Stock-to-flow model for Dummies: Why toilet paper can’t be money

Here we will explain the stock-to-flow model in simple terms.
Stock-to-flow (SF) is defined as the relationship between the production of a good and its current stock available.

Gold has an annual production of 3,000 tonnes and a stock of 185,000 tonnes:
Stock / Flow
SF = 185,000 / 3,000 = 61,67
It takes nearly 62 years of production to produce the current gold stock.

Now you know how to calculate SF-ratio but what does that number even mean? It shows you wether a good is truly scarce. The higher the SF, the scarcer the good and the better its properties to serve as money.

Toilet paper is also scarce why not use as money?

In the current pandemic situation toilet paper could be used as money due to its perfect properties. It’s scarce, easily divisible and non perishable. Toilet paper has become an international meme. People hoard it worldwide. In Australia we have witnessed a cat fight in a supermarket. 
In Germany people do even break into cars and houses to get it.

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The only problem with toilet paper is, that unlike gold it takes not much time and effort to produce it. Toilet paper becomes nearly worthless once producers flood the market with toilet paper. Unfortunately this is also true for Euros and Dollars which (central) banks produce even faster with a click of a button.

Bitcoin

A new form of money was born in January 2009. It’s pure information ist just zeros and ones. Amongst others it’s baked into the protocol that SF will grow for the next 120 years.

Author: Yaya Camara

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