When my daughter Jemima was just four years old, she gave me a home-made Father's Day card. Inside was a voucher she had made at kinder. It said: "The bearer of this voucher is entitled to (fill in the blank) FREE HUGS from (fill in the blank) JEMIMA. This voucher may be presented at any time and never expires."
She is now 11 and I'm pretty sure she has no idea I have kept and treasured it. One day, when I really need a hug, I'm going to cash it in, but until then, it sits on my shelf and gives me a bit of a warm feeling every time I look at it. To me, it has real value because I completely trust my daughter to deliver when I present the voucher. It has "currency" because we love and trust each other and, in that realisation, you begin to understand "Money".
Under the gold standard, the British pound and the currencies of the Empire used to have the same currency as my daughter's voucher because the bearer could present a pound-sterling banknote to the Bank of England and be given gold in return. In the shadow of that promise, a promise from the bedrock financial institution of the British Empire, the paper on which that promise was written had value because it represented a promise from a trustworthy institution to deliver something of set value.
The Empire came off the gold standard in 1931 and since that day, the currency we use in Australia, as you will see if you have a look, now represents not gold, but an assurance from the Governor of the Reserve Bank of Australia and the Secretary to the Treasury that "This Australian Note Is Legal Tender Throughout Australia And Its Territories", in other words, if a debt is owed, this note can be used to legally satisfy that debt in Australia and its territories.
It may not be the promise of gold but it's as good as it gets these days. It means that if someone refuses to take your dollar notes, or give you dollar notes, and demands or tries to deliver something inconvenient such as goats instead of dollars to satisfy a debt, then Glenn Stevens will back you up and Glenn Stevens is the sort of chap you can trust. The integrity of all Australian money would be at stake if he didn't and the consequences of that would be simply appalling for Glenn, let alone the rest of us. Basically, if Glenn gave you a voucher for FREE HUGS you'd rank the value of that almost as close as I rank Jemima's.
And that's money, a relationship between two people. It used to have a hard currency value, but now it is worth no more or less than the strength of the relationship between the holder and promisor and the confidence of the party holding the paper that the other party will deliver on whatever they promise.
On that basis, it might amuse you to begin assessing how much "money" you really have in terms of the relationship you possess with it rather than its face value. Rarely is a dollar worth a dollar. For instance:
You lend $1 to the village idiot. How much is it worth now?
You put $2000 into a TAB account. What would your spouse value that at?
You borrow $500,000, add $100,000 in cash and buy a $600,000 house. How much is your $600,000 worth now, or next year?
You give $10,000 to the CEO of an exploration company.
You put $1 million of superannuation money - your future - in the hands of a flotilla of managed-fund managers across the world who you've never met. How much is your $1 million worth now?
You buy ?205 billion of Greek bonds.
Money is a relationship based on trust, whether it's with the village idiot or the property market, and the easiest way to add value is to constantly assess and improve the relationships you commit your money to. Jemima and I work on our relationship every day because you don't get FREE HUGS taking relationships for granted.
Marcus Padley is a stockbroker with Patersons Securities and the author of sharemarket newsletter Marcus Today. His views do not necessarily reflect those of Patersons.