The Theory of Money, Part 7

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Last week, I talked about how storing Labor Units (LUs) in the form of an asset is risky because any asset is susceptible to shifts in value, so you could lose some of your LUs simply by the asset losing value. This is the risk of storing LUs, but it’s a risk worth taking in order to have some wealth saved away in case of an emergency (or for retirement).

Today I’m going to cover two more foundational ideas before I start building more on the foundation I’ve laid: (1) the cost of a lifestyle and (2) how to be immune to inflation.

The Cost of a Lifestyle

Let’s think about how many hours someone has to work to sustain their lifestyle.

Way back in the hunter-gatherer societies, people’s needs were pretty basic. Food, water, clothing, and shelter comprised the majority of their financially costly needs. There was no innovation to significantly augment the number of LUs per hour someone could generate, so when they went to work hunting and gathering and finding places to shelter, they were probably earning about 1 LU’s worth per hour. But because their needs were so simple, their total weekly cost to sustain their lifestyle was probably only around 50 LUs. So, they worked for about 50 hours, and the rest of their time was free to sleep and attend to social duties and recreate. They wouldn’t ever really work much extra like we do these days because they had no easy way to store additional wealth that they might have generated with that extra work. Storing too much extra food was pointless because saving it for too long would just make it go bad. They didn’t accumulate belongings because those were too difficult to carry around with their nomadic lifestyle. So they worked each week for what they needed and that was it.

Compare that to today. Our modern lifestyles cost way more than 50 LUs per week. Fortunately, innovation has enabled us to generate way more LUs/hour as well, so even those living below the poverty line can afford a lifestyle that is way more lavish than anyone who lived even a couple hundred years ago. But still, how much of it is necessary? Do we need to eat so much and spend to much on entertainment and travel and things? It’s this rat race of working so hard to just barely be able to afford a modern lifestyle. We also have the ability, as opposed to our ancient counterparts, to work extra to store some wealth in case of a time of need, but so many of us spend so much and work so much that there’s no leftover wealth to save or invest and no leftover time to work and generate more wealth either.

I work at the hospital an average of 4 12-hour shifts week, and I sometimes wonder how many of those 48 hours are generating LUs that simply go to sustaining my lifestyle that week. Maybe I could become more frugal and only need to work 3 12-hour shifts per week, and it would be enough to sustain my lifestyle and also invest for retirement. Then I could spend more time doing things that are more important to me. How many shifts/week would facilitate the greatest happiness and fulfillment?

How to Be Immune to Inflation

All right, so those were my thoughts on the number of LUs it takes to sustain a lifestyle and how it has changed over time. Now let’s talk about becoming “inflation proof.”

Remember last week when I talked about the blacksmith starting to counterfeit gold coins? The effect of that was that the number of LUs stored in the form of gold coins stayed the same, but the total number of gold coins had increased, so each gold coin represented fewer LUs. I’ve said this same thing in a few different ways now. Another way I’ve said it is that the LUs got “diluted” over a larger total number of gold coins. I’ve also given a ratio to express this same idea, which I inarticulately called the aggregate-number-of-gold-coins:aggregate-number-of-LUs-attempting-to-be-saved-as-cash ratio.

Understanding this principle is prerequisite knowledge to understanding inflation. We perceive inflation by seeing diffusely higher prices, but what is really happening is that the number of LUs represented by a unit of money is decreasing. So, when $1 only represents 0.049 LUs instead of 0.05 LUs, the money is worth less, which means you need to give more dollars to pay for something worth 1 LU.

There are lots of different factors that cause inflation, and I haven’t talked about most of them yet. But most of them alter the money:LU ratio by altering that inarticulate ratio above. Printing more money is one way to do it.

As a sidenote, I think this is a good place to mention that when a society uses money that has intrinsic worth (i.e., commodity money like gold or corn), it prevents a government from causing inflation (i.e., taking some of your wealth without your consent) by printing more money.

In this series, I’ve been distinguishing stored wealth as cash-wealth and non-cash-wealth for a reason. Cash wealth–if it’s the kind of cash that does not have intrinsic value–is susceptible to the government making more of it and thereby taking some of your LUs through inflation. On the other hand, non-cash wealth, such as a house or ownership in a business, doesn’t lose any value when inflation happens. Let me explain.

Let’s say the farmer has 100 LUs worth of grain that he’s stored to sell next year because he’s going to grow a different crop next year. Then, the blacksmith counterfeits a bunch of gold coins and causes 10% inflation in the intervening months. Has the farmer lost any LUs worth of grain? Nope. He still has the same amount of grain. And he’ll figure out the gold coin:LU ratio and price the grain accordingly. Maybe he would have sold it for 10 gold coins last season, but this season he sells it for 11 gold coins instead. Either way, he is getting paid 100 LUs worth of money.

In summary, cash assets are susceptible to inflation and non-cash assets are not because their prices simply change to reflect the new money:LU ratio.

So, you want to be “inflation proof”? Store your wealth in non-cash assets and you’ll be fine.

I believe this is the last of the foundation I needed to build to finally move on to more modern money things, starting with the invention of banks in our fictitious society, which is where everything changes.

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