Thursday, December 6, 2007

MONEY - part 2

This is the continuation of Money part 1 which is two post down. I am assuming that you were not able to grasp the creation concept so I will try to explain it in more plain manner. It is because before I can tell you anything about stock market or anything else this concept should be assimilated completely.

What is it that everyone gives and none takes?.....................ADVICE. So I can safely assume that whatever advice I am going to give you, you are not going to take it. So in all my post I will only give you facts and inferences. No advice. Infact if there are one or two then you can safely ignore it. There are lots of professional out there to give you those. What I will try to tell you is the fundamentals of concept called money. You should notice that I call money a concept. Because it is a concept and it is not physical. Currency is physical incarnation of money. Non-physical incarnation of Money is Idea, Time and few more things. We will take all of them one by one. So you should know the difference. If you are still confused then go to my ‘Money’ post for the difference between currency and money. I know I confused you but just forget the last few sentences and start afresh.

How money is created.? So we start with an example straight away. Lets take the example of Google and a writer. Lets take 2 universe. Universe 1- there is no Google. Universe – 2 there is Google.
Universe-1 – if there was no Google. How a writer can research his book? He will have to go to the library. Take a cab of 30 Rs each and lets assume he takes 50 trips. That’s 1500 Rs. He will then have to find out the books he need to research from and then search through the contents and indexes and then retrieve what all material he needs. A time consuming process.

Universe-2 – There is Google. Now a writer can research about his books on internet only. He doesn’t have to take a cab. And so he can cut short his number of trips by say 25. So he saves 750 Rs. He pays 500 for internet. And overall he saves 250 and of course ‘Time’ than the first case.

Now in both the Universe we get the book (Forget, the time saved for now, we will come back to it later). But in 2nd universe we have 250 Rs more. So in other words Google created 250 Rs. Now our intelligent readers will point out that hey 250 Rs is currency so currency was created not money. Okk now we convert it into money. We go and buy 25 breads for that. Google created the purchasing power (which is same as money) to buy 25 breads extra. Don’t go into trivialities that what happened to cab driver and all. Here we are focusing on the product called book alone. We get that in the second universe with 25 breads worth of purchasing power extra. So :

Extra purchasing power created while producing the same good = money created.

Money Saved while producing a good = money created.

So if on Monday you produced 10 breads at cost of 10 Rs and on Tuesday you produced the same quantity and quality at the cost of 9 Rs, then you created 1 Rs on Tuesday. And Ofcourse if you produce it at 11 Rs you destroyed 1 Rs. Assuming you sold the bread at the same price on both day. Savvy.

Now don’t think that money saved is money created. I never said that. In that case she could have saved whole 1500Rs by just not writing the book. But that is not money created because we never got the good called Book. It’s the amalgamation of production and saving at the same time is what is called creation of money. You must notice that I have taken only production side and I am assuming that you are able to sell a product at a constant price. There is money creation at the selling side also. Something we call a brand. We will talk about later. To be continued.......

If someone reads this then can he/she tell me if my examples are comprehensible or not. Because I am feeling that maybe they are not. Thank you.


Ankur said...

Good post Ady from the production side of money.Share some stock market fundas or how u practically used this theoretical funda to garner stock market returns

ady said...

Yeah I am coming to that after i finish this money concept thing.They both are related as you will know. I thought that noone is reading my post so i was going at my own pace. Now there is a reader then i will more readily post my blogs.