<DrumBeat: October 14, 2008 The Oil Drum DrumBeat: October 15, 2008>

169 comments on A Long Term Solution to Our Financial Crisis: The Other Forms of Capital

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D.Benton_Smith on October 14, 2008 - 9:52pm Permalink | Subthread | Parent | Comments top

Hi there, anagama,

I think the word that might be hanging you up is "cash" (I didn't use it my post, but you used it in yours.)

Cash is frequently thought of as a tangible item, like a dollar bill, silver coin, or the like. Since such items have physical existence we can easily slip into the idea that they have some intrinsic value, when in fact they usually have almost none. Like all other forms of money (personal checks, electronic bank records, IOU's and Treasury Bills) 'cash' derives its value from belief, trust and agreement. We agree, believe and trust that this physical (but symbolic) item will be honored by others as a medium of exchange for REAL things.

It's so easy to exchange money for the actual things we need or want that most people slip into thinking that they want money itself... but to want money itself is of course quite psychotic. What we actually need or want are the REAL things that money enables us to acquire (food, shelter, clothing, and cooperation or dominance over the actions of others.)

That's one of the essential points of Nate's essay. Whereas money is abstract and can exist in infinitely large quantities, REAL things are finite and can exist only in limited amounts.

But that's not the only problem. One of the other problems is how we control (or fail to control) the relationship between the abstract things (various forms of money) and the real things (the things we require for life.)

Unfortunately, it is possible to have symbols of symbols and that's where the serious trouble starts. We put cash in a bank and the bank gives us a statement that we have that much money on account. That statement is a symbol for the cash. The cash itself is long gone, as a mortgaged house loan (for example) and the bank has only a signed contract (the mortgage) that the loan will be repaid with interest.

That mortgage contract is thus a symbol of a symbol of a symbol.

Well, you can see that this all gets pretty complicated pretty quickly, and if the bank sells the mortgage contract (or bunches of them) you can see that things can start to get out of hand.

By the time the ownership chain of symbols is eight or ten layers deep, electronic computers become necessary just to keep records of the mess. That records exist, however, is neither guarantee nor proof that anyone understands them.

Indeed, no one does. The symbolized money in today's financial world is so multi-layered and recursive that no human mind is capable of comprehending it.

We're all guessing.

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anagama on October 14, 2008 - 11:07pm Permalink | Subthread | Parent | Comments top

That's an interesting answer. About halfway through my own post even I started to doubt what I was saying when I got to comparing the qualities of post-apocalyptic contracts to bank notes. Plus, I was sort of hoping that the whole "cash" thing would kinda slide through. *smirk*

Anyway --- Cash or Money, whether physical or "in the bank", is worth something because we all agree to exchange goods or services for it. A promissory note is worth something because one person has agreed to provide periodic money transfers to another entity.

One of the qualities of money is that every unit should be fungible, that is, I only care that I get a twenty if I go to the ATM and ask for 20 bucks. I'm not looking for a specific bill because any twenty dollar bill is as good as the next (aside from oddball numismatically interesting bills).

In contrast, a promissory note does not have a set value -- the amount of the loan is a fixed value set when the debt and the money were made. However, the value of the note itself can fluctuate greatly depending on how reliable the debtor is or how desirable the collateral is -- in other words, a $100k loan secured with an acre of Santa Barbara beach front as collateral, is far more valuable than a $100k loan on 79 Winnebago with a blown engine. Because the value of each $100k note might vary, every $100k note is not equivalent. If every unit of money must be equivalent, then it follows that debts are not money because the value of debt is variable.

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whitis on October 15, 2008 - 2:03pm Permalink | Subthread | Parent | Comments top

The value of cash is variable too, on the timescales you are talking about. Extremely variable. Inflation, international trade balances and exchange rates, the cost of energy, etc. all affect it. Indeed it may be more variable than your mortgage in many ways. If the bank wasn't stupid enough to loan $300K on a $100K house, the collateral may be more stable than the money. After all, it provides housing for one family whether it costs $1 or $1000 for a loaf of bread. Thus, the human value of the house is relatively constant but the money isn't. Wiemar republic Deutsch marks had so little value that they were burned for heat. But even the house has risk of value change. A flood can wipe it out. There can be no energy to get people from the house to work. A factory can close. Etc.

The problem was, people were so enamored with the intrinsic value of a house, and worse with bogus promise of appreciation, that they let the paper value be inflated over the intrinsic value. Meanwhile, the houses themselves, even the new ones, had sustainability problems - too far from work, too energy inefficient, too large.

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169 comments on A Long Term Solution to Our Financial Crisis: The Other Forms of Capital

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