Tuesday, July 3, 2012

Monetary Musical Chairs

There is not enough money in the world, literally, to pay off all the debt nations and individuals have incurred. We are focused on money (measuring stick) when we really should be focused on productive economic activity.

Jeffrey Snider explains:
Money is simply a tool to help achieve that goal; it is certainly not the predicate condition for exchange, nor should the system strive solely to circulate money. The successful cycle of money in the economic system, like the real, productive demand for money, is only a derivative measure of true economic success.
Economists that continue to proclaim a recovery are consistently disappointed and confounded by persistent weakness because they fail to see past the modern goal of simply cycling money. There is far more to the economic system than just money, the means and motives for its exchange are far more important. Not all economic activity is equal; there is no perfect substitute for true productive activity. (Jeffrey Snider)
The System is Broken
Given the structural constraints that remain in place, unfortunately augmented by the misguided attempt at inflation-expectation engineering, I continue to believe that the natural path of the global economy is further contraction.
In other words, the artificial activity that formed the backbone of economic growth for more than two decades was in such high proportion that absent extraordinary measures there is no way to achieve anything better than temporary pockets of uneven growth.
If there exists a tendency of reversion to the mean in economic terms, this is it. The artificial credit/asset inflation growth kept the economic trajectory far too high for far too long. (Jeffrey Snider)
He’s right. We’ve seen the outcome of economies built upon dot com and housing bubbles and debt. It ain’t pretty. Yet economically-ignorant politicians still talk of restoring the housing market, which means reinflating the bubble. Stupid.

Constant monetary manipulation has become an end unto itself. Monetary inflation, which is the policy of all governments holding fiat currency, is like shrinking the size of a measuring tape to make it all OK when you cut a board too short. Easy money makes people crazy…

Easy money also causes recklessness.  Imagine going to Vegas with a million dollars of someone else's money, that you don't have to pay back...
Had the economy not been artificially boosted by monetary means, it is plausible that this more difficult path to the natural growth trajectory would have forced businesses to "value" financial resources far differently.
If the only way to achieve monetary success is through actual and successful productive capacity, rather than pure asset price inflation, then it is certainly plausible that an increased devotion to productive capacity might have continued the trend in revolutionary innovation.
If nothing else, financial resources that were squandered on stock repurchases might have been put to better use in the real economy as true productive potential, the very element that is missing right now. (Jeffrey Snider)
We are not out of the woods yet. We may not even be at the halfway point…


jez said...

"There is not enough money in the world, literally, to pay off all the debt nations and individuals have incurred."

Hasn't this been true since the 17th century?

Always On Watch said...

Eventually, a Ponzi scheme runs out of any available money.

Silverfiddle said...

Yes, but countries traded and paid off debt by various means back then.

Snider's point is that money is a medium of exchange, but people and governments are now treating it as an end unto itself, with the finance industry playing phony baloney manipulation games that line their pockets but that create no real economic activity.

If governments did not incentivize it, reward it, and cover their losses when they crashed, they wouldn't be doing it.

jez said...

Agree that governments shouldn't be encouraging it, but I don't think the whole financial industry would stop acting dubiously if the incentives disappeared.

Meanwhile, whichever country hosts the large financial sectors benefits from colossal (though ultimately fictitious) amounts of money, hence governments compete to attract the financial industry.

It's a classic race to the bottom in terms of regulation.

Ducky's here said...

Did Obama do this all in just a couple years?

Ducky's here said...

People are treating money as an end to itself.


The banking system has become dislodged from its function in the wider economy.

Bunkerville said...

France paid their debt by selling the LA purchase. Growing up there was no MasterCard, visa, so called lines of credit on our homes. Poonzi indeed.

conservativesonfire said...

If Obama is reelected we will move deeper into the woods. If Romney is elected, it is a start and nothing more.

Ducky's here said...

Well bunker, how else are the banksters going to keep you indentured?

Terrific scheme, they do it with our permission. Although we seem to be catching on to the grift.

Bunkerville said...

Indentured Ducky, but so far they are not trying to kill me. I at least i have a bit of hope. 500billion out of Medicare will make sure my days are numbered.

Z said...

SF....this isn't a field I can comment on but your last two sentences, I know, are right...

Let me ask a question with the fear that I"ll expose the fact that this isn't my subject more than I usually do :-):

I'm hearing on the news financial shows: "we could be going into RECESSION!" And I think to myself "Man, we've had a few bad recessions in the last 30 years alone and have pulled out rather beautifully....I thought things were WAY worst than a recession at this point, so maybe I'm wrong".
Am I wrong or right?
On the other hand, we've NEVER been in as much debt as Obama's put us in, and I'd have thought that will be a condition which puts a drag on getting OUT of any deep recession?
Am I close?

Silverfiddle said...

No one who understands economics should be surprised at this news.

Nothing Obama has done could even remotely be expected to create a favorable economic climate.

And don't let lack of knowledge of a subject intimidate you.

I sound off on stuff I know nothing about all the time!

FreeThinke said...

We're only here for a little stay
Don't worry. Don't hurry.
And be sure to stop in all the bowers
And smell the lovely flowers
You're sure to meet along the way.

~ Anna Blaisdell Arbiti

Submitted by FreeThinke

FreeThinke said...

"I sound off on stuff I know nothing about all the time!"

What utter nonsense!

False modesty ill becomes you, sir. You are without a shadow of a doubt one of the smartest people in the blogosphere.

~ FT

Ducky's here said...

Well Freethinker, the tragedy is that we can't get any closer to seeing our way out of this mess.

Sam Huntington said...

American currency has no value; it is merely worthless paper, upon which the government printed clever designs in order to assuage the anxiety of men who realize this truth. In the present, American currency is as intangible as a politician’s promise. What does have value is precious metal, but since it lacks practicality as a medium of exchange, we have allowed government to convince us that a bank note (fiat currency) is every bit as good. How is such a thing possible when we discharge debts with worthless paper? How is it possible to trust a government’s promise to honor just debt when borrowed from the treasury of foreign governments? How did we ever arrive at this point, where in exchange for their weekly labor, Americans are so willing to accept nothing in payment?

Fiat currency equals nothing.

If it is the intent of government to convince us American currency has value based upon national productivity, then we are obliged to ask, “…production of what?” Our nation doesn’t produce anything beyond fast food and software. As a strategy, this is only half working. I’ve never seen so many fat Asians as since McDonalds opened up franchises feeding 1.4 billion people. Eventually, these people will die from hardened arteries, but I don’t think we’ll have a victory parade for that. As for software, not so much; the Chinese simply violate the copyright and use it as they wish. As for the grand old American companies, such as General Motors … China owns 75% of that one, subsidized by the American taxpayer, of course.

When we speak of manipulating money, we should all understand that it is the manipulation of a fictional thing. Fiat money has no value other than what the government tells us that value is. Raise your hand if you have confidence in that …

Finntann said...

Sam, I am forced to assume, unless you advocate returning to a pure barter system, that you are in some way advocating returning to a gold, silver, or some other physical standard.

I have to say your argument is false and I am forced to ask you, what value does gold have outside of our agreed upon value of it?

It functions in much the same way as a fiat currency, we assign a purchasing value to it, but it is not a value intrinsic to the metal.

Honestly, outside of some electronic and chemical applications it's pretty much worthless. Iron and copper have far more practical value than gold and there are many other metals that we are far more dependent on.

Imagine a world without aluminum, copper, or steel and compare it to a world without gold. Which one would you want to live in.

Like fiat currency, gold only has value because we agree that it does. Fiat currency like gold can be used to represent labor in a barter system, but again, only because we agree to it. Fact is, post-zombie apocalypse, if I have wheat and you have gold, you're pretty much screwed. I can eat wheat.

The only argument you can use for a physical standard is that it can be used to control the amount of 'vouchers' printed. That alone may make a good argument for the return to a "standard", but it doesn't make that standard any more intrinsically valuable than fiat money. The same could be accomplished by legislation.

Gold is as much a vanity currency as fiat money is, it only has value because we collectively assign value to it. The same act that we ostensibly do through our government with fiat money?

So, what's the difference?


jez said...

"...clever designs [printed on money are] in order to assuage the anxiety of men who realize [it is worthless]"

a) the designs are there to make forgery more difficult.
b) the vast majority of money is electronic and never printed, so issues of paper cash are arguably irrelevant.
But sure, the design of cash may have some psychological impact, or at least its familiarity does. I do find it weird handling foreign currencies -- it never quite feels like "real" money. Perhaps that feeling is the accurate one and I should try to apply it to my native currency.

"American currency is as intangible as a politician’s promise."

The worth of money is always decided by the market, not the government, even with gold backing. Look up the historical volatility in the value of gold.

One tangible, solid aspect of even our fiat currencies is that our banks are legally obliged to accept them as repayment on loans. That fact guarantees that anybody with debt (all of us at some time or another) will accept it in return for our goods and services. This is a useful property.

The alleged advantage of a gold-backed currency is that available gold is fixed, or only grows as fast as we can discover & refine it (or steal it like we used to in the bad old days), so it puts questionable tools such as quantitative easing out of reach.

jez said...

Z, I've thought the same thing as you, comparing the current situation to previous recessions even in my life time reports of it seem exaggerated. Maybe it hasn't hit properly yet? Comparisons to 1929 seem particularly overwrought.

I guess that often what journalists mean by "recession" is quite narrow: "at least two successive quarters (6 months) of economic contraction", which may or may not tally with what we mean by the word "recession" -- just a loose term for general gloom in economic outlook.

Sam Huntington said...


I do see your point. I don’t know enough about the valuation of gold or silver to advocate returning to one or the other as the basis of our monetary standard. I have a natural distrust of The Fed, and I suspect it would be difficult to “print more money” if doing so devalued our horde of gold. By the way, some say that there is no gold at Fort Knox … and even if merely a rumor, what is the point of hording gold that has no relationship to our monetary system?

@Jez … what makes money “fiat” is that it relies exclusively on government law or policy for its value. I think it is correct to say that “confidence” has much to do with how people “value” the American dollar, but government (not market forces) decides to place more money into circulation. Believe me, I’m no expert here. I simply note that in the event of a crisis in this country, America’s currency would be worthless. But Finntann is right, too … under such circumstances, wheat may become the new medium of exchange.

Interesting discussion. Thank you …

Silverfiddle said...

Finn and others who poo poo hard currency:

I recommend Murray Rothbard's What has Government Done to Our Money?

There are merits and demarits to an absolute gold standard, but it does take away the ability of government chiselers to collude with central bankers to rob the rest of us.

It's a put up or shut up system. If government erodes the value of its money, people can turn the currency in and demand gold instead.

Steve Forbes explains it well here. Fiat currency always ends badly.

FreeThinke said...


Sam's point may have been that fiat currency is a type of forgery in and of itself.

Finntann has shown himself time and time again to be an ardent RELATIVIST. In my, admittedly limited, experience with Finn he seems ever ready, willing, able and eager to debunk any claims of intrinsic merit or value to any system of thought, religious doctrine, work of art, music, fiction, architecture, lifestyle, rules of grammar and syntax, the diction and accents through which we speak, -- or of any thing in particular.

I don't think Finn believes there are such things as Good Taste and Bad Taste. To him there appear to be only PREFERENCES all of which ought to be accepted as of more or less equal value.

I can understand how it might be possible to adopt such a mentality, but –– well let me explain it fast by minting a new motto:

We are DEFINED by what we CHOOSE to ADORE.

There are several volumes worth of implication in that, if you want to think it through.

~ FreeThinke

PS: If I appear to have been unfair to Finntann, I apologize in advance. I merely made an observation based on personal experience. 'Twas not intended either as pejoration or condemnation. I do think it fair, however, to say that Finn sees his primary role here to be that of Gainsayer-in-Chief. ;-) ~ FT

Finntann said...

SF, Sam... I don't "poo poo" hard currency, in fact I agree with you specifically for the reasons cited, that a standard prevents politicians from printing more paper and devaluing the paper we already have.

I'm simply saying that our valuation of gold or silver is a fiat unto itself, it has no intrinsic real value. You can't eat gold, you can't build things with gold, it makes lousy weapons, etc. About the most you can say about is is "oooh, shiny"!

The people who say "OMG, society is going to collapse, I better buy gold" are going to be in for a rude awakening if and when the stuff ever hits the fan. You'd be better off stockpiling cans of Cambell's soup.

When you get down to it, our fiat currency represents time, hours of labor if you will. The problem isnt the standard (Time) it is the governments ability to print more of it without any relationship to the standard at all. In essence, the Fed counterfeits 'Time' in order to manipulate the exhange.

Basically it is a tax, and in fact it is probably the perfect tax, in that you can't avoid it and the government doesn't have to collect it. Every time the government prints money that is completely detached from reality you are taxed by the amount that your existing held currency is devalued.

There are problems with both systems. With fiat currency inflation can be caused by governments printing money. On a gold specie standard inflation can be caused by discoveries of gold or technological advances increasing its reclaimability.

What we really need is an independent treasury (again), where the executive branch has no control over the supply of currency thus restricting its ability to print money in order to spend money.


Finntann said...

No offense taken FT, I understand you are comfortable in your box, and if representativive of the species we'd still be living in caves, paining the walls and grunting at each other.

As usual, you completely miss the point.

It doesn't matter whether we are on a gold standard or not, politicians will still assign the value of the note and the value of the gold. Such as the 1834 revaluation of the US dollar from 1.6g of gold to 1.5g of gold in which the value of the dollar was reduced by 6%.

Return to a standard is not the panacea you may think it is without significant political and legal reforms. In fact, the same end could be accomplished solely with the political and legal reforms absent the return to a standard.


jez said...

"government (not market forces) decides to place more money into circulation."

A pretty rare occurrence. The vast majority of all money in circulation was created by the banks, not by the government. Banks deciding to be generous or miserly has more of an impact on money supply than quantitative easing.

jez said...

"fiat currency is a type of forgery in and of itself."

What do you mean?

It strikes me that it's important that the medium of exchange have no intrinsic worth... if it did (like wheat), people might choose to use it for it's natural purpose (baking bread), thereby reducing the amount available as money. (I think this has happened already: people started melting down coins for their metal -- I'm unaware of whether it had a monetary impact though.)

Silverfiddle said...

@ Finn: people who say "OMG, society is going to collapse, I better buy gold" are going to be in for a rude awakening if and when the stuff ever hits the fan. You'd be better off stockpiling cans of Cambell's soup.

Agreed. I would only add "lead" to the stockpiling advice...

Here's what I wrote a few years on the subject (back when you were a contributor, Finn, as well as perhaps the only reader...:

Gold Rush