Professional blog

Many of us have a difficult time understanding how the flow of money and the creation of wealth occur in our country. I am going to explain it to you in a series of metaphors in order that you can begin to understand the complexities and the interrelationships of the system. If I am successful in my description, many of you will have a greater insight into predicating what the effect of various forces, such as government policy might have on the efficiency of this system.

We all know that money makes the world go around, but what is money?

In our country, money is the US dollar. But the dollar actually exists in many different forms. All of these forms exist in different states of liquidity. Liquidity is how easy it is for someone, or something to use this money. For example, about 1.5 Trillion dollars exists as physical paper currency. They would have difficulty depositing such a sum with any legitimate Bank.

Most or the liquid dollars, exist simply as imaginary numbers in our Financial system.

But some dollars in this system are more liquid then other dollars. For example, we, as individuals know that dollars held in our checking accounts are the easiest, therefore the most liquid to spend. Certificates of deposit might not be available to spend until a full year passes. Most US dollars exist as some form of debt instrument. Such as money market funds, US treasury instruments, corporate debt, and municipal debt of various maturities. The usefulness to produce wealth of these various instruments really depends on one underlying principle. How confident is someone ready to exchange something they have in their possession that is real for simply a promise.

Since the US dollar, like most currencies, has no backing anymore by some physical entity such as gold or silver, I am going to model money as seawater. Seawater is essentially valueless and virtually inexhaustible. Even though it is essentially valueless, I am going to use seawater as the fuel that drives the engines of the various parts of our civilization.

So the US dollars, now seawater, exits in various huge water Tanks that represent parts of our world. I have to complicate these Tanks further to have different compartments holding seawater at different temperatures to represent how easy this seawater is spent or as we will see use as fuel. For simplicity sake, each huge Tank is divided into five compartments. The compartment with very hot water, is the really liquid money which can spent almost instantly. The hot compartment, could be money that takes a week to be used, the warm compartment a month. The room temperature, a year, the cool compartment is five years, and the cold compartment is thirty years so it is the least useful.

Tank FED, is of course the US Trillion gallons of seawater.

But Tank FED is unique among all of the tanks I am going to describe, because they have unique power of expanding the amount of seawater in their tank practically instantaneously. The only thing constraining the volume of seawater in Tank FED. It is the arbitrary decisions made by the Chairmen and voting members of this quasi-independent Governmental agency.