#2 Laura & Luca - Money

Hi there, my loves, how are you doing? I hope this post finds you well in the future. I'm curious what age you'll be when you read it. Today I want to talk to you about money. And no, this isn't a conversation about how much money we're leaving you as inheritance, but about the very notion of money.

You see, your mother and I were born in Romania, to parents who were never encouraged to understand the world around them. In a communist state, that was simply normal. I don't think you'll ever fully be able to understand this problem, because you live in a different world.

Under communism, most books were restricted. What you could find to prepare yourself in one field or another was just as limited. The reason is simple — it's a lot easier to lead a flock of sheep than a crowd of well-read people. Because of this, our parents never had the skills to explain economic concepts to us. Their preparation for life consisted of finding a good job and keeping it for the next 60 years. That was the communist dream. If possible, that job had to be with the government in some form, and getting there meant paying bribes everywhere you turned.

One of the stories your grandfather used to tell me was about how, as an infant, I needed formula milk, which wasn't available at the time. Somehow he managed to build a connection with a driver who delivered that kind of milk. He'd tell the story of how every can of formula cost double or triple the price, plus a pack of cigarettes. That's what your grandfather did at 25 years old, just to make sure I'd grow up. That was the reality they lived in — and I say their reality because I have no memory of any of this myself. Communism fell when I was still 2 years old.

I'm telling you these things the way they were told to me, without knowing for certain if they're even true, just so you can understand your grandparents' reality, and at the same time, their limitations. My motivation to talk to you about money comes from something I realized myself, back in 2008-2009 and 2010.

The end of 2008 dragged behind it one of the biggest financial crises of that era. I remember being struck by my own inability to understand the global economy. Even though I was 20 years old, I couldn't for the life of me figure out why bread cost more back home in Craiova, just because Americans hadn't paid their bank installments. In the end, what does one thing have to do with the other? And every question I asked my father went unanswered.

In this blog, I'm going to talk to you about as many topics as possible, to help you grow in many directions. I'm trying to pass on as much of the knowledge I've gained as I can. To be honest, my own journey of reading about politics and global finance started from a simple desire to be able to pass these lessons on to you. I didn't want you to end up in my place — grown adults, still unable to understand the world around you.

So let's start with the first and simplest economic concept: money!

Money, in all its forms — cash or electronic — is a way of transferring productivity from one individual to another. Imagine that every activity we carry out, one that generates physical goods or services, is assigned a certain value. That value is set by the free market and varies based on supply and demand. Let's look at a few examples. If I go get a haircut tomorrow in downtown Colmar, it'll cost me 25 euros. That value is influenced by the available supply of hairdressers or barbers — the more of them, the more competition — but also by market demand: how many customers there are, few or many. Normally, these two factors balance each other out, so the market self-regulates.

If demand for barbers is high, and there are many people in the city who need a haircut, then the limited supply of barbers will push the price up. Overnight, a haircut might cost 30 or 40 euros. At that point, more and more people will see an opportunity to start a barbering business, and by opening new shops, they'll increase the supply on the market. The price will drop accordingly.

The only problem is this: through my work, I offered a service to the population. I saw patients all day and tried to make sure they got better. How do I transfer that productivity to the barber? Similarly, someone who makes chairs will have a similar difficulty transferring part of their productivity. This is where the concept of money comes in. Money is just a mathematical, quantifiable way of transmitting productivity across space and time. And here's the important part! While it matters that money can be transferred across space — since chairs you've made would be hard to carry with you to the barber — the even more important feature is transferring it across time. Yesterday's goods and services will be able to buy other people's productivity tomorrow.

Whenever you spend money, you should always think of it in terms of your own productivity, measured in units of time you spent earning it. The equation should always make sense. Let's imagine that through your own productivity, you manage to produce 100 euros in one hour. Most people would look at how much money the people around them earn in order to label themselves rich or poor, but that's a simple, foolish, childish way of looking at things. What you need to look at is what you spend your money on, and which way the scale of productivity tips. If you spend money you earned in 1 hour on something someone else worked 2 hours to produce, the exchange favors you. But if you yourself work 1 hour to buy something someone else made in 10 minutes, then you got shortchanged in that deal.

Always try to see how much you worked for the money you're spending, and how much the person you're spending it with worked for what they're giving you in return. Only then does it make sense to part with the money you've earned.

Of course, we could say we don't accept this system of converting productivity and time into money. But then we'd also have to accept that we'd need to make a direct exchange instead — hand the barber the chair I made, the way a masseur would have to massage the barber in exchange for his services. But what do we do if the barber doesn't need my chair, or the masseur's massage? Then his services become inaccessible to us.

So you see, my loves, a direct exchange of goods and services isn't practical. Using a medium of exchange allows for over-specialization and increased efficiency in every sector. Another advantage is that no scale problems arise. Even if our barber agreed to accept a chair as payment, that chair is probably worth more than one haircut. And if we caught fish or grew tomatoes, given how perishable they are, it's possible the barber wouldn't even accept the fish a year from now.

So the only solution for exchanging value between individuals is to use an intermediary good as a medium of exchange — one that everyone accepts universally. When we talk about transmitting productivity, we're also talking about liquidity. Liquidity is the speed at which we're able to make that transfer. Money is the most liquid form of productivity, because its value can be spent instantly, anywhere. If we have, say, another asset — a house, a car, even a chair I built — its liquidity is limited, because it first has to be sold for money. And to be sold, you need buyers, and the selling conditions depend on the market. A house, for example, might sit on the market for a whole year before it sells. And yes, you could say every good has instant liquidity — it's just a matter of price. We could say that if a house worth 1 million euros is put up for sale and doesn't sell, it has poor liquidity; if we sell it for 10 euros, it'll sell instantly. But then we'd have failed to transmit our own productivity across time, which is what I mentioned earlier, and the exchange would have worked against us. We'd have worked for 20 years to trade it for something someone else makes in 10 minutes.

Of all the properties of money, I think the ease with which it's sold on the market — salability — is the most important one. The ease of selling something on the market instantly ensures the smallest possible loss of value.

Throughout human history, many things have taken on the function of money. Here we can list gold, silver, copper, but also less conventional things like seashells, stones, salt, and cattle. In wartime, even alcohol and cigarettes have played the role of money.

But for money not to lose its value over time, its quantity shouldn't increase while it's being held. That's something we'll talk about another time — inflation. And then we'll also discuss the concepts of hard money and easy money.

For now, I'll stop here. It's 1 a.m. on a Thursday night. The work week is coming to an end and I'm tired. Somehow I couldn't go to sleep without writing these lines to you first. Mommy pointed out to me 30 minutes ago that lack of sleep increases my risk of Alzheimer's, so I'd better wrap this up and go to bed.

Good night, my loves. I love you!