Discourse on the great recession
If a collection of people were to begin a conversation with
the following, “we are going to make society wholly dependent on a collection
of abstractions”; it is a certainty that it would draw a skeptical response. It
is the case, however, that our society is wholly dependent on a collection of abstractions
– abstract representations of the human endeavour. The first tier of which is fiat currency,
since Brentonwoods – a meeting of financiers – the entire world has been
dependent on debased currency, with the greatest dependence on the US$ as the world
reserve currency.
If one contemplates trade absent currency of any kind, one
arrives at a barter society – the exchange between individuals of goods and
services; the public sentiment or the “castle of the mind” can wreak no havoc in the barter society because
there is no opportunity for the migration of value beyond barter, so the actions of people immediately
proximal are the sole determinant of the volume of trade or the “Domestic
Product”. There are no bubbles to burst, there is no means to create them. The
barter society of course is very limiting, precisely because there is no
opportunity for the migration or accumulation of value beyond immediate barter, nor is there any real
means to remunerate an offering of greater value with greater reward. The
barter society offers stability the cost is stasis.
It becomes necessary to mobilize value and to accumulate
value to facilitate the human endeavour, in the face of this reality people seek
compact and readily transferable sources of value, gold for example. The most cogent
example of currency is the clay tablets used in early society to represent a
share of a collective grain holding, people would take the tablet to the
central granary to retrieve a portion of their share of the stored grain. At
times people would circumvent the granary and trade the tablet for a good or
service – the tablet was a currency based on grain – an abstract representation
of a given person’s grain holding or share. It is easy to see the effect of
making more clay tablets, the tablet's value relative to the grain would diminish. With gold-based currency the only
opportunity for a “devalued” currency is to find more gold, a phenomenon that
happened in the mid-1800s when there were large discoveries of gold and the
resulting gold inflations.
The currencies we all rely on now have no base, money is
created now at the swipe of a credit card, there is no limitation on the amount
of money that can be created or the rate it can be created, fiat currency is
only functional due to the belief of value – here the “castle of the mind” can
wreak havoc. When a collective optimism exists – people begin to buy more, so
more currency is created, as currency is created it spurs demand, and it then takes
more dollars to purchase a given good or service – both because people are
demanding more and because there is no limit on the dollars to be had – this fuels
an inflationary feedback loop where optimism reaffirms optimism in the
collective “castle of the mind”. Of course, optimism always runs its course, and
when the collective “castle of the mind” contracts much of the money previously
created is unsupported as values contract, as values contract pessimism grows
and the feedback loop is now in the opposite direction. It is the mix of the
first tier of abstraction – fiat currency – and the second tier of abstraction,
the ability to readily contract credit, which fuels the currency cycle that often
has a massive effect on the economy at large.
To put boundaries on this phenomenon one either has to limit
money or its availability – we have in large measure chosen to limit
availability; this is achieved by central bankers exercising judgment on the level
of the interest rate on money lent from the central bank to banks and the
interest rate of money lent between banks.
The challenge has been that the complexity of any given
economy precludes the ability to intervene at an appropriate time to prevent
damaging outcomes of the cycle and this reality is exacerbated by foreign
exchange of money and other global influences. Regardless of any given domestic
interest rate, money can be borrowed in another jurisdiction for an attractive
rate.
Central banks look at the forest in assessing when to raise
or lower interest rates; secular inflation has little play in the decision
process. It was the housing sector in the US which was running an inflation
rate in excess of 20% in some cases and all the resultant lending complex that
started the crisis of confidence. The US Central back had a low rate of
inflation indicated by low percent growth in the Consumer Price Index (CPI),
a CPI that was suppressed by a long and sustained influx of “cheap goods”
provisioned by the escalation in the Chinese manufacturing capacity. This
coupled with the Japanese government’s near-zero interest rate in the face of a
lagging economy and the resulting yen foreign exchange (yen carry trade)
muffling the effect of any US rate increases resulted in a ready stream of credit
to fuel the housing sector. This was further exacerbated by tacit understanding
that via Freddy Mac and Fanny May the US government was in effect underwriting
the credit binge in the housing sector.
It is important to stop here to contemplate the key point of
discourse, in observing the first tier of abstraction, fiat currency – one can
see from the above discourse that just a single tier of abstraction fuels
violent cyclicality, and one can see the complexity in managing and understanding
the effects of actions taken in the realm of just currency. Our financial system
is a complex of several tiers of abstraction, and with each tier of abstraction
comes, to varying degree, instability. In the financial world, the increasing tiers of abstraction are referred to as “financial deepening”.
In 1985 the abstract representation of the economy had a value about on par
with the “real economy”, by 2006 the abstract representations of the economy
had increased dramatically – some estimated up to 365 times the “real economy”.
Of course, it was impossible to know due to opaque trading systems and the
nature of the financial instruments themselves.
Click Below
For Discourse on Specific Causal Elements
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