Money’s Many And Problematic Definitions

There’s no escaping the Federal Reserve (Fed) when it comes to investing these days. The Great Financial Crisis (GFC) showed how the movement of money through the financial system can impact markets and mainstreamed these previously obscure discussions. As a result, flexing your financial system “plumbing” expertise is now fashionable. Thus, money’s role in investing has (arguably) never been more in focus. Yet, money means different things to different people. It does not, surprisingly, have a uniform definition. This is highly concerning. How can we analyze economic performance, evaluate policy, assess money market impacts, and make thoughtful investment decisions without a consistent view of money?!

Yet, we hardly think twice about money. Financial media bombards us with expert opinions of what may, may not, or even should happen in money markets with no consideration for money’s disparate definitions. Whether you view it as a medium of exchange, a store of value, or just something the government prints will guide your opinions of everything from central banks, to interest rates, to inflation (you even might come to think that banks create money from thin air!). Somehow, this sorry state of affairs has persisted for a long time.

Money’s usual and unusual suspects

In the investment management industry, money belongs to the realm of economists, strategists, and other macroeconomic focused analysts. It’s almost always discussed with respect to the Fed’s monetary policy and the potential impacts to money supplies, economic growth, and markets. A dizzying array of charts populate pages of thick marketing books illustrating alleged relationships between money, models, and the investment performance for common and exotic products alike.

Yet, if you asked ten experts for a definition of money you’d likely end up with as many answers. There is no consensus. In fact, money’s become more complicated. Classifying it has evolved into a game of one-upmanship where obscure lists portray monetary expertise. Complexity is conflated with conceptual grasp.