Friday, October 28, 2005

Intrinsic Value of Money

What blood is to Human Body, Money is to Trade.
Where Human is in food chain cycle, Trade is in Economy.

Concept of money is the best invention of all time because it helps us realise the value of everything, except love. Think for a moment how many hands may be exchanging money now & why?

Misconception:

"Poverty makes you realise true value of money." If that is the case why is there a growing disparity between prosperity & poverty. Then the poor of past should be the of present. But it is not what history tells us.What poverty makes you realise is, what I call, Utility Value of money. It is different from True (or) Intrinsic value of money.

Utility Value of Money:

When money is valued as a means to acquire materialistic means (ie) food, clothes, luxuries... , the intrinsic value of the money ceases to exist. The limitation of utility value of money is that it cannot be higher or lower than the subjective utility of the utility sought. This can be the reason as to why a poor regains poverty even if he wins a lottery ticket.

Intrinsic Value of Money:

The utilization of money to create money through economic activity is the intrinsic value of money. This is where individual expertise play a vital role. When I am able to deploy Rs.100 in an activity & use some expertise to make (say 10%) money on it, I have realised Intrinsic value of money (the 10%). Does it not look very much like a process which rich people carry out day in & day out.

My take on Time Value of Money:

Many a times people have money but no expertise & vice-versa. Hence to balance the demand-supply inequilibrium there is attributed a certain intrinsic value to money (say 6% on Government securities), which is the cost of money you pay to make the money work for you in the area of your expertise. It is determined by the liquidity & ease of carrying out economic activity in general.

Conclusion:

I do not intend to say that utility value is bad (or) intrinsic value is good, all I mean to say is basic understanding of the advantages & limitations of money & our expertise can help us allocate it in a better way.

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Blogger Askinstoo said...

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