Do you understand money? Honestly, is how money is created, used, and tracked understandable or a complete mystery? I have advocated for economics to be taught in high school to understand the actions of government since I was in high school. I was forced to take a class to write checks, balance a checkbook, and other simple economic topics in US Army Basic Training. I thought I knew how money worked after this class, but only later realized I knew enough to get into trouble with money, but not enough to fix the problems I had gotten myself into. I was mid-way through my MBA when I finally took a class on money, economics, and how money works.
I have asked other adults and high school students what they think about money and remain aghast that basic economics is not taught in K-12 education. There is no reason for fiscal illiteracy in America; yet, fiscal illiteracy is evident in the politicians elected, the lobbyists pushing agendas, and how American politicians of all levels understand money. The following is a brief attempt to clear some of the confusion regarding money.
Green money is cash.
Green money is the dollars and cents in a bank account or your pocket and is quickly spent. Green money is often called liquid money or liquid assets, liquid because the holder is presumed the owner, owns it, and can spend it freely any way he wishes. Possession is nine-tenths of the law where liquid assets are concerned. One of the first lessons most of us learned growing up was if you wanted to buy something and your pocket was empty, you went without. Liquid assets are cash, green money and are available to be spent in any way the holder chooses.
Non-liquid assets are considered green money due to their sale; this is why a house, a car, a boat, and other such items are considered assets, investments, and opens the door to depreciation or money loss where an asset is concerned. The sale of the asset provides the opportunity to turn a non-liquid asset into a liquid asset. However, since the asset is often employed as collateral for a loan, the sale of that asset means the loan holder is paid first from the sale. If the resale value is insufficient to cover the full loan owed, the loan, which is red money, can still be collected; this process is why red money is so important to understand.
Red money is debt.
Historically, if a debt could not be paid, the debtor’s blood was allowed to be spilled; hence debt is red money. Red money always comes with a penalty called interest. Interest is green money turned red to return the profit to those who lent the initial funds or principle. That debt, be it a loan, a credit card, or another debt model, remains a burden to the borrower, continues to accumulate interest, and can be called due at any moment in time. While some laws protect the borrower from excessive interest rates, it remains essential to know about and be cognizant of the interest rate trap. The legalese on a contract to launch a debt is important to understand, especially where prepayment penalties, late payments, and the ability to call the note due are concerned.
The interest rate trap comes in several forms. While in the US Navy, stationed in Norfolk, Virginia, a sailor buddy bought a beautiful car for $4000 with a 45% interest rate. He put $1500 in green money down, so the full loan amount, principal, and interest, for 60-months were $7805.49, including the sales tax. Later that month, when the car was stolen, the insurance company valued the vehicle at only $1000, leaving the sailor to pay $6805.49 immediately. This is one type of interest rate trap; another comes from Payday Loans. Borrow your next paycheck today, get the money today, and pay your paycheck back during the next 36-months at an interest rate between 30-60%. By the time the payday loan is paid off, more than four separate paychecks will have been paid to cover a single paycheck loan, provided all the payments have been made on time and as quickly as possible.
While paying off this loan, you lose your job. You can lose your car because your car is sometimes used as collateral for your payday loan. If the resale value is insufficient, you lose your car, you lost your job, and now you still owe a considerable sum that gains interest. Red money is dangerous; like Damocles’ sword, the danger hangs by a tiny thread above the borrower; one wrong move and the sword falls. Debt, red money can be helpful; but, careful planning and budgeting are required before entering into debt obligations. Always it is better to save and budget green money or obtain investors before contemplating debt.
Black money is dead money.
Consider the person who takes green money and places those dollars and cents under a mattress or coffee can in their home. The cash is out of circulation, is not valuable enough to collect, and no one is benefiting from the money through interest. Black money can be created in other ways that will be explored later in this article.
Potential Money – Blue Money
The next type of money is blue money, also referred to as potential money. Consider a hammer. The hammer might cost $20.00 in green money to buy and bring home. In the hands of a trained construction worker, a $20.00 hammer, over the course of the hammer’s useful working life, has the potential to earn thousands of dollars in green money for the construction worker. In the hands of an inexperienced worker, the hammer has the potential to cost thousands of dollars in green money through waste, destruction, and learning. Training a person to improve their performance might cost $300 in green money; but, if that employee can improve his performance on the job, potentially millions of dollars can come into the company because of the training provided.
Money is created when it is borrowed, and interest is paid on the loan. For example, Jack has an extra $500 (green money). He gives this money to his friend Joe in the form of a loan (red money). Joe takes the loan, adds to his business potential (blue money), and through increased profits, can pay Jack his $500 loan plus the interest of $300. Hence, $300 (green money) is created as profits for Jack. While a simple analogy, do the types of money become more apparent?
Joe’s loan to Jack showed on Joe’s books as red money until the loan and interest were paid. During this time, Joe was also making green money, or profits sufficient to pay his workforce, his other obligations, and still retain adequate to pay himself. Small business owners are not paid until everyone else is paid. It is not uncommon for small business owners to be scraping by on the smallest margins because all their non-liquid assets are locked up in loans to keep the business afloat. When poor business practices begin risking inventory and equipment and shareholder investments are added into the equation, is it any wonder why small businesses struggle.
Money is also created when saved in the various saving tools offered by banks. The diligent saver can save $40 a week until he or she is 65 years of age and potentially have millions in the bank for retirement. Why, because the bank will pay interest to the saver from the interest collected on the loans the bank makes with the green money invested from the savings account. Many different savings tools can be considered non-liquid assets because of the agreements made between the saver and the bank. Generally, the longer the bank’s contract to hold the savings money, the higher the interest rate paid as the bank can schedule payments and loan the same dollars more efficiently when the saver’s funds are expected to be in the bank for a more extended period.
Often Federal treasury departments of governments create money by printing more or larger bills. The problem with printing more money is one of surplus, which begins to increase interest rates and decrease the value of the green money held by citizens participating in the economy. Consider that if the only way to create money is to work money through lending, improving business, etc., and then printing only makes it harder to put money to work. Too much money on the market creates negatives; negatives include lower dollar value, which makes items cost more and increases interest rates, making borrowing costs rise, and inflation begins to increase prices for goods in the economy. More importantly, except for necessities, producers’ willingness to spend money stops; these are typical cause-and-effect actions. A long enough period of decreased desire to spend money and an economic downturn is initiated.
State, City, County, Town, municipal governments are even more pernicious with their plots and plans. On the local government level, money cannot be printed. Hence, debt is entered into, and municipal bonds are sold to create money in the private sector, which is then paid to the government in increased taxes, but the money lent to the local government was already spent. One truth discovered about government, when taxes are increased, money is asked of the voters to borrow. The truth is, the government body asking for more has already spent the increase, spent the budget, and usually spent twice as much as they are asking the voters to allocate. Consider special elections for increasing taxes; the money being asked for has been spent, the budget was spent, and now the voters are asked to pay for the special election cost to decide if the local government can spend some more money. The increase being asked very often has been spent three to four times before the election is considered to ask for permission to enter larger amounts of debt in the public’s name.
Poor fiscal planning increases debt by decreasing the value of the original municipal bonds. The government has to borrow more to get relatively close to the value of the first municipal bond sold. Note, municipal bonds are considered a debt to the local government and as green money non-liquid assets to the purchaser; municipal bonds can be bought and sold on the private market. Government focuses upon the holder of the most bonds; because elected leaders are focused upon the holders of the most bonds, citizens bear no weight in being heard. Money talks!
In several different locales, municipal bonds can be held as unseen debt or black money, also referred to as unfunded liabilities, kept on other books, not currently open to the public. The monies owed are not considered red money because there is no plan by those in power to pay these debts; thus, the city’s debt could be significantly higher than reported. Unfunded liabilities never have a plan for repayment by those in power. Unfunded liabilities can be a mixture of many different debts (employee retirement, some municipal bond types, unpaid bills to local service providers, etc.). The common denominator remains, there is no plan or money to repay this debt. Thus, black money is created because there are no plans or money to meet these obligations. The taxpayer remains on the hook for the principal and the interest of those unfunded liabilities. Unfunded liabilities are hopes of current politicians on future prosperity, and sometimes, depending upon laws, unfunded liabilities are part of the government’s credit rating. Low credit ratings by the government increase taxes, the risk increases, making borrowing money more expensive, and the taxpayer generally has no idea how poor their municipal government’s credit rating. Never forget, municipal government, many times includes the local school board.
While this explanation is elementary, the lessons contained are sufficient to protect the bottom-line, improve knowledge, and provide an opportunity for improving circumstances. When bottom lines fail, before anything else, look to lost blue money as the cause. When blue money is disregarded long enough, red money increases exponentially, and green money evaporates; this formula is set in stone. Potential blue money is not elusive, but it takes keen observation to protect and grow. Grow enough blue money, and green money multiplies exponentially.
Americans must start demanding fiscal literacy in the politicians running for office. Americans must begin understanding the captivity they are in where the government spending is concerned. Ask yourself, would your bank honor a post-dated check? Why should the government be allowed to write a check the bank won’t allow you to write? Can you spend 8-15 times your salary between paychecks and maintain your house, car, and other assets? Of course not, so why should the government be allowed to do this on your tax dollars?
Fiscal literacy improves freedom and liberty. Fiscal literacy is required to maintain the US Constitution and US Bill of Rights. Budgets are not bad things for government to live on; in fact, the government should be the first exemplar of budgetary soundness and fiscally literate action. A Liberty FIRST Culture will require fiscal sanity and fiscal restraints, a reduction in debt, and a payment plan for all unfunded liabilities.
© 2021 M. Dave Salisbury
All Rights Reserved
The images used herein were obtained in the public domain; this author holds no copyright to the images displayed.