Must Read: Apropos of Everything (Continued)
By Barry Ritholtz - April 21st, 2011, 9:15AM
Earlier this month, I published a piece in the Think Tank titled Apropos of Everything by regular TBP contributor Paul Brodksy of QB Partners.
It went viral, and Paul received literally 100s of emails about it. Many o you asked to be informed when the follow up was published.
It is now live in the Think Tank:
All three parts are your weekend homework assignments . . .
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April 21st, 2011 at 1:13 pm
I have been thinking about the world reserve currency thing and come to an idea that the world accepts the buck because of those 11 carrier battle groups and that huge war dept budget that we shoulder. The world somehow accepts that we will use our huge power in acceptable ways and they like to shelter under our umbrella. I wonder if our host has any thoughts along this line.
April 22nd, 2011 at 11:36 am
This 3 part article reminds me forcibly of one of those novels where someone from a 2 dimensional world is trying to understand a three dimensional world, unsuccessfully. In this case, it is someone from a three dimensional world (without time) trying to redesign the monetary system of a four dimensional world (with time)… unsuccessfully. Fully responding would require far too much space, but some simple examples.
• The authors, and others like them, seem to fail to fully understand that the total amount of debt in existence is an illustration of the “speed” of money (understood most easily as the number of transactions, including debt transactions, that a given dollar goes through in a year). The rise in uncovered debt is closely related to the rise in speed.
• The idea that money should be fundamentally an instrument of saving, and therefore somehow “solid”, is a strange construct. Historically this does not appear ever to have been the primary role of money. Furthermore, money “saved” (let us say, in the extreme, stuffed in a mattress) is the “slowest” of money, in that no exchanges at all occur. What is the benefit of giving priority to this form of money? (Except that it is understandable to someone from a world without time.)
• The authors seem to treat gold as fixed in quantity. Suppose that gold was given the “shadow price” that they suggest tomorrow. Suddenly gold mines in deposits of extremely low concentration would be viable, and the supply of gold would expand rapidly… Oh, but wait, wasn’t that just what the authors were trying to get around… a currency of which more is constantly being created.
• Worse, gold as a currency requires energy to create (mine). The limiting factor on the economic viability of a mine is largely the cost of the amount of energy required to extract the gold. Suddenly vastly greater proportions of our available energy, both human and oil and other sources, would be going into gold mining, instead of, say, growing food. Which could cause food shortages, which would result in more gold being required to buy food, which… sounds like rampant inflation to me, where-upon those people who had saved in gold would see a loss in value… but we’re back where we started. Of course all of this would equilibriate … into another system with inherent fluctuating dynamics over time… sort of like the one we have. The dynamics are a function of natural dynamics (eg. yearly crop yields) overlaid with variable time delays in price/value response in different parts of the system.
• Furthermore, there seems to be an assumption here that the total basket of goods is constant, and therefore that increasing money supply is necessarily inflationary. But the total basket of goods is extraordinarily far from being constant. On the simplest front, even the human population is still expanding. Not to mention the tablet I read the article on, the computer I’m writing this response on… and half the other things I use which didn’t even exist 30 years ago.
Take all these factors and many others into account, all of which exist in a four dimensional world, and you may be able to begin to write a real analysis of what money is, what may happen to it, and what it may become… but this article is far from such an analysis.
April 22nd, 2011 at 12:03 pm
Theravadin in the middle of that above – “both human and oil and other sources, would be going into gold mining, instead of, say, growing food. Which could cause food shortages, which would result in more gold being required to buy food, which… sounds like rampant inflation”
sounds like many other get rich quick schemes going down these days
“Time time time what has become of me” .. ummm .. of course
THE BANGLES (Live) – Hazy Shade Of Winter (w / lyrics)
http://www.youtube.com/watch?v=taf8fYP9Y-A
April 22nd, 2011 at 12:06 pm
the great Google came thru
April 22nd, 2011 at 12:37 pm
Part two of my response: Energy
The authors of the article also seem rooted in the idea of labour as being fundamental to the measurement of value. Labour has always consisted of intelligence + energy. Until the industrial revolution the two were combined in the labourer. Now the two are largely split. As the combination of population growth and development have begun to reach the limits of available energy (essentially solar+fossil+nuclear+geothermal) the real basis of any currency has been the ability of the sponsoring nation to control energy. The US dollar is the reserve currency as much as anything because of its use for pricing oil. If the authors want to look to any “solid” backing for a currency, they should look to energy, which has a number of interesting characteristics:
• Total reserves are constantly declining. Therefore an energy backed currency is unlikely to devalue over time
• It is freely fungible between its various forms based on physics
• It is physically convertible to most of the rest of the things we use. With a bunch of energy + human intelligence you can mine more gold, make more cars, increase crop yields, etc. So the conversion value is not based solely on market transactions, but partly on physical relationships
• Its exchange value can be increased by the application of intelligence. Figuring out how to reduce industrial process energy requirements is always a winner.
Doing a sensitivity analysis on the impact of changes in energy prices on any commodity or good is extremely revealing. In industries where I have done this the result often showed that the portion of the total cost of production represented by energy was north of 50%. In essence, for instance, the morning paper you read is more than 50% composed of fossil fuel, if you rate composition on the value of inputs.
I would suggest that the real backing of the US $ is total US oil reserves plus the dollar’s energy pricing function. The Chinese get this, which is why they are busy chasing energy around the world. The petrodollar is more than just an expression of where the dollars are. It’s the real backing of the currency. The question is really whether or not we want to make this explicate. Imagine a world where the price of oil was fixed at, say, $100/barrel (that is to say, $100 = 1 barrel of oil equivalent), and start tracing the way the currency works. The results are interesting.
April 22nd, 2011 at 12:39 pm
Greg0658: You are exactly right. Human ability to optimize is constantly being perverted by incentives which isolate impacts – your typical get rich quick scheme, AKA the sub prime mortgage mess.
April 23rd, 2011 at 3:00 pm
Here’s a thought from a lay person (financially speaking which may actually be a plus): I read that contrary to the dire predictions, Uncle Sam is far from being broke because:
1) He owns lots of real assets: look at the relevant maps, especially land in the Western States/Alaska, National Parks, buildings etc not to mention his Gold reserves which are still booked at $35/oz and of course the OCS (Outer Continental Shelf) extending 200 miles offshore, the first 3 miles being States’ property, think of those mineral deposits especially hydrocarbons
2) He has the power to increase his revenues simply by increasing taxes and levying excise taxes, have no worry our politicians are listening. He’s also compelled to function according to a document that has proven extraordinarily resilient timewise and appropriate for our Republic: The US Constitution with “rules” that make changes very difficult, requiring 2/3 majorities, etc. Does this make sense?
3) He has the most powerful military machine and his geographical location and population make up is excellent, notwithstanding the illegal immigration issue…
Now bring on the devastating responses to my naive post
So, what me worry?