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BobK71 (OP)
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May 17, 2015, 02:02:17 AM
Last edit: May 17, 2015, 02:30:09 AM by BobK71 |
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I welcome any comments about this essay, including challenging ones. To make it readable, I've had to make assertions, which may or may not seem justified or adequately explained.
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What Is Money?
Money is an agreed standard of value. Any economy that has advanced beyond bartering must use money.
The acceptance of any money requires faith. In the religious war among monies, partisans are eager to point out the faith-based nature of opponents' monies, while forgetting this basic fact. The intrinsic values of monies rarely, if ever, justify their monetary values.
(National currencies naturally start with the most faith, but for this very reason, they are also the most abused over time. Exactly how they will perform, thus, becomes fundamentally uncertain. Ordinary citizens are basically gambling with their savings, no matter what they do.)
Money's Evolution
It seems, money really grows on trees. I.E. wherever there are thinking humans, there is money. Shells, tobacco, laundry detergent have all been used. Gold and silver have emerged through the millennia as dominant forms of money in important parts of the world, due to their physical properties.
Modern Western money started as physical precious metals, evolved into paper which was supported by the various, progressively weaker versions of metallic standards, to fiat paper. Central bank fiat policy also evolved from "inflation-targeting" to "dual-targeting." (The other target is employment.)
Each step along the way, savers were expropriated by a combination of inflation, broken promises (e.g. central banks' undying commitment to gold at a fixed price,) and financial instability. For some reason, at each step, the promises of the last step were always found to be impossible to keep, in the end.
Throughout this period, the state has grown more powerful, while financial crises always seem to recur. Commonly accepted logic justifies the expanding role of governments and central banks as needed to contain crises, while forgetting that state-supported financial asset expansion has been the root cause of every crisis. (The conventional logic never seems to be challenged by the economics profession.)
Money's Role in the Rule by Elites
The core modern social structure is a grand alliance between the political and financial elites. Each group receives most of its power and wealth by issuing money and debt out of thin air, while confidence lasts. While the political class contributes state power to prop up the values of the money and debt issued by both groups, the financial elite contribute innovative ideas by dreaming up new assets the public might believe in, if temporarily.
Bank assets provides extra demand for the money and debt issued by the state, and actually protect them from market forces, if bank assets crash. It's for this service that banks receive a share of the benefits of state power, in the form of taxpayer-funded bailouts and loose regulation (given the guarantees of their debt by the state.)
The central bank is the institutional cornerstone this partnership. Its real function is to keep the partnership alive by keeping both sides honest. (I.E. "honest" only to each other under the terms of the partnership, for example, by refraining from issuing too much money or debt and endangering the system as a whole.) If it never seems clear whether the central bank is public or private, this is basically why.
The chief device for extracting wealth from the rest of society is issuing money and debt, free of cost, while the public still trust in their values, to benefit members of the elites quite personally. The consequences of inflation and financial instability are borne by the economy at large.
At this point I should mention an important point: the various gold standards have actually been another device for propping up the values of state and bank issued money and debt. Compared to fiat money, they did slow down monetary expansion, but the basic nature of the system was no different. (The central issue is that the state is involved in money, specifically in artificially propping up the money it issues.) What this means is that modern monetary pollution didn't start with the demise of the gold standard, but with the founding of the Dutch and English central banks much earlier.
Why Hasn't Paper Money Imploded?
A big part of the story is the modern human capacity for economic growth, made clear by the Italian Renaissance (during which money was still precious metals.) More and better products and services give value to money and debt, which are really just claims to real wealth. (More and more, however, this scenario should be taken with a grain of salt. As monetary pollution progresses, exponentially growing forces come from all hidden corners of the system to impede economic growth. This point was basically made by John Maynard Keynes himself, before he became part of the establishment.)
Another fundamental support system for inflated money is the political and military power of the state that issues it. It's no accident that the most inflated monies came from the Roman Empire, the 17th-century Dutch Empire, the British Empire, and later the USA. These monies were inflated most because their issuers could. One way or another, a strong state has the means to make peoples of the world "believe" in the value of their paper. This can take the form of acquiring colonies which happen to desire to hold reserves in paper sterling, or allying with oil-rich dictatorships which happen to demand dollars for oil, and to store their national savings in dollars. (More on these topics under "International Money.")
The failure of the decades-old, IMF issued Special Drawing Rights to gain traction as a global reserve currency is a counter-example of the above. The SDR has no strong backing from any state, and doesn't clearly and directly benefit any state. Unlike gold, bitcoin, etc., there's no natural limit to the supply of SDRs either. Thus, there is no reason investors or central banks should have confidence in the SDR in its own right.
Finally, the ability of the imperial system to distribute the benefits of monetary issuance widely (if unevenly) give many people a vested interest in the survival of the system. Every citizen of the imperial power (and its close allies) benefits from the over-valuation of currency. The professional class in these countries, including economists, benefits even more. These "benefits" come with the cost of inevitable long-term decline of the imperial and allied societies, as both people and institutions naturally grow weak when there is free wealth to bail out irresponsible behavior. Ultimately, the "benefit" of money issuance acts like an addiction, and few affllicted countries or people have been able to escape from it.
One way or another, this process sustains and breeds a lack of awareness among the populations of democratic countries, which becomes the ultimate green light for monetary and financial manipulation.
International Money
This is where things get really interesting, but also morally problematic in a serious way.
Economists generally agree on a complex and recurring process called the "exorbitant privilege" of reserve currencies, a phrase coined by Valéry Giscard d'Estaing in the 1960s. Simply put, it shifts most of the economic pain and financial instability caused by financial pollution from the core imperial countries to the rest of the world through a mix of capital flows and policymaking. If you always wondered why democracies tolerated this system, this could ultimately be the biggest reason. (Just in 2013 we saw a powerful demonstration of one phase of this process. Just by saying it might "taper" its money-printing program soon, the Federal Reserve stirred up a financial storm in developing countries via sudden capital flight and strengthened the dollar by doing nothing.) In future I will try to explain this process in more detail.
Conceptually, "exorbitant privilege" is the same process by which top US politicians and banks appropriate power and wealth from the rest of the population, but transplanted to the international stage. When you can issue paper that people believe has value, at least for now, you have a lot of power.
But here, we are dealing with real economic and social misery, caused by the inability of poor countries to use their price advantage to progress economically. And this misery is imposed by the imperial system. We can't condone terrorism, but we can see here a good part of how it might have developed, from an objective point of view.
(The elites in the developing world generally work with the system by doling out even worse financial pollution to their populations and benefiting from it -- and this is actually part of why "exorbitant privilege" works. But there have been rare exceptions. Early 19th century China trusted only physical silver and wouldn't accept any other money from its trade with Britain. It simultaneously imposed trade barriers, in an attempt to insulate itself from economic instability originating from British financial pollution. The result was an outflow of precious metals from Britain that must have endangered its leveraged monetary system. The other result was the British-launched Opium War that eventually brought China to its knees.)
Many processes work to ensure that the imperial monetary power eventually declines. You could say corrosion and decline comes from the very nature of the system. The Dutch endured economic hardship when their debt-money bubble finally burst. British economic pain would have been even worse in the mid-20th century if it had not been for the help from its hand-picked successor, the USA. It's hard to see any bright long-term future for the USA.
History seems to show that, when there is global monetary hegemony, the "top dog" will be, at least initially, a genuinely strong and enlightened country with liberal economic values (where "liberal" is not as used in American politics.) This is easy to understand: if you want global investors to trust the money and debt you issue, you have to refrain from obvious financial repression. Crucially, this also means that, in a post-Rome world, the modern global empire must rely on both "hard" and "soft" power. And financial pollution is a cancerously growing erosion of soft power.
This also, perhaps, sheds light on why it was the USA, and not Germany that took over from Britain. It also means the next global hegemon, if there will be one, will probably not be China but India. It seems, public life and political culture are a big part of the story.
The Role of Money in Economic Activity
There is no question that the world owes its high modern standard of living, in large part, to monetary inflation. Whether this affluence implies either happiness or fairness is a different question. (Note: we are not using "fairness" in the sense of equal results for people; we're using it to mean freedom from state intervention at the core of the system to transfer wealth between different groups.)
Monetary inflation, driven at the core by the skillful and powerful hand of the state, both requires and is nourished by constant real economic growth. All the issued debt and money must be able to buy goods and services at decent prices, or trust in these assets would collapse. But economic growth dictated by the needs of finance is fundamentally unnatural. The results include the quick-buck mentality that drives environmental pollution and personal unhappiness.
A big and progressively self-defeating part of this story is inequality. Financial market distortion that originates from state-sponsored monetary inflation create artificial winners and losers. More and more economic activity goes to supplying the winners with life's luxuries. When there is any wind of contraction, the winners pull back spending and throw too many people out of work. In constant fear of this, the authorities must maintain monetary inflation to stimulate consumption and investment. But these actions tend to worsen inequality (especially when combined with the "need" to avoid turning monetary inflation into consumer price inflation and exposing the system for all to see,) and the cycle continues.
(A more technical perspective is that capital is mis-priced across the system, ultimately, by state intervention. The current system is thus the financial equivalent of the socialist economy, where the state, and not the infinitely nuanced price signals around the economy, determines supply and demand. The problems caused by this market distortion are then used to justify further distortion and even repression, under the general assumption that the authorities have nothing but the good of society in mind.)
Ultimately, the economy can be said to be addicted to state-directed money and debt inflation. The economics profession is correct to say that abandonment of this core system would cause a lot of immediate economic pain, at this juncture.
Is Modern Money Here to Stay Then?
We should first consider the fundamental condition of the modern system: money, debt, and various other financial assets, which are only claims to real wealth (goods and services,) vastly outstrip the amount of real wealth at current prices. More tickets have been sold than there are seats in the house. People have confidence in the values of these assets only because of the various deceptions practiced by the authorities, ranging from driving central banks of the world to hold them as national reserves, to allowing banks to use "innovative" risky assets to soak up the wealth. (Though one of the latter backfired spectacularly in 2007/2008.)
Any system with deception at its core can't possibly be stable on a long-term basis. In this case, sooner or later, simple property rights, which is a much older and tested human institution than modern money, will reassert itself.
More specifically, the system suffers from a number of key problems for sustainability. The more paper wealth the system creates, the more wealth will want to find good homes where it can keep its value, if not grow. But since the extra wealth is artificial and not driven by real economic growth, this can only destabilize and corrode the system further by driving asset bubbles and their eventual busts. The system's response to all problems is, predictably, to create more paper claims. And the cycle continues.
Another key destabilizing factor is the mutual reinforcement between inequality and instability, as mentioned above. One way or another, the authorities must have inequality. Inequality is currently the only way most money can stay saved and not drive up inflation and discredit itself. But so much money in the hands of the few will cause asset bubbles and instability, not to mention political "problems."
Also, artificially high economic growth rates increase the educational levels and awareness of the citizenry. The system needs this high growth to survive, and yet this very growth will threaten it via growing awareness.
In short, the system works towards its own end in multiple ways (as all inherently contradictory systems do.) And the exponential nature of this system's factors of instability will move things faster nearer the end. But history is full of unsustainable systems lasting for many lifetimes. The very reason for manipulation is that it usually succeeds for a while. Though the end result is not in doubt, its timing is.
What Money Should Be
Since even democracies have no effective way to monitor the sausage-making of money and other core financial assets, the public must demand that the state keep its hands off money completely, and let each money sink or swim in the free market.
Amazingly, this would be the only real change needed. Other things will take care of themselves. There will be no more endless arguments about bank regulation, for example, since banks will have to do what is necessary to survive. (The Scottish free-banking system in the 18th century, luckily allowed by a political quirk of the country's union with England, is still one of history's few great examples of stable, effective and innovative banking. Under this system, the per-capita GDP of Scotland went from half to equal to that of England.)
The purpose of the state is to uphold the values that have been agreed to by all members of society. Anything extra is a form of oppression, mild or severe, by definition. For better or worse, the only universal values we have developed so far are the sanctities of life and property. We don't want to give guns to the state to arbitrate between savers and debtors, partly because we ourselves don't agree on how to do it, and partly because the biggest debtor of all can't really be expected to judge impartially.
I earnestly hope that democratic populations will eventually develop the maturity to demand simplicity in money, to understand that "complex" is not "better" -- it's dishonest. This is not to give in to cynicism, or to think that simplicity is a virtue in all human systems. (It's not.) It's just that, with this system, the incentives to be dishonest have proved too great for mortal humans to resist.
The Future of Money
As an artificially complex system, the short-term future of money is fundamentally uncertain. Though I don't like to indulge in predicting social and economic trends at the macro level (since, at heart, modern money is a political institution,) I'll survey a number of conceptually sound pathways we might follow, for better or worse, as some of the major possibilities.
We start with the simple observation that when there are many more tickets sold than seats available, something has to give, eventually.
Strangely, the big picture seems to be that only measures at one extreme or the other of the spectrum really make sense to the authorites. A good analogy might be that modern money is a poker player who finds themselves with a weak hand in a big pot (which implies that other players probably have very good hands and won't fold easily.) The player should either fold to cut their losses, or make a huge bet to try to scare the other players into folding. Anything in the middle would guarantee defeat, and the stakes are high, no matter what happens. (Note that the historical plumbing-like neutral function of money has been transformed into a poker game by the vested interests associated with state-managed money.)
So, one possibility is that the authorities decide to re-peg major paper currencies to gold, cryptocurrency, or other limited-supply commodity. (In the case of cryptocurrency, there's a precondition that the world has grown to trust in its value and future.) This is the well-trodden path of countless countries who end up having to peg their currencies to a strong Western one. With a high enough peg rate, the issuers of currency will have enough financial stability to give themselves room to pursue fiscal and monetary stimulus more aggressively in order to achieve the growth, social stability and inflation they want. So, inflation will come, and, fundamentally, this move would represent a repudiation of a large percentage of past debt (as well as of restoring paper currency's official status as debt) and a restart of the system. But, of course, if the authorities are considering this move, they are not going to let the public know until the last minute.
Implicit in this move would be the acknowledgement of a certain failure. For this reason, cryptocurrency might be a "better" candidate than gold, since there were much lower peg rates against gold in the past that central banks swore to defend. If the populace still don't understand money, the authorities can claim that the pegging's purpose is to put money on a more advanced, electronic, foundation. (It's possibly for this potential scenario that the US government has been generous enough to bitcoin that its value has risen so much in recent years.)
The other possibility is that the authorites defend the system by making financial repression overt, thus giving themselves much more power to stimulate the economy. The key move would be making nominal interst rates negative. Savers' money would be lost automatically, at a central-bank-determined rate, by staying in the bank, so they'd better spend or invest it, and stimulate the economy. A crucial precondition would be the banning of cash by the major economies (since if bank interest is negative, people could defeat the system by having their money in cash.) Thus, it's likely that the move would take two separate steps. First cash would be banned, say, for anti-terrorism or anti-crime reasons. When all major currencies were electronic-only, negative rates would be announced as a means for central banks to rescue and stimulate the economy.
In this scenario, precious metals and cryptocurrencies would probably be banned alongside cash, by claiming that they could be used as cash.
Needless to say, as in the equivalent poker play, there are various risks associated with this move, for the authorities (which we won't enumerate here,) assuming they could pull it off. In addition, the elites themselves would have to ask, if nothing else, whether they really wanted their children and grandchildren to inherit a world where private property was radically redefined with highly unpredictably ultimate consequences.
One popular scenario among economists that IMO probably wouldn't survive is some kind of international reserve currency issued by some organization, perhaps modeled on the IMF's SDR. The issuer of the reserve currency would draw confidence from neither the naturally limited supply of the money nor the power of a united sovereign state. We only need to look at the euro to see this future unfold. The euro is fundamentally destabilized first by the political wars between creditor and debtor member-nations, and then by the currency's issuer (the ECB) having to print money to "solve" all potential problems when politicians won't agree how to help out. If this kind of problems arise among the relatively homogeneous European countries who pledge solidarity to each other, we can't hope to avoid them in the wider world.
Both the euro and any future fiat internationalized reserve currency suffer from the naivete that this kind of currencies will command confidence without the power of a strong and unified state to prop them up.
I would like to end on a hopeful note by citing the nowadays-little-known fact that China went from centuries of paper back to commodity money in the early Ming dynasty after experiencing inflation and severe financial repression to prop up the paper. (This was not long after Marco Polo reported to Europe that paper money existed.) Granted, a huge amount of silver was being discovered in South America, and some rich and powerful forces must have benefited from the change, it must also have involved some seeing of the light by the authorities. If a country with centralized power, which was its own world, eventually acknowledged the natural laws of money, perhaps things will get better for us sooner rather than later.
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