Thursday Jun 30, 2011

The value of money

A dictionary definition of money is "any circulating medium of exchange, including coins, paper money, anddemand deposits". If you ask an economist for a definition of money, you will be introduced to terms like M1, M2, M3, all of which denote tangible assets - currency, and anything that is liquid enough to be used as currency; checks, stamps and now mobile minutes being examples. The macroeconomic theory of money is fascinating - the effect of money supply on exchange rates and interest rates, the concept of the "money multiplier" (if I deposit $10 into a bank, the bank will likely loan $8 of it to someone else, who will then give it to someone else in exchange for goods and services, who will then likely deposit it again, which will result in the bank loaning it again and so on - making that $10 of money supply worth a lot more ($10+$8+$x+...)). 

But all this depends on money supply - in other words, money that is printed by the mint. The Treasury Department spends a lot of time figuring out how much money to print, there is lot being written on QE2 now-a-days, which is intended to increase the money supply.

Money is used to purchase goods and services, and yes it is saved too but that is so one can purchase goods and services later.

Completely unrelated, there is a sea change occurring in the web world, dominated by, I believe, Facebook. With 500M active users and growing, FB has the ability to introduce a "money supply" which is completely unrelated to today's "money". Using today's money, a FB user can buy a certain number of FB$s, and then use the FB$s within FB to purchase goods and services - with the money multiplier kicking in. I remember talking with a colleague about this a few years ago, the true way to monetize the web is to introduce an alternative system to the existing, and FB has the ability to do just that. There is enough momentum, enough mass for FB to start to monetize its user base. And completely screw up the economists at the Treasury, not to mention disintermediating the banks completely.

The only other ubiquitous asset is mobile minutes. People exchanging mobile minutes for tangible goods and services happens today, the big difference however is the demographic. While Safaricom offers this ability in Kenya today, FB has the 15-40 year middle class user as their user. And the next generation is growing up with FB as a standard channel for communicating with their peers.

Virtual flowers when going in for the kill? If your target is an avid FB user, why not? It certainly is a lot more green - no pun intended!
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