in Finance

Easy Money – Hard Money

by sarcasticsindhi 25 January 2022, 6:42 am 2k Views

You might not be in the right direction if you think people sitting on comfortable wobble chairs with their laptops in air-conditioned offices earn Easy Money and the amount earned by people who work at the construction sites in harsh weather conditions is Hard Money. Easy or Hard Money has nothing to do with the physical investment of human efforts.

Before moving forward to Easy and Hard Money, you need to grasp the concept of the stock-to-flow ratio.

Table of Contents

Stock-To-Flow[S2F]

Stock: Amount of resources in the reserve and moving in the present market.

[let say the total gold/dollars/rupees reserved in banks and cash present in markets]

Flow: Production of new resources annually

[How easy and how much gold/dollars/rupees brought into the markets annually]

let’s travel back in history for a minute. People considered many things as monetary assets to exchange goods and services in the past. Like in the 16^th century, people traded on glass beads in Western Africa. The Aggry glass bead type was the most efficient in trading as it was rare to find in a particular geographic location and its new production was limited.

Why glass beads only?

At that time it used to take a lot of human hard work and time in glass beads production. On the other hand, in European parts, because of the advancement in the tools and abundance of raw material, it was not very challenging to create new glass beads for manufacturers. So, Europeans contributed to the excessive supply of beads in African markets. Hence, people lost their purchasing power as beads lost their intrinsic value over time because of excessive production and supply of it in the market.

Before Europeans entered and increased the supply of beads in African markets, Beads were considered to be Hard money. As its supply was limited in the market. Furthermore, It used to take considerable time and energy to bring new supply in the market. Here the stock-to-flow ratio of beads was high and that made beads Hard Money. However, European’s spreading their easily produced beads in the African market lowered the stock-to-flow ratio. Because now it was not much time consuming for people to produce new beads and bring them into the supply. How easy/hard is it to bring the new supply of money into the market defines the easiness/hardness of money. You can click here to have more information on Stock-to-Flow Ratio.

Is Gold Easy Money?

Hmmm, now you just need to ask two questions from yourself.

Q: Is gold limited or unlimited in the present market?

A: Limited.

Q: Can we multiply the supply of gold over the night or in a couple of days?

A: NO or very less.

That makes the S2F ratio of gold high as it takes effort to produce. Hence Gold is Hard Money, not Easy Money.

The easy way to calculate the stock to flow ratio of any commodity is to calculate the new supply of that commodity which is coming into the market in a given period of time.

In case of gold, the gold miners are able to increase the supply of gold by an average rate of 2% annually, that means the gold miners are able to extract 2% of new gold as compared to what is available in the market. In simpler terms if we have 100 tones of gold then gold miners are mining 2 tonnes of gold on an average annually.

S2F Ratio of gold = 100/2= 50, Which implies the stock of gold will get double in the next fifty years from now in the market.

More the S2F value of any asset/commodity the more hard an asset/commodity is as compared to its peers.