Investors are wilting. In these hot, hazy, humid days of summer, they are growing languid, squishy…and soft. They go to the beach. They think of other things. They read novels…or the mainstream press. Their brains turn to mush.
There is little to report from yesterday’s market action…which leaves us free to think about other things.
What will we think about?
Let’s begin by quoting an article that appeared on Thomson Reuters’ Alpha Now website, chosen more or less at random:
‘To the extent that central bankers around the world are able to use forward guidance to influence market expectations of their own future policy rate, then of course they retain some control over the shape of their own yield curve. Nevertheless, what lies beyond their control is the size of the risk premium that drives a wedge between the average expected future policy rate and the yield on government debt.’
The comment is not indecipherable. Nor is it meaningless. But what meaning it has it derives from a complex amalgamation of ideas, theories and abstractions. The typical reader without a background in finance or economics is baffled. He suspects it is gobbledygook. He is mostly right.
But the subject of the comment is something we all know about: money. It’s something we all understand. Or think we do.
But this is a particular kind of money: credit-based money. It is money that isn’t always what it seems. Our brains are not sure what this credit-based money is all about…what it’s worth…how it gets its value…what it will be worth in the future…or when it will be totally worthless.
Our awakening to money began about a week ago, when we picked up David Graeber’s book Debt: The First 5,000 Years.
Graeber is an anthropologist. He is very clever. He sets out with a new perspective — not the familiar clichés of an economist or speculator. And he adds the penetrating insights of a sharp man with an axe to grind. Like the rest of us, of course, he can be bright. But sometimes he misplaces his thinking cap.
Like so many academics, he often takes himself far too seriously. More than once he makes the biggest mistake you can make in historical analysis: post hoc, ergo propter hoc. Just because A happened after B, it doesn’t mean B caused A.
Connecting this thought to the Alpha Now comment above, interest rates may go up…or they may not. Either way, the central bankers may or may not be responsible for them. Who the hell knows?
Often, Graeber thinks he knows more than he really does. If he had chosen a different career path, he could have been a central banker. He believes he can know unknowable things. And he is willing to believe things that aren’t true.
What’s more, he has a remarkable faith in the ability of bureaucrats and politicians to do what can’t be done by anyone. But his book — which we strongly recommend — helped us to catch a glimpse of something he missed.
Graeber contends that the origin of money was not as Adam Smith imagined it. He thought he saw primitive man bartering corn for pelts…or arrowheads for women…and then realising that some form of ‘money’ would make the transactions easier.
If you didn’t happen to have what the other person wanted, you could still do business, accepting money as a placeholder and then completing the exchange with someone else who had what you wanted.
Money caught on like the internal combustion engine or the internet — because it made life easier and more efficient.
Not so, says Graeber…
Governments invented money to pay mercenaries and support armies in distant locations. This may or may not be true. It makes sense that money arose where it was needed. And if the anthropological research Graeber cites is correct, money was probably not needed in primitive, tribal settings.
In a small community, money is not necessary. Markets, as we know them, do not exist in small, primitive communities. The exchange of goods and services was not a matter of simple, rational calculation.
Instead, exchanges were an integral part of social, cultural, religious and community life. People gave gifts. They ‘paid’ for brides. They traded favours.
Or they practiced a form of archaic communism — each providing what he could…others taking what they needed, infinitely nuanced by the particular beliefs and prejudices of the people involved.
To the extent they were keeping score, individuals remembered who owed what to whom…and wove complex webs of credit that stretched over many generations.
Credit was the first ‘money’, in other words.
But although this form of organisation — endlessly elaborated over thousands of years — is suited to small groups, it won’t work for large ones.
Humans are well adapted — over thousands of years — to certain activities. They can throw a stone or drive a car. No problem.
In small groups they can also organise themselves and solve problems. But the evolutionary adaptations that make humans suited to problem solving in small communities cause them to make a mess of problem solving on a large scale.
This is as true of money…as it is of war and social welfare programs.
A stockbroker in New York eats fresh figs for breakfast. He doesn’t know who grew them, who shipped them or even who owns the store where he bought them. He walks around in shoes made in Italy…surely he has a debt to the cobbler.
Should he send him a stock tip? Should he offer to trade his portfolio for free? Should he offer him his wife? And what about the mason in Queens who built his chimney? Or the assembly line worker in Malaysia who put together his iPad?
It would be impossible for him to maintain a recollection of all the obligations he owes these people…even if he knew who they were.
What can he do?
More on that tomorrow…
But before we leave you…consider this. A headline from the Financial Times:
‘Geithner joins after-dinner top table with $400,000 for three speeches’.
Without modern money, Geithner’s speech might bring him two goats and one ugly daughter. Instead, today, his payoff for bailing out the banks (with other people’s money) is more of other people’s money. From the banks, of course. Deutsche Bank alone gave him $200,000 — according to the FT. Blackstone and Warburg Pincus each ponied up as much as $100,000 more.
Let’s see, a few speeches. A few consulting gigs. A seat on a board of directors. Maybe fees for lobbying Congress or the administration. And heck, why not a partnership in a private equity firm? Hey…don’t worry about Tim Geithner! The zombies will take care of him; he’s one of their own.
Geithner gave the bankers trillions — in cash and guarantees. He helped make it possible for them to earn extravagant fees, commissions and bonuses when the going was good. Then, when their reckless wagers blew up and the going turned bad…he and the Fed dug them out of the rubble and put their losses onto the public.
None of this would have been possible without money. But it was a specific kind of money that enabled the banks to make a fortune in the first place and Tim Geithner to protect their ill-gotten gains in the second.
for Markets and Money
From the Archives…
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Interest Rates: Something Wicked This Way Comes
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The End of a Share Market Correction… or the Beginning?
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