Money is power, as anyone who has watched The Godfather or read an expose of the shadowy interaction between oligarchs and the establishment knows. But I think of money as stored energy.
You work, beg, borrow, steal, or otherwise obtain money.
You put it aside – store it.
Later you discharge the power and make something happen.
A plane moves, with you on it. Food appears on a plate, a partner smiles at a gift, an Amazon delivery arrives. Your run the tap and hot water comes out.
I’ve thought about money so long this way I assumed everybody did. But then I had a conversation with a friend who evidently didn’t.
“Of course you must be right – I’ve just never seen it that way,” he genuinely said in unfashionable agreement.
We kicked the analogy around for a while.
Voila – a blog post!
The electrifying power of a pension
My friend always saw money more like a slightly advanced barter system.
He works and he gets things or experiences. Money is like a handshake between these things happening.
Given roughly half of people live paycheck to paycheck, he’s not alone.
My friend is not good with money, but he’s not terrible. He won’t be gunning for The Accumulator’s mantle anytime soon, but he’s not in debt, for instance. And he pays into a pension.
Actually, I noticed the words he used: “I pay the pension every month.”
Intellectually he knows he’s putting cash aside for the future. But through his money lens, his pension is another monthly bill to be paid.
I see a pension as surplus energy stored for the future. A long-term battery backup, or perhaps given the timescales involved something akin to the US strategic petroleum reserves. Power to be discharged when my everyday supply has dwindled or been switched off.
Money is stored energy: a grid
We can flesh this analogy out. Look at our personal finances like an energy grid.
I can see the blog now: The Money Power Grid – Light up your finances.
(Apologies if it exists. I dare not Google when I’m on a roll!)
Here’s a first schematic of my money energy grid.
Immediate power generation
You work and get paid for it. An energy transfer takes place from the buyer of your car to your bank account. In these and various other ways you fire-up energy on-demand, like an oil-fueled power plant can send electricity flowing into the grid. Stop burning fuel though, and the power goes out.
Trickle generation
Other revenue streams can top-up your energy supply in the background. Like the power generated by domestic solar panels, the money that comes in from small passive streams or a buy-to-let property won’t be enough to live on, but it all adds up. Especially if we can put it away for future use.
Short-term energy storage
In a world without bank accounts, everyone would have to spend most or all their money right away. But so long as inflation isn’t rapidly diminishing the power of our money, we can allow it to accumulate in the equivalent of batteries, to be discharged as needed. This short-term storage should ideally at least maintain our spending power. Impossible in today’s low interest environment, but that’s normally how we’d look to wire the grid.
Long duration energy storage
A drawback of renewable energy systems such as solar, wind, and tidal power is we’re not good at storing the intermittent power they generate. They’re like a freelancer who finds it hard to put money aside for their future taxes. Battery technology is improving, but for now the best longer-term energy storage solutions are quite cumbersome. For example a hydroelectric dam will use an energy surplus to pump water back up to a header lake. That way it has a renewed capacity to provide the juice when required.
Our long-term money energy storage comes with catches, too. You have to lock money into a pension. Shares best protect you against inflation over the long-term, but are volatile short-term. A rental property takes more maintenance than a savings account. Even with cash accounts, you expect to get higher interest rates the longer you lock your money away.
Transmission lines
We need to get our money energy from A to B. From our employer to our bank account. From our current account to our ISA. Unfortunately energy is lost in transmission.
In the real world, jostling electrons over tens of miles of power lines creates wasteful heat. In our money grid we can maintain all our power on the short hop between a current and savings account. But elsewhere we lose energy to fees, fines, and ongoing expenses as we charge our longer-term storage. Taxes can cause a mini brownout. Maybe the drain of the notorious latte factor fits in here, too. A smart financial grid is engineered to reduce these leakages.
Energy spikes
Sometimes our money grids must handle huge inflows of energy. It’s a good problem to have, but it can be tricky. One physicists’ controlled nuclear explosion is another one’s nuclear power plant, after all. Similarly a sudden windfall – a lottery win, or an inheritance – can bolster the long-term resilience and strength of our money grid if we’re ready to capture and store the energy. But the fact so many lottery winners wind up back where they started shows many people’s grids aren’t really fit for that purpose.
Fuel tankers, coal lorries, and power sharing agreements
I’m reaching for an equivalent to debt. Perhaps it’s in the sunk cost of the raw materials of power generation? Fossil fuels we ship in for energy here and now, regardless of the long-term consequences? That’s not quite right. A better analogy might be when one grid sends surplus energy to an adjacent grid that’s not generating enough power to keep the lights on. The inflow solves things for now, but all that energy will have to be repaid…
Electric shocks
Don’t stick a screwdriver in a socket. Don’t day trade Gamestop shares.
Feel the energy
I’ve slightly tortured the money as stored energy metaphor, but I do think it’s an interesting framework.
The consulting work I’ll do this afternoon sounds to me now like the roar of a gas-fired plant powering up. Meanwhile the adverts on this website and the shares in my ISA will be ticking away, sending pulses of energy into my grid.
Overloaded from a recent asset sale, my current account looks ready to blow – I need to get that energy flowing somewhere productive. Like up in Snowdonia, where metaphorically my monthly payment to my SIPP is pumping water thousands of feet high into the mountains, where it will wait until I open the floodgates and the energy comes flowing back out.
We could also have fun turning various laws of energy into financial rules of thumb. (I did this yonks ago with the first law of thermodynamics.)
Here’s one:
E= MC2
Stored energy = Money(Compounded)
Well, it’s a start.
May your finances never blow a fuse!
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“current” account – how apt!
I really like this as an analogy – “stored energy” feels like a much more satisfying idea than “numbers/records in a database”.
A few ways you could extend the analogy (some are a stretch perhaps…):
1) Education as a form of capital investment to upgrade the efficiency of your power generation (i.e. you’re now generating more ‘energy’ per unit of time thanks to a higher salary).
2) Your power plant has a limited working life – eventually it will either be replaced by newer technology or you’ll want to switch to something with a lower environmental impact (part-time work?), and so it makes sense to be mindful of your energy usage now and have a plan for the transition.
3) Asset diversification and multiple accounts aim to build redundancy into the system and guard against disruptions to the grid – things will inevitably break in ways which you won’t be able to foresee, so avoiding single points of failure where possible is good engineering practice.
The idea of wealth & energy being connected has always appealed to me. Most traditional economics makes no sense at all, but one guy has done a lot of work in this area & his ideas resonate.
You & others here might be interested in reading up on Dr TimMorgan’s ideas & his SEEDS project. He doesn’t give investment advice, but does provide a lot of food for thought. E., see his series of articles starting here – or anywhere else on his blog . . .
https://surplusenergyeconomics.wordpress.com/2020/11/12/184-the-objective-economy-part-one/
Bitcoin is literally stored energy, an environmental disaster because of all the computing power wasted to mine new bitcoins.
I’ve tried to see money in a similar way of stored potential. For instance,if I invest £4000 in equities, I don’t see it simply as a monetary figure,but as one less item on my list of monthly outgoings that I shouldn’t have to concern myself with again, for example the annual cost of haircuts (remember those) they should with luck pay for themselves in future. Each time I add to my investments I tick off another item on the list.In this way it keeps me focused on a long term objective, and stops me looking for an endorphin hit on a purchase I probably don’t need.
You’re close – it’s actually stored time, but a brilliant thought proving article nonetheless!
@TI. Not sure about money being “stored energy”. Assets could be argued to be a store of energy but, to me, money is a flow concept, more akin to the flow of energy around a circuit.
Great, the 2nd law of thermodynamics is applicable too. A hot cup of coffee will always go cold; (energy transfers from higher to the lower level, aka increasing entropy); the universe and our bank accounts destined to a lower average energy, without external input/effort. By insulating the cup it will stay warm longer or by adding more external heat. It also partly explains the relative difficulty of amassing very large sums of wealth and holding on to them for any length of time, and the ease with which the lottery winner can dissipate his prize!
Enjoyed this. I have for a while thought of my retirement stash as a form of “stored toil”. A store of my life’s work efforts and some of that of others through investments. I think of it as some form of coiled spring and see it as my duty in retirement to release this carefully back into the economy so that others may gain from it through their own labour and efforts. It will be a careful unwinding hopefully, I don’t want this mainspring of stored up toil to be fully unwound before my end of days!
Super analogy. Also, as a retired electronics engineer, I was deeply impressed that you did not once confuse energy with power!
I don’t think you need the metaphors, nearly everything you buy has energy as its principle input, GDP is closely correlated with energy consumption. There is a strong argument that money is energy.
This is why I’m sceptical that we will ever stop climate change, it would need rich countries to accept becoming poorer and poor countries to accept not becoming rich.
Absolutely loved this – big smile on my face. My first “real” job was working with power stations, optimising their operational schedules to hit the tea-break spikes each day. Is that the financial equiv of trying to time the market you reckon??!
Anyway – cheers for the entertainment. I have to admit I love my ground source heat pump and the solar panels we put in our self-build. Our house currently (great pun btw Berkshire Pat!) earns the equiv of a not insubstantial ‘salary’ each year whilst also knowing we’re helping on the green front.
Thanks again!
@John Bray
Yes that captures one view of Bitcoin which I suspect is overhyped. My understanding – verifying bitcoin transactions does use energy in updating the ledger (and miners are paid to do these calculations, they don’t mine new coins per se.). Its the level of security this method guarantees – a world wide non government controlled ledger proving ownership, and accessible only by unique key, I think that is the reason why people are happy to pay for a small amount of energy per transaction. Not totally relevant in the UK perhaps but outside of western democracies more so. And yes lower energy consumption cryptocurrencies are being worked on, Ethereum for example has a Proof of Stake in the works that will trade off computing effort for some level of security. Perhaps bitcoin will become a gold standard to Ether/other coins ‘paper money’.
I like the analogy. It sort of fits with my “retirement song”, doesn’t everyone have a retirement song? Anyway I have a retirement song 🙂 I love electronic dance music and I have always thought of Galvanize by the Chemical Brothers as my retirement song, just for the lyric “World, my finger is on the button…” Anyway decided to share, because it sort of fits with power analogy.
Nice analogy, I’m another engineer very familiar with the electrical power industry. We used to pay $13 million USD a year for the electricity that flowed through the single power meter that served our industrial facility so we paid a lot of attention to not using any more than necessary. I’ve usually seen people compare money to storage of time, but energy storage is equally valid and kind of a unique way of looking at things. There might still be some oil fueled generation plants in the third world but I’d be surprised if there are any in Europe or the UK, certainly it is only kept at natural gas fired generation plants as an emergency back up fuel in the US. Its just way too expensive and the emissions are too high for continuous use. Most new plants are fired with natural gas or they are wind or solar based.
Entertaining ideas. A foundational idea about energy of course is that it is conserved. I found an old £1 note in a passport the other day. Happy to test the conservation of money by sending it to you and seeing if it will get you and a couple of your mates a round of beers and couple of packets of crisps. As for it being a store of time try that on someone who just found out they were being paid 10 grand a year less than a colleague for the exact same work. What baffles me about money these days is you never see it! Nobody does as far as I can tell. And whatever it is it’s nowhere in particular and doesn’t seem to exist in any material sense.
David Orell has developed a quantum theory of money and everything, but as far as I recall there were no explanations featuring cats, poison and boxes so I couldn’t make any sense of it. Unlike your regular quantum theory which is crystal.
“What baffles me about money these days is you never see it!”
Crowley’s First Law*
‘Money is an abstract concept-until you haven’t got any’
*named for AleisterCrowley, a popular, handsome, and wise contributor on TMF(UK) and the Lemon Fool. Who is in no way related to me. Really
Vicki Robbins describes money as a form of Life Energy in YMOYL–it’s kind of funny, because people seem to think of it is very hippie-ish if you put the word “Life” in front of it, but really she’s saying the same thing.
Money = square root of evil
Time = money
Also E=mc2 is not far different from
kinetic energy = 1/2 mv2
(where c=v)
So the energy E that is pent up in mass could be thought of as a form of kinetic energy
Bear in mind that if we have momentum travelling through the dimensions of 3d space, we would also have momentum travelling through the time dimension – so we have a kinetic energy going through time.
I believe that a gravitational interaction transfers some of this kinetic energy through time from one object to another (conservation of momentum) – which is why relative tine is different near a source of gravity
Also bear in mind that electricity generates magnetism (ie the coordinated spin of atomic nucleuses)
Also that light is an electromagnetic wave – a store of energy somehow linked to both electricity and magnetism?
Haha “Electric shocks” perfect.
That was a damn good article. Perfectly explained. Nice job Sir.
@madflier: “You’re close – it’s actually stored time, but a brilliant thought proving article nonetheless!”
I don’t particularly like either equivalence, although they may be helpful when explaining the benefits of having savings/investments to someone who struggles to see the value.
The reason I don’t like the energy or time analogies is that the comparison falls down in many cases. If money is stored time, then what is the time to money ratio for £100. I think we can agree that saving an extra £50k over the next two years doesn’t equate to living longer, and if I choose to spend the money on better experiences (better seats at a sporting event or whatever) then my life doesn’t get shorter. With time in particular my issue is that it implies that working hard doing something you hate now isn’t a bad use of your time simply because the money you’re getting is that time back; but having a terrible life experience during your prime working years is unlikely to be justified by any time the money earnt could notionally save you in the future, especially when you go beyond a relatively basic threshold. At an extreme level, what’s the time value for a relatively normal person when they win £30m on a lottery jackpot, would it really be 200x greater than the value of £150k to them? If not, which is my opinion, then money and time aren’t directly interchangeable.
Great series covering the idea of ‘monetary energy’ in depth through the historical lens of scientific revolutions (you can skip the intro/outro of each episode):
https://www.youtube.com/watch?v=4rvTppy1qLI&list=PL2jAZ0x9H0bRvoNt1xNJWYa9_8_an03h0&index=1
@TI – Interesting analogy, but it can’t be taken too far: Energy is conserved, whereas money and wealth can be destroyed.
Actually the better way to think about the economy is in terms of energy flows. So the higher energy flows thanks to the innovation of steam engine coal use, to internal combustion engines and fossil fuel, to electric motors etc is one way we can look at the increase in quality of life the past 220 years.
Hey TI,
Interesting article :D… I liked where you went with that. Curious how through investing we can make energy from energy it seems… I myself hate how money gets demonised as in of itself its just a handy IOU, but it does strike me as odd and perhaps the part people don’t like when they think negatively about money is often that by simply having IOUs, you can generate more IOUs.
I rely on this to achieve FI of course and a SWR no doubt but I do wonder about that side of things at times… The ethics of it all but I digress.
TFJ
Oooh interesting! The manifesting world always talk about money being energy … but this is a much more practical take on that.