How are Sars-Cov-2 and the nature of money linked to each other? Well, many businesses have to close to contain the CoViD-19 spreading and will have financial difficulties!
The Sars-Cov-2 virus creates a global crisis that puts a lot of stress on individuals, families, societies and also businesses. The current pandemic is causing dramatic situations. National health-systems can’t cope with the number of patients affected by the virus. Our thoughts go out to the families and nations that confront difficult situations.
Writing about the nature of money in the context of the pandemic seems almost an insensitive thing to do. The opposite is true!
Money is omnipresent and affects each individual’s life. For many, it does that in an unwanted way. We need to analyse its nature so we can understand its impact on peoples’ existence.
What is money? I’ve been trying a long time to grasp the nature of money. Sometimes, I think I get it. And at other times, it’s like starting from scratch because there seems something essential to be missing.
Today is March 16th 2020. As pointed out by Euronews (1), It’s the day on which Europe and many other regions in the world are locking down their economies and societies to contain the spreading of SARS-Cov-2. My own business revenues will take a hit and I will definitely have difficulty paying the mortgage. Other businesses too will loose up to 100% of their revenues during this lockdown. Will I go bankrupt? Will others go bankrupt? Should temporary liquidity shortage imposed by exogenous generalised factors lead to businesses failing?
These questions relate to the questions about the nature of money. I’m going to take this particular and exceptional circumstances as a basis for what is a trial to understand better the nature of money.
So, let’s take as an example the coffee shop I visit each morning to start the day. This morning and for the coming 2 weeks, the coffee shop has to close on governmental order. For at least 2 weeks, 100% of their revenue will be foregone. They will still have fixed cost like rent or monthly mortgage payments that will be due to a landlord or to a bank.
Two weeks seem survivable. But let’s suppose things worsen and let’s suppose payments are impossible for a few months. Is the landlord as a result going to expel them? Is the bank going to sue them for failing to pay? Will they in fact go out of business? Let’s try to crystallise some aspects of the nature of money.
Money Supply & Future Utility
In our previous article “A Freestyle Interpretation of Money”, we suggested that the total money supply is nothing else then an arbitrary but generally accepted benchmark number that represents the total value of an economy. Now, that doesn’t answer the question of what value really is.
If the above coffee shop goes out of business, does that mean there was no -future- value in their model?
Let’s follow the value chain of the coffee shop(2). A client buys a coffee for the utility (s)he’s going to extract from it. In exchange, the client gives money, which represents the value of that utility. The coffee shop uses the revenue to pay -let’s say- the bank mortgage. And here intervenes an interesting aspect in the nature of money. The money that the shop pays to the bank represents not only current but also future utility and value.
The price of a piece of real estate represents the current value of its future utility. The latter starts now and continues into the foreseeable future. A mortgage allows you to buy a piece of future real-estate-utility. The amount of the loan represents the current value of the future utility of that piece of real estate.
If you don’t manage to pay your monthly mortgage, then the bank also has a problem with its own liabilities. A bank holds deposits from clients on which it pays an interest rate as compensation for foregone utility. If the bank can’t honour these payments, then depositors could retract their money and allocate it to a use that proposes a higher utility.
Creditors allocate capital to their utility maximising choice. A society as a hole also directs the money supply BY CHOICE towards the utility maximising centres that it decides to support and develop. The big question that should be noted goes as follows: is this choice made collectively or exclusively? If it’s more exclusive, then obviously the choices made risk to be made less in the interest of the collectivity.
Money represents the value of current and future utility we extract from current and future goods and services. The part of the money supply that comes from future value and utility finds its way in the current monetary supply by actualisation (the process by which you compute the current value of future utility). If the production of that utility comes to a halt due to a generalised force majeure, then there is nothing to actualise and thus the corresponding current value and relevant payments are actualised to zero.
Money Supply and Justification for Payment
When generalised exogenous factors temporarily inhibit a whole economy to produce utility, then the capital -or money supply- that is at the basis of that production apparatus, isn’t capable of producing returns either. Debtors that can’t honour payments due to exogenous generalised factors, aren’t the centre of obstruction. The centre of hindrance lies in the force majeure which is impersonal and without liability. The context of a -hopefully- short term crisis like the current pandemic, imposes by consequence very particular circumstances that remove the basis and justification for payments to creditors.
In a situation where the entire economy suffers from similar exceptional exogenous circumstances like a pandemic, it might also be that the utility maximising logical choice lies in the reinforcement of the healthcare system and the alleviation of financial stress on families and businesses. It could be that these kind of choices, independently from the above justification for payment arguments, are the ones that create the conditions for an efficient re-activation of the economy after the crisis abates.
(1) Alice Tidey & Alasdair Sandford with AFP, AP, 07/04/2020, “Coronavirus, Which European Countries are under Lockdown and for how Long?”, www.euronews.com, https://www.euronews.com/2020/03/19/coronavirus-which-countries-are-under-lockdown-and-who-s-next, last consulted on 07/04/2020
(2) We are simplifying the value chain to revenue that comes from clients that is then used to make mortgage payments to a bank (with the unrealistic assumption that the coffee shop is owner and not renter of the premisses it uses to run its business).