital Human Capital Man Built Capital Natural Capital Sun COMPONENTS OF US MONEY SUPPLY
  30. 30. The next slide shows the remarkable change in the balance sheet (assets) of the Federal Reserve Bank in the United States since 2007 (since the Bush era Great Recession) MULTI DIMENSION IMPACT ACCOUNTING
  31. 31. MULTI DIMENSION IMPACT ACCOUNTING SunSun EOP Financial Capital Human Capital Man Built Capital Natural Capital SunSunSun BOP Financial Capital Human Capital Man Built Capital Natural Capital Sun US FEDERAL RESERVE ASSETS
  32. 32. And this slide shows the changes around the time of the financial crisis in 2007 and 2008 MULTI DIMENSION IMPACT ACCOUNTING
  33. 33. MULTI DIMENSION IMPACT ACCOUNTING SunSun EOP Financial Capital Human Capital Man Built Capital Natural Capital SunSunSun BOP Financial Capital Human Capital Man Built Capital Natural Capital Sun US FEDERAL RESERVE ASSETS
  34. 34. 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
  35. 35. 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
  36. 36. Financial engineering It is possible to make economic 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
  37. 37. Transaction processing Money 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
  38. 38. Profit in the financial sector All 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 real efficiencies are being enabled and not just financial cosmetics. MULTI DIMENSION IMPACT ACCOUNTING
  39. 39. Money is a stupid measure But 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 ignored as if it has no value. This is insane. MULTI DIMENSION IMPACT ACCOUNTING
  40. 40. Gold standard There 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
  41. 41. Fractional reserve banking This 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
  42. 42. Mark to market Mark 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
  43. 43. 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
  44. 44. Multiple moneys There 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
  45. 45. 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
  46. 46. 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
  47. 47. 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
  48. 48. A unit of impact value In order for impact to be treated with the same seriousness that we treat money transactions that result in money profit and money wealth, then we need to have a way to measure impact and to account for it that is just as rigorous. MULTI DIMENSION IMPACT ACCOUNTING
  49. 49. 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
  50. 50. REMINDER This slideset is A WORK-IN-PROGRESS. It will be upgraded periodically. It is part of a series of more than 100 slidesets. Navigation to these is available here: FEEDBACK is welcome. Please email to Peter Burgess … … with a catchy phrase in the subject line so that it gets attention, and please identify the specific slideset(s) involved. TRUE VALUE ACCOUNTING
  51. 51. THANK YOU Some links and contact information: Email Peter Burgess … Peter Burgess LinkedIn profile Link to website Link to navigation to other resources: TRUE VALUE ACCOUNTING