17 Banking and Finance

Wealth is measured in terms of present assets and future productivity, while money is a claim to wealth—not wealth, itself. Money is a commodity that flows through a financial system for trading assets such as currencies, securities, equities, and commodities. Currencies simplify and reduce the friction inherent in trading, but it is the financial system that is the critical infrastructure. It is also a dynamical system exhibiting properties of a complex CIKR—fragility, nonlinearity, interconnectivity, and, often times, random chaos.

Money is a particularly important and complex commodity. It has no intrinsic value, but instead represents wealth in the form of purchasing power. Failures in a financial system are largely failures of confidence in the purchasing power of a currency. Present asset value and future productivity establish a currency's purchasing power. Therefore, productivity is the true source of wealth. After all, governments print money “out of thin air” and use it to purchase debt that is paid off by citizens through innovation and work, for example, productivity.

Productivity is the ultimate source of wealth, while money is a commodity manufactured by the government. When productivity and money supply get out of balance, financial systems become unstable, and the dynamics of an economy become nonlinear. When the imbalance is extreme, severe economic consequences result. It is the job of central banks to stabilize an economy by balancing ...

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