It has been three-and-a-half years since I last posted about my concept of money and cryptocurrencies. I have decided to start the year out detailing my literal bets on my own wealth in the form of a (perhaps sacrilegious) Credo (literally “I believe”), twenty-five pithy statements without much explanation. Even though Jesus warned against putting too much faith in money, we all live our lives daily with some important “faith assumptions” here. Some of these are likely insufficiently qualified or even wrong. But such is faith.

Money is denominated choice

1. Money is, at its root, denominated choice, a method of counting our choices that somebody else agrees with us to accept as a common measure. As such, money is not a thing in and of itself. It is math.
2. It is the choices that are the valuable things being traded in the markets. Current choices are called consumption, paying now for past choices is debt, and buying future choice is investment.
3. The U.S. dollar, in which most of my wealth is denominated, and likely yours, is simply the counting method most commonly trusted here (and in much of the rest of the world). That trust, with some government backing, is what creates a fiat currency.
4. Dollars allow us to put one number value on, say, choosing a gallon of gasoline at the local Wawa versus a value on a sandwich chosen from the same store, or even a value for the car itself should I choose to trade it in. If I accept the current math offered by Wawa, I make the trade of currency (my available current choices) for gas.
5. Wages paid in dollars are simply how I have agreed to accept new denominated choices in return for my labor. That is my personal productivity (or more accurately, was; as a retiree, my primary new choices come from past choices invested).

Inflation, deflation, and foreign exchange

6. Inflation and deflation are destabilizations of that counting method up or down for some items compared with others, say, my wages versus that gallon of gasoline.
7. When the denominated choice for that gasoline goes up faster than my wage counter, that is inflation for me unless I can substitute something else for my gasoline choice. My own limited quantity of miles driven these days means that this is not a significant inflation hit for me.
8. Lots of free-market pressures push that counting method in one direction or another. For instance, increased demand for my current 2017 vehicle in the free market makes it worth more today than its value was last year, despite being one year older (but only if I sell it).
9. The Federal Reserve is tasked with countering any extremes of free-market pressures on our counting method in order to keep the counting method relatively stable, using the economic tools that we allow it to exert.
10. The question is not whether we trust the Federal Reserve to be successful at its stabilizing task, but whether it is, in net, more trustworthy than alternative counting methods, say, gold or cryptocurrencies.
11. Other countries have their own denomination method and a Federal Reserve equivalent that may or may not be as trustworthy as ours. I earn a small pension in U.K. “pounds sterling,” and I leave those “new choices” in Britain to the extent that I trust the United Kingdom’s counting method to remain stable.
12. Foreign currency exchange rates are simply the mathematical conversions between one counting method and another. Changes to these conversion factors happen constantly as people place free-market bets on their relative trustworthiness. Other than that, the current dollars-to-pound rate of about $1.35 per pound sterling is mostly just math.
13. Paper bills and coins are simply an authorized low-friction choice exchange method for use in a non-technology environment. They are but a small fraction of all of the U.S. denominated choices out there, which are mostly made up of digital trust that my choices will be there tomorrow.

Commodities and cryptocurrencies

13. While gold has a unique productive use, that value is overshadowed by its use as an alternative money denomination method. In this sense gold is (along with other similar commodities) simply a different trust method, but one that is less under single government control, and more determined by market forces, gold producers, and large holders.
14. If the criterion is the stability of what it will buy in other goods and services, then gold has, in the last few decades, been less trusted than the U.S. dollar. However, it’s trust measure is sometimes counter-cyclical, going up when fiat currencies get less trustworthy. In the end, though, commodities are still mostly trust-based, similar to fiat currencies, rather than inherently valuable.
15. Cryptocurrencies are more like gold than fiat currencies, except that they have no alternative use. They are solely digital trust. They have value only to the point that someone else will exchange a more trusted fiat currency or other commodity for a unit of cryptocurrency at a later date (sometimes called “the greater fool theory”).
16. It is possible to “get more choices” when the “trust value” of gold or cryptocurrencies rise relative to dollars, but that rise is always a “zero-sum game.” There are as many “choices” lost somewhere else, to someone else, as are gained. “Cryptocurrency miners” are basically a tax levied on existing holders in order to expand the “money supply.”
17. The history of wealth demonstrates that the number of winners in the zero sum financial games is almost always far fewer than the number of losers. In other words, wealth-choices inevitably concentrate in the hands of a few people unless governments intervene, often through large-scale “penny sucking.” The probabilistic odds are that most of us are usually not the winners in zero-sum games, as we do not have the resources to “penny-suck” at a sufficient scale.

Stocks, bonds and risk

18. Investments of any kind are “postponed choices,” giving up some choice today for the promise/trust of more choices at some point in the future.
19. Risk is the quantitative probability of getting more, or fewer, choices than expected back in the future in exchange for foregoing consuming your choices today.
20. Interest rates are a quantitative odds-measure of that risk and trust, betting money/choice today versus money/choice in the future. Historically, U.S. Treasury bets (U.S. bonds) have been among the least risky of all “postponed choice” options around the world.
21. Stocks and corporate bonds are bets on future industrial and service production, which is the creation of future “choices” into the economy. Some of these choices are tangible (e.g., manufactured automobiles) and some are very amorphous (e.g., Facebook).
22. Stocks and bonds are basically on a continuum of trade-offs between risk and return, with higher long-term average returns typically at the stock end, but with much more variability of returns. For most investors, the “ownership” function of stock is irrelevant.
23. Some investments are more fungible than others. I can sell a high-denomination U.S. bond for dollars in seconds, however there is a lot of time and financial cost “friction” in selling land.
24. Downside investment risk can be substantially lessened mathematically through well-selected portfolios, although this tamps down potential upside on investments as well. Most investors will, in the end, wind up ahead of the pack though an investment strategy of diversified portfolios.
25. A portfolio based on the Standard and Poors 500 stock index has consistently earned about 7% compounded returns after inflation over the long term.

Simulation of a diversified buy & hold strategy over 40 years of U.S. stock history. The Y axis is log scale. The midpoint line is approximately a 7% compounded return after inflation. Green lines are the returns from any given day’s new investment. Source: Zoni Nation.

If your money Credo is the right one, you are more likely to wind up in financial Heaven than in financial Hell.

Related posts:

• Money is choice
• Visualizing 7% investment risk
• Penny-sucking economics