It seems almost inconceivable that something of universal importance could be universally misunderstood, at all levels, from child to economics professor. But there is a very convenient reason for all the confusion surrounding something as simple as money: profit motive. We'll pinpoint who benefits from widespread misunderstanding, later.
Before we move forward, ask yourself the question, "What is money?" Have you ever been asked?
"The study of money, above all other fields in economics, is one in which complexity is used to disguise truth or to evade truth, not to reveal it." - John Kenneth GalbraithWhat is money?
Most people are inclined to point to a distressed note, olive in color, tucked neatly inside their wallet. Everyone knows that these paper "Federal Reserve Notes" are money, right? Wrong. A paper note is "currency." Currency is about the only thing in the world that is not a form of money.
Money is any tradable asset.
An asset is "tradable" when it carries some tangible value, that is, when it is something that people value. A house is money, because people desire homes. A car is money. A paperclip is money. A service is money, if it is desired and can be traded for other things.
So what is the paper note in your wallet? Isn't it money, too? Well, a paper dollar bill does have some tangible value, I can write my grocery list on the back of it. For the most part, paper is worthless. A paper note is "currency." Currency is an accounting system for money. It is difficult to haul your vacation home to market for trade, so we carry currency instead. Currency in isolation, without backing assets, is worthless.
Assets are money. Currency is a paper accounting system for money. Paper is worthless without money.
It follows then, that the total value of any accounting system for money, or all the currency in circulation, is always equal to the amount of money that backs it. There can be a billion dollars of currency in circulation, there can be a trillion, there can be a quadrillion, or there can be a single dollar. The number of paper dollars, or the number of zeros printed on those dollars, does not matter. The sum total of all circulating currency always accounts for the total amount of money in existence, and nothing more.
This concept is critical to understanding what happened in 2008, and what is about to happen in 2009, and beyond.
So we know:
MONEY = any tradable asset
CURRENCY = a paper accounting system for MONEY
CURRENCY/MONEY = the amount paper per asset = PRICES
The amount of things an asset commands in trade = VALUE
VALUE almost never changes. The VALUE of a house is four walls and roof over your head, so it always commands a similar house in trade, regardless of their PRICES. PRICE can be anything, it is meaningless with respect to asset VALUE. PRICE, while initially arbitrary, should be stable. However, as we will uncover shortly, the people who do understand money will have none of that.