The Money Paradox

Ilya V Kuntsevich,Roman V Libkhen

doi:10.22158/jbtp.v8n3p16

Abstract

Money has two key properties—accumulation (value) and liquidity (exchange), which results in what we define as “The Money Paradox”. In the language of Physics, money can be in either static (value, potential energy) or dynamic (exchange, kinetic energy) state, however the same money can’t be both static and dynamic at the same time because the states are mutually exclusive. In our paper we discuss the conditions under which money changes its state and how such transformations impact continuity (stability) of economics. Our goal is to identify the measures of continuity and thus sustainability of economic activity, as well as to help determine a point in time when new money must be infused into a financial system in order to maintain a continuous production and exchange of goods and services within an economic system without interruption, i.e., a financial crisis.

Highlights

All objects in the universe have a tendency towards lower levels of energy
As the system continues to produce, it increases the value of money because money, unless the speed of its circulation increases, becomes a commodity in short supply, and loses required liquidity to maintain the status quo. This problem is currently solved by the world central banks via infusion of new money into a financial system, frequently referred to as “quantitative easing” through acquisition by central banks of treasury bonds, mortgage backed securities and other financial instruments, all linked to economic performance
In order for a given economic system to continue functioning and not stall, its economic activity should, on the one hand, continuously create value items and, on the other, continuously maintain a sustainable distribution level of the money within the system. This approach will keep the system’s entropy rate of change above 1 (S’ > 1) and prevent a negative scenario that would require new money to be infused in order to keep the economic activity robust and avoid stagnation

Summary

Introduction

All objects in the universe have a tendency towards lower levels of energy. Scientists call this a high level of entropy. In order to avoid the freeze and retain their level of kinetic activity (speed, or rate, of economics), economic objects require additional energy (e.g., inflow of new money) in order to decrease entropy Otherwise such a system would inevitably stall because any further continuity of the money flow would be impossible due to its freeze. The slope of the curve represents current, or the flow of charge (exchanged energy), which decreases with time as accumulated potential energy of the stored charge transforms into energy of the electric current, eventually bringing the overall system to a higher level of entropy - a low energy state Similar to this example, it is impossible for static money (at its lowest level of kinetic energy) to do any work without a transformation, which liquefies and expends that energy. S is a monotonically increasing function, meaning entropy can only grow with time (and new transactions T); it is not limited from above and can grow to infinity

Result

Conclusion