🌆 Two Types of Economies

Before going through this post, I suggest reading History of Money and Economy which explains economy in general and sets the scope and context in which this post is written. Everything explained below is through my mental model and my understanding of the economy.

We have been debating capitalism and communism for over a century now but both of them are not helping people with their erosion of wealth. It is because the governments are only focusing on the modes of acquiring wealth and not on the value of the wealth. The real question is How do we make sure that our hard earned currency note of 100 remains ~100 after 10 years?

What is wealth though?

There are different types of wealth – land, gold, stocks, currencies etc. Each of them can have an implicit value, independent of the other and removing one doesn’t impact the other, theoretically. Each of them has different risks to its value as well, stocks are more risky than gold and gold is riskier than land. And let’s keep in mind that we are talking about it in long term.

Out of these, everyone is a part of the currency based financial system. It is also controlled centrally and without any say from anyone but the government. This system started with defining the identity of the sovereigns. Since a government can do pretty much anything it wants with the currency, it has become the weapon to destroy other economies which depend on it for the value of their currency. And not just that, in doing so it is destroying the wealth of its own people who are holding their wealth in the form of currency.

The currency system has merged the two fundamental economic systems which I call: debt economy and value economy. Both of these exists together but have fundamental differences, and when they are not separated, it leads to destruction of the value economy.

Before we understand more about it, it is important to understand what I mean by value and debt economies.

Value economy

Value economy is the economy which has a true value or non-zero value because for it to exist, we have to work ⛏️ 👷 👩‍🏭 👩‍⚕️. But, what is work? The fundamental definition of work comes from physics which is energy spent.

If we expand on that, it would mean that if we are spending energy on anything and it is producing something then it can have a value like a bag of rice or firework or a website.

The other way to look at it is, if the thing already exists in abundance and we don’t have to work for it, then we don’t value it like, ocean, trees, fish, sand, water to an extent, etc. You can also say, because we want to be paid for our work, the produce has value.

Debt economy

Debt economy on the other hand, is an expandable economy. It can grow without having the need for any work or produce today. It exists in anticipation that it will be valued tomorrow when the produce will be available after work for consumption. But today it has a zero value.

The first thing that comes to mind is: Loans. Yes, but not all kind of loans. If it is a forward loan or lending, it is part of the value economy. Example, you had some money and you lend it to your friend for their business. They are going to spend it and it will reach other hands. And to begin with, it was already a valued money, yours.

But there is this Fiat money, which forms the debt economy. What it basically says, go ahead take this money that I, central bank, has printed which doesn’t have value. Spend it and when you have money from extra work, pay it back.

💬 Wait!!! Extra work? How?

Yes, because everything in value economy is already accounted for. Whatever we already are earning is going somewhere – rent, savings, stocks etc. And if we are not working more for the debt created by Fiat money, then the value of the value economy will go down. The value goes down to compensate for the debt.

To understand it better, in order to pay for personal debt, you have to cut down some money from your savings, stocks, party fund etc. Basically, you are left with less money to spend or for you, personally, the cost of products or value of other people’s work increases. Simply because you have to pay for the debt.

Now, think of this at a scale of the country. The debt created within the economy, will eventually have to be paid by the real value if there is no extra produce to compensate for the debt value. The economy end up being less valuable and people less wealthy.

But how would one notice the difference?

The value of the work will become less because people will have less money to spend. And if the value could be measured against something else, let’s say Gold. Then the price of Gold would have increased which means the value of the currency would have decreased given the value of Gold is constant. And in real life, there will be more number of zeros on the currency notes we have. To demonstrate,

💡

Let’s say Gold has a constant value and there are two currencies A and B from two countries X and Y respectively.

To begin, 1unit Gold = 1unit A = 1unit B. Which also means that country X has same size of value economy as country Y.

Let’s say Y added country’s half value worth of Fiat B currency in the economy. This will mean that now, 1unit Gold = 1unit A = 1.5unit B. Which means, since the value economy hasn’t changed, the value of currency B has gone down. This still doesn’t make people in Y country poorer unless the country is not able to create new value.

Let’s say country Y fails, then value of 1unit B = 1unit A/1.5 = 1unit Gold/1.5. This means that people can buy less Gold with the money they have. Or… they have been paid less in terms of Gold units.

But if the country Y succeeds, but only able to generate 0.2 worth of value economy then the value of 1unit Gold = 1unit A = 1.3unit B. There is still 0.3 of excess debt from earlier.

It is only if the country Y succeeds and able to generate more than 0.5 worth in the value economy, it makes people richer which it should. Let’s say it is able to generate 0.7 worth of value economy. Then 1unit Gold = 1unit A = 0.8unit B, which means people are able to buy more Gold or are being paid more and hence richer in comparison.

In reality, no system is efficient enough to generate more value than the amount it requires to run it which always leaves some gap or debt. This debt accumulates over time and the inflation becomes so high that every week it requires more currency notes to buy everyday items like bread 🥖 and tea ☕️ .

This kind of inflation is called hyper-inflation. It has happened to Venezuela, Zimbabwe, Germany etc. in the past and it is going to happen to more countries in the future. To understand simply, suppose you have 100INR in your bank and at 10% weekly inflation, it will be only 90 INR worth next week and the week after, 81 INR and after 1 month 72.19 INR. And after 1 year ? Just 2.29 INR. And these countries have had inflation over > 100% weekly.

Even if the inflation stays low but overtime the salaries and pays stays constant, it has the same effect. With 3% monthly inflation, in 1 year 100 INR will be worth ~70 INR only. And that’s how debt economy is eating value economy and value that hard work generates. The destruction of value is less because of the rich willing to pay higher prices but it’s not negligible.

Saving value economy

This is work in progress.

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