Bringing the Heart Back into Investment

Introduction

When you take a look at your surroundings, have you ever wondered why there seems to be so much disharmony? Why are the things we create often not beautiful and typically not built to last? The things we bring into existence seem to be out of line with organic creation. Can this lack of alignment with the laws of nature be attributed to the financial system?

In this article we will explore the financial system. What is it set up to do? What is money and what is its purpose? How is money created? Is there a difference between physical money and electronic money? Where does the value of money derive from and should the value of money fluctuate?

We will then give some thought to the concept of an investment. When we talk about making an investment, what do we mean? What is our intention when we invest? Is it possible for us to adopt a more noble approach to investment? If so, how do we achieve this?

Lastly, we will look at whether it is possible to restore harmony in the world and how the financial system re-imagined will play a key role in doing so.

The Purpose of the Financial System

We created a financial system so that we could trade goods and services with one another without being restricted to trading locally and having to rely on barter. We needed a commonly accepted unit of account so that we could seamlessly trade anything with anyone. Without the ability to do this the societies of our world would not have been able to advance as much as we have.

What is Money?

The reader may find this to be a curious question. As money is so central to everything we do, or refrain from doing, surely, we all know what money is?

Money has been defined by economists by reference to its functions, namely that it is used as a medium of exchange, a measure of value for contractual obligations, a store of value or wealth, and a unit of account.

Defining money from a legal perspective has typically been more concerned with the notion of payment, how settlement of a transaction by bank transfer can be achieved. The law recognises various meanings of money including that it serves as a common standard of value to which the values of different goods or services may be defined, a unit of account for debts and liabilities and a store of value or purchasing power.

The term 'money' refers to banknotes and coins as legal tender, and may also refer to not only actual ‘cash’ but also a right to receive ‘cash’, as in a credit of a bank account, and perhaps even that which is invested in short-term, liquid securities (money market instruments).

Another key aspect is that money should be accepted equally without reference to the character or credit of the person who offers it and without the intention of the person who receives it to consume it or apply it to any other use than in turn to tender it to others in payment for goods or services or discharge of debts.

This leads us to the conclusion that money must be denominated or expressed by reference to an identified unit of account, which effectively preserves the nominal value of the medium of payment.

Money as a Commodity

A commodity is something that can either be extracted or grown, itemised, clearly be identified and categorised in defined units. This allows the commodity to be universally recognised and priced, facilitating trade. We know what is being bought and sold and we can therefore agree on its value.

Money can be said to be a form of commodity where a general consensus has been reached that the commodity in question (e.g. gold) is what we use when we exchange value between us. Coins used to be gold or silver and paper Banknotes were an extrapolation from this, promising to pay the bearer of the Banknote its equivalent amount in gold. Gold-backed currencies have been phased out during the 20^th Century with Switzerland being the last Western nation to leave the gold standard in 1999 and with the United States leaving the gold standard in 1971. Our current-day fiat currencies have no underlying commodity backing the claim.

Money as Currency

A currency is one step removed from money. It is a claim on something of value (money) issued by an authority who can back up the claim. It derives its value from the money which it is backed by. A currency is intended to be used to transfer the security of money from one party to another. The word currency is derived from ‘current’. Think of it as an energy that should be constantly flowing, moving from one party to the other, facilitating trade, which is really an exchange of energy (I have created this, you have created that, let’s exchange these goods or services at a value that we agree upon).

Money as a Unit of Account

Similar to how a kilogram is a unit of weight which serves its purpose of measurement, the purpose of money as a unit of account is to provide an intuitive and measurable value to goods, services, taxes, debt. 

In order for money to be a unit of account, it needs to fulfil three conditions, namely that it is divisible, fungible, and countable or measurable. This makes money a convenient tool for the exchange of value between parties.

Like a kilogram is a unit for measuring weight, money should by extension be a unit for measuring economic value. This means that if we say something costs (Sterling, GBP) £20, ‘£’ is the unit of measurement (like a kilogram) and ‘20’ is the quantity, or the price. The unit of measurement, the money, needs a tool for measuring it, but other than that, it just is.

Seen this way, how would it be possible to claim that there is a lack of money? Like the numbers in an accountant’s spreadsheet, they have no intrinsic value.  You cannot have a lack of kilograms, can you?

Store of Value versus Facilitator of Trade

Do we need our money to be both a store of value and a facilitator of trade or are these not completely separate functions that can be handled as such? This goes back to the question of why we need money.

The point of having money is to ensure that we can do business with anyone, anywhere, and that the value transferred in the business exchange can flow from one party to another using a recognised unit of account.

Is money really the appropriate tool to use as our nest egg which we save until the need arises, in the knowledge that it’s value will not be degraded over time?

Money should circulate, moving from one party to another, making sure that we are able to exchange value between one another. If money stagnates (is saved), an issue arises with the supply of money.

Up Close and Personal with the Financial System

We cannot fully understand money unless we understand how our financial system works, where in fact only a small percentage of what we call ‘money’ exists in physical banknotes and coins issued by our central banks. The rest is virtual money, that merely exists as an accounting in the banking system.

It is commonly believed that banks act as intermediaries, lending out the deposits that savers place with them. If you take this view, deposits would typically be ‘created’ by the savings decisions of businesses and households, and banks then ‘lend out’ those existing deposits to borrowers, for example to companies looking to finance investment or individuals wanting to purchase property or other assets.

However, savings do not by themselves increase the deposits or ‘funds available’ for banks to lend. Viewing banks simply as intermediaries ignores the fact that, in reality, commercial banks are the creators of deposit money.

Rather than a bank lending out deposits that are placed with them, it is the act of lending which creates deposits — the reverse of the sequence we typically envisage. Each time a loan is made by a commercial bank, ‘money’ is being created. The amount of the loan granted is registered by the bank as a deposit made by the customer (the borrower), accounted for by the bank as a liability, whilst simultaneously being accounted for by the bank as an asset on its balance sheet (as the bank is owed the amount it has lent to the borrower). This means that bank customers are performing both the role of creditor (as account holder with a positive bank balance) and debtor (as the borrower).

This money created by banks when extending credit (lending) merely exists by virtue of the computer entry the bank has made when it lends money. In fact, the correct term for this is that the banks create ‘credit’ meaning that they create deposits in their act of lending, thus increasing the ‘money’ supply, and thereby depleting the value of ‘money’.

Creating the Rat Race – the Unaccounted for Interest Burden

Things get trickier as the interest due on the loan over time is not created when the debt (i.e. the ‘money’ or ‘credit’) is created. This results in banks constantly having to create new debt in order for us to collectively as a society be able to satisfy the interest that falls due on existing loans. At a certain point in time, the monetary system becomes debt saturated. It is no longer possible to create enough new debt to satisfy the interest due on existing loans. With the interest component of a loan not being created at the time of granting a loan (the creation of credit), there is a built in deficit in the system.

This unaccounted for and compounding interest burden is the answer to why we need constant “growth” to sustain our economy. We’ve been conditioned to think that economic growth is needed in order for us to continue to advance as a civilisation. In actual fact, the ‘growth’ we perceive to be needed is largely required to fund our debt burden in a system where the debt (the amount borrowed plus interest) is always going to be greater than the money available. Economic expansion is necessary to service our growing debt burden. Note that growth in the real economy (products and services which keep society going) is very different to the financial economy. We are experiencing the shrinking of the real economy in order to sustain the financial economy and the growing debt burden.

Our debt burden has created the rat race. We find ourselves incessantly running in the hamster wheel, getting nowhere, and becoming increasingly depleted. It has created a scarcity mindset, where the choices we make are from a place of lack or fear. We are competing for the same financial resources and there is not enough for everyone.

We may not be consciously aware of it, but we are devouring one another. Each time someone gains, someone else has to lose.

Investment Detached from Purpose

This scarcity mindset has made us adopt a distorted view on investment. Think about it. We need to ensure that we can outrun the hamster wheel. If we don’t, the money we have diminishes in value. This leads us to search for investments that can outperform ‘the market’ ensuring that at the very least we are no worse off (keeping up with ‘inflation’), and hopefully we gain some. What we are investing in becomes a secondary consideration.

It has also led to us creating and endorsing concepts such as fiduciary responsibility and investor primacy for businesses, requiring companies to focus on shareholder return above everything else. In addition, it has driven the mergers and acquisitions market, as with competition, only the big players are able to survive on decreasing margin potential due to their size and reach.

No wonder corners have to be cut with profit margins becoming the prime focus, leaving no choice but for businesses to compromise on the products and services being offered.

It feels like we’ve put the cart before the horse. The investment return has become top priority as the growth of the economy (our own and that of our society) is a necessity, otherwise we lose out and the financial system can no longer sustain itself.

This required growth in the economy has also fuelled consumerism. We need consumption to increase to make the system work. No wonder fashion and trends have ever shorter cycles and products like white goods and cars are no longer built to last.

It is now easy to see how the beauty of our world is being drained, one drop at a time initially, unnoticed perhaps, but building up to a flood.

The Crypto Boom

The quest for investment returns has fuelled the cryptocurrency market with the value of the global cryptocurrency market topping USD $3 trillion after the election of Donald Trump as U.S. president 5 November 2024.

There are many good things to be said about the cryptocurrency market’s potential. It’s decentralised nature, if truly decentralised, unplugs us from centralised power structures. However, is cryptocurrency ideally placed to be an investment? The question we need to answer is whether a cryptocurrency is suited to be used as a store of value or a tool for the exchange of value.

Bitcoin has seen an enormous surge in investors entering the market. The majority of investors are buying Bitcoin to hold it, with the expectation that its value will increase over time. This suggests that Bitcoin investors intend for it to be considered a store of value, at least for now.

Perhaps the real use case for cryptocurrency is for it to facilitate the transfer of value between parties, and not be used as a store of value, unless of course it is storing something of real value? This gets us into the realm of exploring what we mean by value. Just because many investors are flocking to buy something resulting in its price going up, it says nothing about its value. Aside from the price investors are willing to pay for Bitcoin, likely investing with the scarcity mindset and scrambling for gains, does it have any intrinsic value? Perhaps the value is its data, and then in effect users are investing in the infrastructure facilitating the storage of immutable data?

Price and Value

Equally, whether it is investing in the stock market or in real estate, the price we pay for an equity investment or a property is not directly linked to the intrinsic value of the company in which we invest or the property we buy. We have also been blinded by the theory of supply and demand, which plays a part, but it does not tell the whole story, thereby confusing real value with the price.

In reality, the rise in share value or property price is linked to the decrease in purchasing power of money, which as we now know is inevitable due to the accumulating and unaccounted for interest burden on our collective debt. The resultant movement of money into the financial economy inevitably leads to the aspect of our economy, where real goods and services are exchanged, shrinking, and it is this contracting real economy which determines our prosperity.

Realigning Investment with Purpose

Let’s for a moment imagine a world with a financial system that did not have the problems we have explored with the growing debt burden and increased money supply, topped with the accumulating unaccounted for interest. We would start seeing the world through an entirely different lens. Goods and services would not be as expensive as they are. The value of our money would not be diminishing. Perhaps we could finally concentrate our energy and resources on things that make our lives better, and support all life on Earth.

If we had resources available to invest and we no longer needed to think of investment return as first priority, would we not choose to invest in enterprises that we believed would lead to the betterment of the world? Would beauty win over low cost utility? Would long-term, truly sustainable goals succeed over short-term profit maximisation? Perhaps competition would no longer be such a strong driving force, as abundance would be available to everyone.

A Shift in Consciousness and Creating True Abundance

It is undeniable that we are experiencing an evolution in human consciousness and many of the structures and systems which we have created no longer serve us.

We are looking for purpose in our lives. We have a desire to follow our hearts. We are tired of making choices that only make sense because we need to keep our heads above water and find ways to win against the treadmill. It has sucked the creative life force out of us and we are ready to say enough is enough.

We have reached the point where we are ready to turn our focus away from motives driven by profits alone and pivot towards people fulfilling their purpose. Our creative life force is our currency.

As the financial system collapses over its own weight, plenty of opportunities arise for us to create networks and systems that help us thrive. It is finally time to bring the supporting and nurturing, more feminine attributes into finance. This feminine aspect has been missing from the financial system since its inception. Humanity is ready to make the shift now.

Anna has spent more than 20 years as a financial services lawyer in the City of London, having worked for financial institutions, law firms and consultancy firms, but left the profession in 2016 after the passing of her parents to cancer. This spurred her to embark on a new career in the health and wellbeing space where she became involved in a number of start-up and scale-up business ventures involving novel, unique technologies.  Since leaving her first career in finance, Anna has committed herself to re-imagining how the world of financial services could evolve to become aligned with human creativity, generating abundance rather than acting as its impediment, by forcing humanity to focus on survival instead of thriving. There is clearly more in store for humanity than what we have seen and experienced, and Anna has devoted her time and energy into projects supporting these endeavours, notably the transformative SRTE® platform (www.sagessesrte.com) which honours the creators in venture finance.