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It's the money, stupid

Global economy | It's the money, stupid Bill Sharon

Some thirty plus years ago I read a book entitled Man's Worldly Goods - The Story of The Wealth of Nations by Leo Huberman. Mr. Huberman was an avowed socialist and co-founder of The Monthly Review – a dyed in the wool lefty if there ever was one. My recollection is that his book was easy to read and an interesting history of how wealth was defined over time and through a number of different economic systems.

One idea from the book stuck with me: Mr. Huberman suggested that political reality is always at least one generation behind economic reality. People might consider themselves as citizens of a particular country but the economic system in which they operate crosses borders at will. Perhaps we might update that idea to say that economic reality is always at least one generation behind monetary reality. The manner in which money is created and wealth is calculated is becoming more and more detached from global economic activity.

The Federal Reserve and the Bank of Japan initiated another round of quantitative easing last week; these two central banks are buying debt instruments; in the US the target is Treasury bonds (for now), in Japan it is virtually any kind of debt. The expectation is that these efforts will make the currencies of these countries less valuable with a resulting increase in exports, their debt instruments will be less valuable because of lower yields and money will flow out of bonds and into stocks. The market will rise, people will feel richer and the economy will expand.

But the logic behind this practice is looking more and more like a pretzel. The central banks create money by creating debt. While it is true that the Federal Reserve is virtually giving money to the banks, the principle still holds when the banks use that money to create loans and thus, more money. Some of that created money was invested by the banks in another debt instrument called a Treasury bond which is now being purchased by the central bank that will create the money to buy it. It’s difficult to follow. One ends up wondering where the value is.

The vast majority of us believe that money is necessary to survive. We use it to buy things we need and, although less so these days, things we want. But the monetary system on which that belief rests has become extraordinarily abstract and complex. Paper money that we carry around in our pockets and wallets is just a tiny fraction of the total; all the rest are digital dollars.

Nassim Nicholas Taleb, in his book The Black Swan tells us that complexity and volatility are inextricably linked. We have an economic system, capitalism, which requires volatility. You can either be successful or you can fail. Failure by some is not only an option in this system, it is a requirement. But we have gotten to a point where we can’t tolerate any failure because the system has become so complex no one really knows what will happen if we have another Lehman Brothers. The problem is that the attempts to force stability by manipulating interest rates or enforcing regulations just end up creating greater instability.

Add to all this the results of the elections in the US last week (and hence the play on words from James Carville’s admonition to the Clinton campaign staff in 1992 in the title of this piece). The message, once you get past all the posturing by the left and the right, was pretty clear. Too many people don’t have jobs and the ones who do are afraid that they might lose them. An expectation has been created that the political process can address that problem. No one has really explained exactly how.

Technology is eliminating jobs and the increase in population (a subject we’ve all decided not to talk about) is dramatically increasing the number of people who want jobs. The prospect of unemployment increasing is not politically palatable so both parties run around talking about stimulus or tax cuts all the while hoping against hope that something good happens.

We choose not to see how rapidly things are changing as we live our daily lives. Drop someone from the early 1980’s into today’s environment and they would have some difficulty understanding why it is that much of the population walks around with their eyes glued to little hand held devices. They would also be astonished at the price of a candy bar and a telephone call. They would be terrified at the level of debt, not just in this country but around the world. Things have changed a lot in a short period of time.

We would all like to believe that we are going through a normal, albeit very difficult business cycle. Things will get better – they always have. But we may want to consider that some of our assumptions just don’t hold water any more. The debt we have is too large to be addressed by budget cuts and our grandchildren aren’t going to pay it back. The jobs we want are disappearing because of the technology we invented to enhance productivity. The money that we work for has become a pile of abstractions so complex that it is virtually impossible to understand. It’s easy to list the problems. It’s easy to demonize someone else. But the real questions remain.

There is a quotation from Einstein that I’ve used before: “No problem can be solved from the same level of consciousness that created it.” There are some fundamentals in play here – the idea that everyone can get a job, the idea that working at a job will earn money that has value, the idea that debt is a reasonable vehicle to create that money. All these ideas are under tremendous stress. New ideas are emerging - like contributionism and time banks that still seem utopian in the current context but offer a new way of thinking about commerce and the concept of exchange. When you get past all the noise about “what should be” you can begin to work on “what could be”. Time is short.

Tags: central banks , economic crisis , economic recovery , Federal Reserve , financial crisis , global economy , QE2 , quantitati , sovereign debt , US
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