The Duality Of Money

This is a pair of photographs taken by Keith Weiner, for a high school project. It seemed a fitting picture for the dual nature of money, the dual nature of wood both as logs to be consumed and dimensional lumber to be used to construct buildings.

Last week, in Is Capital Creation Beating Capital Consumption, we asked an important question which is not asked nearly often enough. Perhaps that’s because few even acknowledge that capital is being consumed, and fewer tie it to the falling interest rate (perhaps that is because the fact of the falling interest rate is, itself, controversial). At any rate, we showed a graph of Marginal Productivity of Debt.

We said that this shows that consumption of capital is winning the race. And promised to introduce another new concept to explain why.

Money Has a Dual Nature

Money, or even an irredeemable currency, has a dual nature (in this article, we will do something we have never done before. Except where specifically said otherwise, we will treat money and currency the same, and when we say money, in this article, we also mean that the same applies to the dollar too).

We assume that readers are familiar with the income side of the duality. One earns $X. One can spend up to $X dollars. The purchasing power paradigm is based on this side of money’s nature. It even goes so far to think of all assets in terms of their liquidation value, and hence purchasing power.

The reason is simple. If the central bank has a mandate to devalue, then one would be a fool to hold a significant money balance for a long period of time. There is an expression that fits this idea perfectly. You put your money into something. It could be stocks, real estate, crude oil, bitcoin, etc. Whatever you expect will go up in purchasing power. We get comments all the time, asserting that the point of owning gold is that it will go up—you guessed it—in terms of purchasing power.

Whether one is earning, or whether one is spending, this is the income side of money. Everyone knows the income side, as they know the sun rises in the east and as they know about gravity.

On the other side of the duality, money is a capital good. Or to be more precise, money is readily exchangeable for any capital good, and money is the measure of all capital goods.

When one earns money, one receives income. One may spend that income, though it is prudent to save some of it. The moment that the money is deposited or otherwise saved, it flips to the other side of the duality. It is not now your income, but your capital. We have written about consuming your capital, of eating your seed corn. That is not our focus today.

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