Tuesday, 5 November 2013

The Difference between "Money" and Capital

Zerohedge.com is out with an article today clearing up something some fail to understand (h/t Steve Baker MP),
We’ve recently come to the conclusion that there seems to be a widespread misunderstanding of what "capital" is. We happened to stumble across a fabulous book called Talent is Overrated (no sarcastic emails on why we were so attracted to such a title, please) written by the well-regarded Forbes journalist Geoff Colvin. To be clear upfront, is an excellent book which we learned a lot from. But consider the following extract (our emphasis):
For roughly five hundred years—from the explosion of commerce and wealth that accompanied the Renaissance until the late twentieth century— the scarce resource in business was financial capital. If you had it, you had the means to create more wealth, and if you didn’t, you didn’t. That world is now gone. Today, in a change that is historically quite sudden, financial capital is abundant. The scarce resource is no longer money...
“Financial capital” indeed. We found it striking that Mr. Colvin, a distinguished journalist of a distinguished business magazine should use the concepts of capital and credit completely interchangeably. Yet this is a fundamental error of thought. Capital is not money. One is scarce, the other is in infinite. And we might not have thought anything of this sloppy language had we not been talking to an economist a few days earlier who feared for the future of euro. The situation remained grave, he said, and there was surely no alternative than for the ECB eventually to “print more capital”…
What he meant, we think, was printing more money. But it’s not what he said. He had confused money with capital as Mr. Colvin did in his book.
I'll take the opportunity to highlight that what we today call "money" is actually "fiat money" or "paper money" not backed by anything in stark contrast to good old "commodity money" backed by for example gold (go here for more on this). The former can effectively be created in unlimited quantity while the growth in the latter is limited by the quantity of gold.

Read the full article here... 

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