Mdia p3-06-money-150420


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Mdia p3-06-money-150420

  1. 1. MULTI DIMENSION IMPACT ACCOUNTING File: MDIA-p3-06-MONEY-150420.odp Peter Burgess (c) All rights reserved MDIA MONEY
  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? 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
  7. 7. 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
  8. 8. 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
  10. 10. 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
  11. 11. '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
  12. 12. 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!
  13. 13. 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
  14. 14. 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
  15. 15. 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
  16. 16. And this slide shows the changes around the time of the financial crisis in 2007 and 2008 MULTI DIMENSION IMPACT ACCOUNTING
  17. 17. 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
  18. 18. 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
  19. 19. 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
  20. 20. Financial engineering It 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
  21. 21. 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
  22. 22. 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 there are real efficiencies being enabled and not just financial engineering. MULTI DIMENSION IMPACT ACCOUNTING
  23. 23. 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 assessed as having no value. This is insane. MULTI DIMENSION IMPACT ACCOUNTING
  24. 24. 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
  25. 25. 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
  26. 26. 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
  27. 27. 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
  28. 28. 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
  29. 29. 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
  30. 30. 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
  31. 31. 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
  32. 32. 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
  33. 33. 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
  34. 34. 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 … MULTI DIMENSION IMPACT ACCOUNTING