The Money Post

I have had many heated arguments with my parents, whom are like most people facing retirment absolutely shellshocked by the financial crisis. Warren Buffett has long made it his policy to not invest in things he doesn't understand - keeping him out of Enron, and also Microsoft equally. Both to his credit, indeed Microsofts astronomical success through the 80's and 90's was that nobody could have predicted how successful it would be.

More concerning though, is not just the lack of understanding in investment categories like, stocks, bonds, derivatives and property, but that most of the worlds investors don't even understand cash!

Things Cost More Than They Used To!

Nothing illustrates more how money is an abstract concept than inflation. Currently news reports run on Zimbabwean Trillionaires. Except that in Zimbabwe, a trillion dollars would struggle to buy you a tomato. The Dutch Company that was printing the money for the hyperinflation simply refused to release any new 'Gajillion' bank note denominations (probably because they saw no real prospect of being paid).

When a child contemplates the existence of rich and poor, and wonders at the cruel nature of the world that does not allow everyone to be equally rich - 'why? Why don't they just print millions of dollars and give it to everyone?' the answer is, if you give everyone a million dollars, and milk is limited. How does the seller determine who to give their milk too? Why they give it to the highest bidder. This is the simple explanation of inflation, that only happens in places like Zimbabwe.

The subtle everday sense concerns the existence of bubbles. The child who thinks about million dollar milk, should rationally be inoculated against herd mentality assett bubbles. But it seems we actually seem to never attain this level of insight.

Printing money creates 'unspecial wealth', ratcheting up debt also creates unspecial wealth. In fact, debt always appreciates faster than asset prices, a relationship so obviously unsustainable it takes a concerted lack of genius to ignore it.

Banal (but infinitely more dangerous inflation) is caused predominantly by inadequate measures of well being - simply consumption = growth. So instead of something brilliantly productive, like figuring out how to travel vast distances using relatively no energy on a bicycle, simply buring bicycles on a big pile looks like growth, because we consume a lot of bicycles. Also spending all your savings looks like growth. And spending other peoples savings looks like growth. And spending other peoples savings on a house looks like growth. And then someone spending even more of someone elses savings on the exact same house looks like growth. And then spending even MORE savings on the exact same house looks like growth...

And so, people percieve they are getting richer, when they are getting more and more indebted. Sure, in a very short time frame (say 10-16 years) it can look like its working, because each time you load up on debt you can sell off the house in a few years for a greater amount and thus pay down your debts and walk away with a modest profit. Except that this sale requires someone with more debt than you had to use their debt to buy out your debt and they use their debt to fund your 'profit'. Which goes into the bank, which the bank then lends out $9 for every $1 you put in.

This creation of 'wealth' is effectively the same as just printing money. The house it must be pointed out, gets no more useful. No more productive unless the owner can get more rent. The owner gets more rent by putting the price up. Alternatively, the rent may be regarded as the repayments in the interim between buying and selling the house that service the debt.

Thus, as debt goes up so do living expenses. Meaning that if a milk producing individual is using this 'wealth creation' strategy, they have to compensate for the increasing living expenses. So they put their prices up. This in turn is a living expense increase, so other people are now obliged to put up their prices. And everyone puts up their prices until everyone is back to where they started.

Why? Because ATEOTD (At the end of the day) Money has a job to do. Its job is to reflect the total value of the resources we can access from the Natural Environment without killing us all.

True cost economics isn't a theory, it is a force of nature.

Psychology and Economics Get a Divorce

Keynes is despised by most economists because he looks at human behaviour instead of rational behaviour.

Keynes noticed shit like 'wages don't go down, because people never accept lower wages' he noticed that in 'microeconomics' price behaviour was not elastic. In the short run, prices never went down, only up. The value of money thus had to come down.

So too does the Uber-Evil of our times GNP hate Keynes, because it is a purely rational model that ignores actual human behaviour.

In particular GNP as a measure of wellbeing, completely disregards an IMMENSE body of research that tells us that as an individual gets richer they get no happier.

Money is not useless, it just as has been percieved from a very early age - not everything.

A richer person may experience more pleasure than a poorer person, but because of their inflated expectations it also costs more to service their pleasure. As Daniel Goleman points out - it is possible to have yacht envy.

Humans are also notoriously bad at forecasting hedonistic impact, known as impact bias. They think being poor is worse than it is, and being rich is better than it is. Even when their own experience would disconfirm these expectations. They are also incredibly bad at estimating odds.

All this makes a basis in the 'rational human being' a collossally bad assumption to pin all our economic hopes on.

Other contrary elemants of the human psyche to popular economic theory are schadenfreude, or taking pleasure at your enemies demise. In 'genealogy of morals' Nietzsche attributes ALL morality to the creditor debtor relationship, pointing out that corporal and capital punishment have never done anything to reverse a crime, they merely give human beings pleasure in an act of revenge. So too, economists cant predict that people will reject a bad offer, even if its better than nothing to take a moral stance. They will punish someone out of spite. There is no room for spite in economics.

At any rate we would have a far more robust economic system if it was founded on the principles of 'people are fucking morons' with dollar bills bearing an imprint of 'this money is no longer yours after you spend it' and more crucially economists actually regarding debt as something bad to have, and entertaining the possibility that people may take on debt irrationally. As in a big sign over every mortgage house that says 'ACHTUNG! CAUTION: THESE PEOPLE MAY NOT ACTUALLY KNOW HOW THEIR HOUSE IS GOING TO MAKE MONEY'

Because at the end of the day, money has to be backed up by things that can actually sustain us - food, clothing, energy and to a much more modest degree shelter.

FORGET THE GOLD STANDARD

Adam Smith proposed classical economics to move away from an obsession with the gold standard back then. Back in the day European kings used to sell whatever grain and wheat and shit they could find for gold that they could stick in a treasury buried under ground somewhere to sit in clinky piles for the rest of its life.

Smith pointed out, that rather than maximising exports, countries should be trying to maximise imports because these were the things that actually imporved quality of life.

Because Gold whilst having some utility, its major utility in the old days was as money. It was non perishible, and rare enough that people couldn't 'print their own money' by digging up a whole bunch of gold in their backyard. But once legal tender came in it was much safer to use other shit as currency. But to get people to trust 'monopoly money' they initially backed it up with a reserve of gold.

But since gold wasn't useful as money, gold as a reserve needed the same fundamental confidence that makes any currency 'generally acceptable'. Gold is now useful in electronics, a comeback for it. But as Buffett says 'Gold is dug out of the gorund to be cleaned, melted down and burried under a different piece of ground to be guarded by men. It has no utility.' So if what makes currency useful is confidence in it being redeemable for other goods, what makes gold useful is it being redeemable for other goods.

So money then...

Money represents access to the Natural Environment

This is what money will do. It will do it on its own, no matter what economists say. This is the truly special thing about money, the thing a lot of people don't understand.

Money sits on a shelf in some bank vault and... it thinks. It thinks about its self worth, it works on its self esteem. It builds itself up when it is down, and it humbles itself when it has a swollen ego.

Look at a bank note and you will think - Its just a piece of paper. How can it think and evaluate its own self worth?

And the answer is, it doesn't really. The market has a belated tendancy to have revalations. I don't believe in Efficient Market Theory, because bubbles are irrational creations and the corrections too quantum in nature.

But basically, Money sits on a shelf and thinks - 'hang on, all these houses being built. When I really think about it, there's far more houses being built than there are people to live in them. But people are buying them for increasing amounts of me (money) even though there is no 'real' demand, just a fever. Worldwide the real estate prices have represented about 30-40% of the growth of the past few years, I gotta correct this.'

And the money decides it can buy a lot more houses than it previously thought. When money decides it can buy 30-40% more houses than it thought, a lot of shit follows.

The chain is too complex for me to describe, because it is still unravelling. There is so much unravelling that it may pause for a break. But basically that money is going to figure out what it thinks a Californian house is really worth in terms of...

Atlantic Salmon, Teak, Coffe Beans, Rice, Concrete, Wool, Beef, Apples, Pine Nuts, Pesto Genovese, Ravioli, Lemon Tarts, Pears, Mochi, Gyoza, Pork Buns, Sausage Rolls, BBQ Sauce, Bread, Sunglasses, Lead, Pine... etc.

It will figure out what everything is worth relative to everything else. But the Natural environment we must understand, cannot be beat. There is a physical law of money, like gravity that no matter what you think something is worth, will always be grounded in those fundamental human needs for survival - water, air, food, clothing, shelter. Not even the richest person can ever convince money that it is worth soooooo much that they don't have to worry about these fundamentals.

Money may (and has) indeed decided in the past that it was worth more than vast swathes of humans. That is called famine, something we sorely don't want to globalise.