What Everyone Should Know About Money

The frantic concerns we hear today about government budget deficits and accumulated stocks of debt exhibit a deep, willful and politically motivated misunderstanding of what money is. To suggest that the government that creates a non-convertible, floating fiat money such as the dollar, the pound or the yen, could conceivably run out of it is either a political protest of that government’s ability to unilaterally control interest rates or a statement of complete ignorance. Money is not just the thing we all carry around in our wallets, it is a system, and it does not exist in nature, it is a creation of governments. Gold was the preferred money in a world in which one could not depend on governments. With six billion people in the world, we all depend on governments in ways as entirely unimaginable to our ancestors as the internet or space travel. Living in modern societies we can no more do without fiat money than we can do without government itself. Imagine what you would do if tomorrow you were totally cut off from money.

When a credit cycle busts, as a big one recently did, that is the condition that most people find themselves in with the absence of a fiat money system. No one as yet has had the hubris to claim they can tame the credit cycle, and the infinite liquidity of a fiat system in duress makes it unnecessary to succeed in such an effort. The problem with fiat money is not its performance in crisis, conditions that called it into existence in the first place. The problem is what the powerful do with it day to day. Money is a man made system invented as a tool to facilitate distribution as societies concentrated beyond the utility of reciprocal obligations and barter for commerce. Because it relies on a universal empty signifier, however, money has properties more akin to mathematics than the analogue world we inhabit and who's values it represents. The manipulation of these mathematical properties allows those who understand them to concentrate flows of money into forms that become indistinguishable from power. Once money is deployed this way, it is within the purview of those manipulating it to rob the prudent of reward for their efforts.

The Bubble Bursts Verse

Back in the first round foreclosures,

T’was the bankers that made themselves hosers:

With mooches for debtors the MBS bettors

Were buggered by shorts from their brokers.

Well-hung bankers in trading floor branches,

Of banks built of dud bb tranches,

Were shocked to discover their positions uncovered

When Hypo Real shunned their advances.

With mountains of dreck on their books,

The best and the brightest and crooks,

And Freddy and Fanny all ran to their nanny:

It’s free money whenever she cooks!

Now bankers, they really can’t stand her,

That nanny, she could make them pander,

But loves them so much that whenever they touch

If they don’t pick her pocket they rob her.

While her power makes them so jealous,

Only bankers are worthy, they tell us,

To indulge in her pleasures, all national treasures

They'd corrupt lesser mortals among us.

And her children she tends to neglect.

She lets them all get by on debt.

But for bankers suffices to look past their vices

And backstop their every bet.

When the economy finally tanked,

From her brood employment was yanked,

But instead of their succor she embarked like a fucker

On a high horse of moral complaint!

It wasn’t bank’s loose lending standards,

But the low lives, those big spending bastards,

That created this mess and she had to confess

They deserved all their little disasters.

Having given all that they had asked,

She was shocked when her bankers then tasked

P R flaks with attacking all her efforts at backing

Rationales for the big bucks they’d sacked.

Now it’s nanny who’s going to get hosed

By those big spending bankers who posed

As the hope for the future she really felt suits her,

But now they’ve run off with here clothes!

Bankers speak now with the voice of the state

They tell the rest of us "fish or cut bait"

Give your money to us or you're under the bus!

Extortion they insist is our fate!

So it seems that Americans are left

To select between robbery and theft

As preferred means to fund financial industry fun

While forsaking our own lives bereft.

Deflation vs Revulsion

In our current predicament we find the mainstream of economists, seduced by the history and mathematics of a return to Neo-Classical monetary theory, insisting that there remains no space between the deflation that we currently face and currency revulsion they insist is the inevitable consequence of continued deficits. No new model needs to be constructed to contest this view, it exists in reality and is called Japan. For twenty years deficits have accumulated well beyond the Neo-Classical inflection point of 90% of GDP that is supposed to trigger inflation. Now at twice that level Japan has no experience of either inflation or it's supposed successor currency revulsion. Neo-Classicists insist this will all end any minute now. They have for twenty years.

Mathematical models of growing complexity began to be constructed in the late 1970s to explain the growth in Keynesian economies from 1936 to 1976 as having been in spite of rather than because of Keynsian policies. Occam's Razor was abandoned by a wooly new economics that obscures its motives in this complexity. Now equidistant from that inflection point, the macro economy has returned to a state very similar to that for which Keynes invented his policies.

There is a broad pattern that is so obvious that it apparently disappears into the landscape for Neo-Classists so obsessed with trees that they can't see the mountains. Since 1936 as annual deficits added wealth to the economy the economy grew at a rate that reduced the percentage of GDP the accumulated debt represented. This is because growth in the economy exceeded growth in the cumulative deficit. Each occasion where annual budget deficits were abandoned in favor of surpluses was followed either by a stall or contraction of the macro economy.

There is no doubt that Keynesian policies can be misapplied, price and wage indexing were a mistake the OPEC shock compounded to create a real inflationary episode. This reality does not however close the gap between incipient deflation we now face and the currency revulsion mainstream economics insist we face. The real threat to a fiat currency facing a debt deflation seems to me to be that the value of that currency is entirely dependent on the productive capacity and effective trade of the economy denominated with it which the deflation itself threatens to dismantle through bankruptcy and liquidation. When the US can no longer produce and consume, its currency will be valueless, and the quickest way to get there is a general deflation.

Inflation is a risk. Currency revulsion is a risk. Debt deflation is a risk. Demand deficiency is a risk. Neo-Classical economics refuses to recognize that demand deficiency can exist because it insists that debt dynamics are a purely monetary phenomenon. This view depends on "rational expectations" which describe the mathematicians fantasy life rather than any lived human experience and Say's Law that requires humans to deploy all their income at all times, and to do so effectively. Both necessary propositions for the Neo-Classical position place the human economy in the Procurstean bed of mathematics and would rather decapitate humanity than abandon the bed.

PS 
Five years on now, not only has QE massively inflated the balance sheets of the Fed and asset prices for the rich, but the GOP's continuing erosion of the authority of the IRS to collect tax from the wealthy is setting the conditions for revulsion. To gamble further with our patrimony, our sanctions efforts with Iran, Russia and Venezuela are all pushing toward a China centric integrated foreign exchange system.  So we have erosion of our own strengths while actively incentivizing an alternative. 1/28/15