The question in modern society is, can the conversation called “money” be reconciled with the conversation called “ecology”. To form an answer, it is helpful to understand “capitalism”.

If money is a conversation, then many different types of conversations have evolved and can evolve from the basic conversation. These evolved conversations elevate the complexity and sophistication of the original invented notion of money. Capitalism is a philosophy (complex conversation) of money that breaks the original notion of money into two major invented notions:

• Flowing money, called “cash flow”, “recurring revenue”, “annual earnings”, etc., and
• Stored pools of money, called “capital”, “equity”, “assets”, etc.

The relationship between these two invented notions creates powerful results for people who engage in the conversation called capitalism. The essence of this conversation follows these three steps:

1. money is valuable because it can be used to buy things
2. a flow of money is valuable
3. therefore, money (capital) can be used to buy a flow of money (cash flow)

In capitalism a person who creates a recurring flow of money can sell that flow to someone else. I call this “capitalizing the cash flow”. This is the basis of all investing, including the stock market.

What does it cost to buy a cash flow? If you purchase a Certificate of Deposit (CD) at a bank that pays 5% interest annually, you are actually paying 20 times the cash flow to purchase that cash flow. If you “sell” your cash flow back to the bank, they stop paying you the 5%, and you get your capital back. In the language of the stock market, this CD would have a “price to earnings ratio” of 20 – the cost to purchase the cash flow is 20 times the annual cash flow.

This entry was posted on Saturday, March 29th, 2008 at 7:47 pm and is filed under ABC's for..., Entrepreneurs, Investors. You can follow any comments to this entry through the RSS 2.0 feed. You can leave a comment, or trackback from your own site.