Archives for posts with tag: money

The common sense definition for an inflationary situation is ‘when too much money chase an inherently limited amount of goods and services’.

The ‘limited amount of goods and services’ part is easy. We live on a finite planet, we have a limited capacity to transform whatever resources we are able to identify into usable goods and services … so…
OK, we can always identify new resources and build new capacity but we cannot do any of this ‘on the spot’. We need time. And, even more importantly, we need to put ourselves to it!

Then ‘who does the chasing’?
After all, money is ‘inert’. It doesn’t do anything if let alone in a drawer. On under the mattress…
In reality, we – buyers and investors, are the true ‘inflationary agents’.
‘But it would be completely stupid to sit on a pile of money when inflation rages! You have to buy something otherwise you’ll loose a lot of value! At least, you need to invest that money…’
This is one of the best examples of a self-fulfilling prophecy!
Indeed. Buying or investing during an inflationary bout is the reasonable thing to do! Yet we need to understand that our actions will, temporarily, exacerbate the very inflation we are trying to ‘tame’.

But where does the excess money come from?!?

Until not so long ago, the sovereign was the only one person who could bring new money to the market.
And their ability to do that was severely curtailed by the amount of bullion available for this task.
In fact, the first major inflationary episode in the second millennium had been fueled by the gold brought back to Europe by the Spanish conquistadors. Which bout of inflation brought about the first major change in the European economic thinking.
“To inspect the country’s soil with the greatest care, and not to leave the agricultural possibilities of a single corner or clod of earth unconsidered… All commodities found in a country, which cannot be used in their natural state, should be worked up within the country… Attention should be given to the population, that it may be as large as the country can support… gold and silver once in the country are under no circumstances to be taken out for any purpose… The inhabitants should make every effort to get along with their domestic products… [Foreign commodities] should be obtained not for gold or silver, but in exchange for other domestic wares… and should be imported in unfinished form, and worked up within the country… Opportunities should be sought night and day for selling the country’s superfluous goods to these foreigners in manufactured form… No importation should be allowed under any circumstances of which there is a sufficient supply of suitable quality at home.” Philip von Hornigk, 1684.

After a while, economy had become ‘complicated’ enough to demand ‘paper money’.
The amount of goods and services produced had become so large – and insufficient bullion was added to the money pool, that prices would have had to shrink if the balance was to be maintained.
Unsustainable! Nobody would have bought anything and everybody would have jealously guarded their precious money while waiting for the prices to fall further. This process is known as ‘deflation’ and is considered even more malign than a decent amount of inflation.
We have to note at this point that ‘paper money’ had been made possible by the advent of the ‘nation’.
This is a rather complicated discussion, for the present purpose it’s enough for me to mention that ‘paper money’ being accepted as ‘tender’ means that the general population has enough trust in the issuer of the bills. That the individual user of the paper money trusts/believes he is part of ‘something bigger’.
In those times, it was the issuer of paper money who practically controlled the amount of money which existed on the market.

Which brings us to the present times.

I’m sure all of you are aware of how “fractional reserve banking” works.

‘Yeah, the banks create money out of nothing!’

Wrong!
For banks to be able to ‘create’ new money, they have to extent credit!
For new money to be created in this way, somebody must walk into a bank with a business proposition.
That somebody might want to buy a house, a car or whatever else. Or that somebody might want to start a business. If that somebody convinces the bank that they is solvent or that their idea is worthy enough, then and only then new money is created!
Money doesn’t appear out of the blue! It is born out of trust. That somebody not only trusts themselves but they are convincing enough to determine the banker to extend that much needed credit!

But wait!
We’ve developed yet another mechanism which churns out money.
The stock market.
After developing the business started with the loaned money, the somebody we’ve been talking about above decides to make an IPO. To sell part of his business to investors. To monetize his initial investment.
Depending on the moment chosen for the IPO – and the economic data in the prospect, the IPO can be a huge success. For ‘somebody’ and for the early buyers. You see, each time the price of the stock goes higher, new money is created. Based more on the ‘market’s expectations’ than anything else…

‘But people who put their money on the financial markets are rational agents! They are experts in their field…’

Yeah, right…
You’re talking about the experts who had put together the collateralized debt obligations debacle…
And many others. Too many others…
Also, you’re talking about the experts who had bought those papers! Who had trusted the expertise of the first batch of ‘specialists’!

Thinkers, from Freud to Kahneman and Ariely, have proven than humans are very good at rationalizing and less so at being truly rational.
That for a market to behave in a reasonable manner, it must preserve its freedom.
That it must be free from ‘bullies’ – individual agents who muster a lot of ‘clout’, and free from any mania.

The 1637 Dutch Tulip Mania is a very good example of what might happen when a market gets obsessed with something.
When too many people – not even a majority, forget about the fact that economy (oikonomia) is about making ends meet and that getting rich may be a nice consequence but is a terrible goal.

‘OK, nice try. But what about inflation?’

We have an inherently limited amount of goods and services.
A relentless mechanism which churns out money.
Meanwhile, some of us obsess about their need to conserve the money denominated portion of their stashed away fortunes.

Inflation is nothing but another mechanism.
Which re-balances the market.
Piece-meal – adjusting for daily changes, in normal times. When things evolve ‘freely’.
Suddenly when the market – the people who ‘man’ the market, find out about ‘the dark side of the moon’.

The title is misleading enough to become an abomination!

What Leschziner said during the interview was:

what we term reality is entirely a construct of our nervous system.”

Guy Leschziner is right.

And the guy who wrote the title is an a$$hole!

In the sense that for that person, ratings – a.k.a. ‘money’ – are far more important than presenting an as accurate as possible version of reality…

Hence the public belief that ‘media are not to be trusted’.

A reality created by the greed with which we, as a cultured species, attempt to transform everything into money…., power…, or any other kind of ‘influence’/relevance we happen to covet….

https://www.theguardian.com/science/2022/feb/06/guy-leschziner-reality-is-entirely-a-construct-of-our-nervous-system

http://perflensburg.se/Berger%20social-construction-of-reality.pdf

Where conditions had been ripe:

The market had become free.
Free for more and more people to search for new ways to meet their needs.
This freedom had allowed the market to become efficient enough for more and more people to be able to satisfy some of their wishes, on top of most of their needs.

Agora had become free.
So free that politicians had to solve more and more of the real problems encountered by the society at large.
Life had become so free that states had become prosperous.

And more and more of the people were happy!

Now, the market is so free that more and more people have started to search for ‘really’ new ways to meet their wishes. Eventually, they came to be known as ‘financial engineers’. The market is no longer the place where people meet to satisfy their needs but the place where some of them accrue huge sums of money while more and more of the rest find it harder and harder to survive.

The Agora is also at its freest.
‘Political marketeers’ have taken over from the ‘the old school’ – and ‘real’ politics have been replaced with ‘give the people what they want’. Political life is no longer about solving problems. It has become a relentless quest for power.
Keeping things ‘afloat’ is no longer THE goal, only a cost.

Is this sustainable?

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As much as I love writing, I do have to eat.
And to provide for my family.
Earning money takes time.
If you’d like me to write more, and on a more regular basis, hit the button.
Your contribution will be appreciated!

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Having an unlimited supply of flour might be helpful but never enough.
What you really need is bread!
Which also demands yeast, skill and some work thrown in for good measure.

Same thing about the relation between money and happiness.
If you’re not wise, and diligent, enough, no amount of money will ever be enough for you.
Nor will it bring you any closer to happiness.

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As much as I love writing, I do have to eat.
And to provide for my family.
Earning money takes time.
If you’d like me to write more, and on a more regular basis, hit the button.
Your contribution will be appreciated!
Another very efficient way to help would be to share my posts.

As much as I love writing, I do have to eat.
And to provide for my family.
Earning money takes time.
If you’d like me to write more, and on a more regular basis, hit the button.
Your contribution will be appreciated!

As much as I love writing, I do have to eat.
And to provide for my family.
Earning money takes time.
If you’d like me to write more, and on a more regular basis, hit the button.
Your contribution will be appreciated!

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Let me make something clear.
Crystal clear!

Money, and its ‘derivatives’ – from ‘capital’ to ‘financial market’ and ‘stock exchange’, are the tools we used to get where we are now.
Without them we would be still foraging in the woods.

Only something rather insidious has started to eat the whole scaffolding from inside.
Same process has been happening with weapons. We invented them for hunting. Then used them for self protection. Against large beasts and fellow humans.
Finally, after using them to conquer and defend our liberty, we used them to subjugate others. To impose our will upon some other people.

In other words, we used guns to shoot ourselves in the foot.
Unwittingly.
Both as hapless individuals and as a cultural species.

Money – and its derivatives, have suffered the same degradation.
We used it, at first, to coordinate our efforts.
The Stock Exchange had been an excellent way to coordinate otherwise disparate means. Very few of the corporations who have changed the world into what it is now – for good and for bad, wouldn’t have come to life without the money which fuel them.
Nowadays, too many of those who trade on the Stock Market do it in a ‘barren’ manner.

They do not contribute anything but extract value.
The inside traders being only the visible part of the iceberg.
Which iceberg might tank the whole contemporary ‘arrangement’.

If we keep sleeping during our watch.
And there’s no one else on deck…

“Capitalism has generated massive wealth for some, but it’s devastated the planet and has failed to improve human well-being at scale.”

Drew Hansen, Unless It Changes, Capitalism Will Starve Humanity by 2050,
Forbes, feb. 9, 2016.

I’m afraid we are dealing with a huge confusion.
Capitalism hasn’t generated anything and hasn’t starved, nor fed, anybody.
People did!

Capitalism is nothing more, nor less, than a particular manner in which we, ‘the people’, relate to property while ‘the free market’ is one of the manners in which economies are run.

And here’s the place where things become ‘murky’.

‘Oekonomia’ is Greek for ‘making ends meet’.

“The annual labour of every nation is the fund which originally supplies it with all the necessaries and conveniencies of life which it annually consumes, and which consist always either in the immediate produce of that labour, or in what is purchased with that produce from other nations.

According therefore, as this produce, or what is purchased with it, bears a greater or smaller proportion to the number of those who are to consume it, the nation will be better or worse supplied with all the necessaries and conveniencies for which it has occasion.

Adam Smith, An Inquiry into the Nature and Causes of the Wealth of Nations, 1776

The way I read it, Smith sees ‘wealth’ as people’s/nation’s ability to supply for their ‘necessaries and conveniencies’.
In other words, ‘to make ends meet’.

How we define our needs, the manner in which we choose to fulfill them and what we are disposed to ‘spend’ in the process… is our responsibility.

So.
What is it that we need/want?
A healthy planet? Clean air/water/soil and a fair opportunity for each of us to earn their keep?

Or a dog eats dog type of contest for ‘who has the biggest pile of money’?

Capitalism can encompass both.

Unfortunately, the second scenario has nothing to do with ‘making ends meet’.
On the contrary!

What do we want?

Money.

When do we want it?

Now.

How do we get it?

By being efficient.
‘Give as little as you possibly can while taking as much as you can possibly grab.’

And who’s going to get the job done?

Huh?!?

Capisci?

I don’t think the American Dream is in anyway toxic.
The real problem arises from what those who have fulfilled their dreams choose to do afterwards…
It’s one thing that if from some point on the ‘winners’ start helping others to fulfill their dreams and quite another if they keep fulfilling (gorging on) they own dream long past the ‘waking hour’…

Most probably Michael Clark is right, things started to go South from the moment the American Dream had been corrupted from ‘I dream to make it out’ to ‘I’ll stop at nothing in my quest to the top and nothing else matters’.

And no, I’m no fan of Big government.
If the urge to help doesn’t come from within it doesn’t help any if an outside agent keeps pestering you. It doesn’t matter who is ‘number one’, private or government, it’s the very fact that we, as a species, still have the obsession to reach that position that’s dragging us down.

Clark, Michael, “Is the American Dream toxic?“: http://seekingalpha.com/instablog/428250-michael-clark/882441-is-the-american-dream-toxic
Dolmanian Sarchis, “Why keep wasting money on toothless constitutional monarchies?“: https://nicichiarasa.wordpress.com/2015/02/25/why-keep-wasting-money-on-toothless-constitutional-monarchies/

New York Times has published recently an article about various unexpected effects of automation. The way I see it the whole thing can be boiled down to:

“Artificial intelligence has become vastly more sophisticated in a short time, with machines now able to learn, not just follow programmed instructions, and to respond to human language and movement.

At the same time, the American work force has gained skills at a slower rate than in the past — and at a slower rate than in many other countries. Americans between the ages of 55 and 64 are among the most skilled in the world, according to a recent report from the Organization for Economic Cooperation and Development. Younger Americans are closer to average among the residents of rich countries, and below average by some measures.”

The point is that ‘classic’ automation freed the individual from the repetitive chores that transformed man into a machinery, as depicted by Chaplin in ‘Modern Times’, and allowed him to pursue more challenging/interesting ways to ‘make ends meet’. The current phenomenon turns the tide in exactly the opposite direction, demeaning the individual to the role of a ‘servant’ for the almighty machine. That’s why people become less and less skillful and, even worse, less and less proud about what they do for a living.

Dangerous situation.

Extreme fragility, dead ahead.

Just prior to the Great Depression an American accountant, Ralph Elliot, had taken Charles Dow’s insight about economic cycles a step forward and came up with the ‘Wave Theory’.
I won’t enter into details here but I have to give you some broad outlines.
Charles Dow: In any market, prices evolve in trends – sustained moves towards the main direction fragmented by ‘reactions’ that run contrary to the trend. According to Dow there are three categories/levels of trends: major, intermediary and minor. The major trends cannot be manipulated and comprises three phases: ‘accumulation/distribution’, ‘public participation’ and ‘panic’. The names are self explanatory but if you want to read some more please click here.
Ralph Elliot: (If a certain asset is traded by a large enough number of traders so that market could be considered ‘free’) Price action is fractal in nature and hence can be broken down and analyzed as such. While Dow identified 3 levels of trending Elliot uses 9 but both ‘agree’ that each action in the direction of the analyzed trend is followed by a reaction contrary to that direction.

Robert Prechter, the brain behind ‘Elliot Wave International’, ” the largest independent financial analysis and market forecasting firm in the world” – the guys from whom I borrowed the picture above – has been using successfully the ‘Elliot Wave theory’ for some 40 years now.
And here comes the really interesting part. Besides building Elliot Wave International as a market analysis company Prechter also founded The Socionomics Institute, a think tank that starts from the assumption that the markets are driven by the prevalent social mood (sentiment) that dominates at any given moment and not all the way around as it is usually believed. Prechter posits that markets go down when/because ‘people are afraid’ and not ‘people start to panic after the market has begun to go down’.
For some people this whole process is a tug of war between greed and fear. It makes a lot of sense but we still lack an explanation about why at some points the bulls are stronger than the bears and at some-other points the situation is completely turned over. Reason was supposed to take care of business at all times, wasn’t it?
Now some of you will tell me that Daniel Kahneman and others have provided ample proof that the market is far from being rational... OK, I agree with that but still, we continue to need an explanation for why the market behaves for so long as if it were reasonable only to break down exactly when everybody was so happy – as it constantly did, from the Tulip Mania in the the XVII-th century Holland to the last financial melt down.

Now please remember two things that I already mentioned.
– One of Charles Dow’s assumptions was that ‘major trends cannot be manipulated while the lesser ones might
– (If a certain asset is traded by a sufficient number of traders so that market could be considered ‘free’). Here I was presumptuous enough to introduce my own experience into the equation. After I was introduced to the Elliot Wave theory I found out that it worked (meaning that I could use it successfully – statistically, of course) for indices or other frequently traded symbols while it is completely useless for illiquid ones.

I started to understand what’s going on only after reading Nassim Taleb’s Antifragile.
The gist of this book is that for a system to remain viable, to conserve it’s chances to survive, it has to keep open as many options as it possibly can.
Does it make any sense to you?
To be alive means being able to make decisions, as freely as possible. If you are forced to make one thing or another then you are not free anymore, right? If you have at least the slightest opportunity to choose among two or more possibilities then it means that you still have a sparkle of life in you! Stephen Hawkins, tied in his wheelchair for so many years, is alive just because he choose not to be overwhelmed by his condition while so many of us are (brain) dead because we indiscriminately follow fads, fashions, habits, you name it. The moment we give up our individual autonomy and enroll into a crowd (read ‘herd’) we might have the impression of becoming safe, or at least safer, but in reality we are already headed for the slaughterhouse.

It is somewhat true though that ‘there is safety in numbers’. And no, I’m not contradicting myself. The bigger the crowd the harder it is for someone to control it (take it to the slaughterhouse, by will or by error) and the greater the chances for an individual to escape an unforeseen  predator. So you need a really big crowd if you want to have a survival situation, a reasonably viable system.

If we look back in history – no magical solution can be found there, only a long list of errors – we’ll see that empires never fail to crash, authoritarian regimes survive for considerable shorter periods than the more democratic ones and that the more powerful a fad was the least it survived. And all these situations fit perfectly Taleb’s theory: the less open options a system has the less able it is to survive. The emperor is but a single man, who inevitable ends up being ‘naked’, no matter how capable it is – and people notice it sooner or later. Also the more an authoritarian a regime the less are the ordinary people inclined to contribute to the welfare of the community.
And something else. When a fad becomes intense enough the people involved become blind to any other alternatives but those prescribed by those convinced that they have a lot to gain by keeping that fad alive. That’s why it is very hard for a social ‘vicious circle’ to be broken until enough people hit the rock bottom. No grown up will voluntarily shout ‘the emperor is naked’ because he thinks he has nothing to gain from this. As strange as it may seem it is rather hard for the regular Joe, who’s afraid of the emperor, to understand that the entire kingdom becomes a laughing stock for the rest of the world if the emperor is known to stroll naked through the public square.

Now please take a second glance at this picture.
Extreme fragility, dead ahead.

What does it suggest?
That there is a certain correlation between income being concentrated in fewer and fewer hands and the probability of a market crash?
But correlation is not causation!
No, it isn’t. Not unless we can find a reasonable story for what may ’cause’ that correlation! Explain it, that is!

By now I’m almost convinced that most of you have already ‘got’ it.
Concentration of revenue means concentration of decision power. As less and less people (proportionally) remain in ‘powerful’ positions they not only command a higher proportion of the aggregated revenue of the entire community but they also control in a greater measure the destiny of that community.

No, I don’t think that ‘they’ are ill intended. ‘They’ live here too. They are not idiots, otherwise they wouldn’t have reached/been able to retain those lofty positions. So no, I don’t think they are willingly leading us to disaster.

The problem is that they are too few! No individual human being is able to make a considerable number of decisions in a short period time. That’s the very reason why we have consultants and so on, right? The problem is that ‘consultants’ only give advice, they cannot/are not allowed to make actual decisions. And the fewer are the people wielding real power the more the rest of us become mere consultants…

And according to Taleb’s theory and to an immense number of historical occurrences the less people are involved in the decision making process the higher are the chances for a catastrophic error to ‘reset’ the entire system.

PS I. Funny for a conclusion like that to be drawn from a picture published by somebody who caters for those ‘working’ hard to get as rich as possible, isn’t it?
On the other side…if these people considered the issue to be important enough to write about it … maybe it’s worth a moment of our precious time.

PS II Never say never!
I don’t think we are necessarily facing another economic melt-down in the immediate future. It might happen, of course. It will happen – sooner or later, of course again, but there is no sure way of telling when.
What I’m trying to suggest here is that there is a very strong possibility that in the near future we’ll witness a considerable change in how we manage the economy and in the way we relate to the concept of ‘money’.

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