Exchanging Currency Causes A Glitch In Capitalism
It is basically akin to a bug, some things are disproportionally cheaper or more expensive than they really are.
Today’s topic is really cool, just wanted to share first…
I finally discovered it! The thread that runs through all my essays. Metacognition, mental models, and concepts.
Metacognition is thinking about thinking, or simply put, understanding our cognition.
Mental models are different lenses from which to view the world.
And concepts make invisible things visible. For example, ancient Greeks couldn’t see the color blue. Let me repeat that.
Ancient Greeks couldn’t see the color blue.
They didn’t have the concept of blue so they couldn’t see it. Concepts are how we experience the world in a very literal manner.
Concepts allow us to see things we couldn’t before.
Today we’ll talk about a concept I named currency arbitrage.
Let’s begin!
We can’t see money
Money is transparent most of the time. We don’t think about it.
I mean, sure, we constantly think how to make money. But we scarcely think about it.
Most people don’t understand inflation, why bills and coins have value, or how weird the exchange rate between currencies is.
We’ll focus on the last one for this article.
For a sneak peek:
It has nothing to do with the value of the currency.
It’s all about demand.
I’m from Mexico, welcome!
$1,000,000 pesos buys you a house here in Mexico.
$300,000 dollars buys you a house in the US.
$300,000 dollars = $6,000,000 million pesos
A house is a house in Mexico and in the US.
Then why can you buy SIX houses for the same amount of dollars here in Mexico?
Because of a weird trick in currency exchange: Supply and demand.
Money is like a ruler. It's used to measure value. In theory.
But if people want your currency you get an unfair advantage.
It starts simple.
"Oh! I want your currency. I'll give you 2 coins of mine for 1 of yours".
But then it snowballs. A lot of people want your currency. You change the exchange rate to 5 foreign coins for 1 yours.
Money becomes a product itself, subject to supply and demand. It stops being a metric to value things and becomes a thing that has value outside of itself. It stops being a ruler.
That's why things become really expensive (or cheap) in other currencies.
Not because the value is different. Not because one is better than the other. But because we subject our currencies to the open market. To supply and demand.
That’s why a house in Mexico is 83% cheaper than an equivalent house in the US.
Absolutely insane.
The exchange rate immensely helps a few currencies and screws everyone else
I don’t think it had to happen this way. We could have just made it an adjustment.
How many pesos are in circulation? 20? Ok, cool. And how many euros? 200? Fine. You want to exchange pesos to francs? Sure, I will give you 10 francs for 1 peso.
Just multiply the amounts by billions and we are good to go.
Easy. Clean. No one got hurt.
If we treated money as a ruler and not a product, we would just adjust the numbers on the bills we carry but we would still have the same purchasing power all over the world.
And of course, some things would still be more expensive in other countries.
Not because of a weird currency bug, but because the product is more expensive to acquire for real business conditions like shipping costs.
Avocados will be more expensive in England than in Mexico, for example.
Money is a ruler
When we forget this simple fact we run into big problems.
Inflation undermines the ability to trust the ruler.
Currency exchange rates throw the ruler out the window and replace it with a product.
Money is so important in our daily lives.
We always think how to make more money but seldom think about its nature. I think this is a mistake. Understanding what money is (its origins, how it works, etc), is one of the few reflections that grant us very practical results.
I would encourage you to think about the nature of money more.
Have a wondrous day.