[Update: this post wasn't as clear as I wanted it to be. Because my head wasn't as clear as I wanted it to be. Reading and responding to comments has helped me get clearer, I think. Let me try this:
There are two reasons why people buy an asset:
1. Because owning the asset earns them a flow of services, either in money or in kind. Bonds, houses, land, cars, etc.
2. Because they expect to earn capital gains by selling the asset again at a higher price. Zero coupon bonds, maybe gold, maybe bubble assets, etc.
(Or sometimes it's a mixture of 1 and 2.)
What about money? Why do people buy money (i.e. sell other stuff and accept money in exchange)?
Normally, economists say that money is an example of 1. People buy money because owning money earns them a flow of "liquidity services". I hold an average inventory of $100 currency in my wallet because it makes the shopping easier, and that flow of services compensates me for the loss of interest and capital losses from the 2% inflation that I expect.
But in this post I want to say that money is an example of 2. I sell apples to buy money, and subsequently buy bananas to sell that money again. If I value the bananas I buy more than the apples I sold, then in subjective terms, i.e. measured in my utility, I have made a capital gain by first buying then selling money. If we follow a $20 note as it circulates around the economy, each person who buys then sells it makes a subjective capital gain; but this sequence of subjective capital gains is perfectly consistent with that $20 note losing value as it circulates around the economy. It's like an Escher staircase, where each step is up, in the eyes of the person who takes that step, but where the staircase spirals down, because what looks like an upward step in the eyes of the person taking that step would be a downward step when seen through other eyes. Because we have different preferences at the margin, so evaluate goods differently, which is why we trade.
Original post follows:]
I buy a house. Not because I want to live in it, or rent it out; the house will sit empty while I own it. I buy it because I plan to sell it again, and I expect that what I get paid when I sell it will be worth more to me than what I paid to buy it, even taking into account the fact that I will wait a few weeks between buying the house and selling it again.The person I sell it to doesn't plan to live in it or rent it out either. She buys it for exactly the same reason I bought it. And she plans to sell to another person who buys it for exactly the same reason. And so on.
It's perfectly obvious to all of us who buy the house that nobody would ever want to live in it, and that we all plan to gain by selling it to somebody else. And none of us would ever buy it, at any price, if we thought we could never sell it again.
And it's also perfectly obvious to all of us that the price of the house will fall over time at around 2% per year.
And I have just described a rational expectations equilibrium, where everybody is behaving perfectly rationally, and expects everyone else to behave perfectly rationally too.
And it's not just a theoretical possibility. This happens in the real world, in Canada, and many other countries, and this has been going on for years. And everybody thinks it's perfectly normal.
OK, I lied to you about one thing, but only one thing. It isn't a house. It's a $20 banknote.
But why should it make any difference to my story whether it's a house or a $20 banknote? A totally useless house, that nobody would ever want to live in, is rather like a $20 banknote.
See right back at the beginning of my story, where I said "...I expect that what I get paid when I sell it will be worth more to me than what I paid to buy it..."?
If my story were about a house, I would normally buy it for money and sell it again for money, and I would only buy it if I expected to get more money when I sold it than when I bought it. Otherwise I could have done better just by keeping my money in my pocket. And everyone must expect to get more money when they sell it than when they bought it. So my story wouldn't work if it were about a house, and everyone expected house prices to be falling at 2% per year.
But if my story were about a $20 banknote, I would buy it for (say) 20 of my apples, and sell it for (say) 19 of her bananas. And she sells it for 18 of his carrots. And he sells it for 17 of my apples. If I prefer B to A, and she prefers C to B, that doesn't mean that he prefers C to A. Transitivity does not hold. Because different people value different goods differently. That's why we trade. And if using money makes it easier to trade, we will still buy money even if everyone expects it to lose value over time, so that I first bought the $20 note with 20 of my apples, but buy it for only 17 apples when it eventually returns to me. Nobody was a fool, and nobody expected there to be a greater fool.
This post was mostly just for fun. And to remind us that the medium of exchange is not like other goods.