over 10 years on 2008-06-01


reading bloomberg news this am there is a discussion of the fact that while the government has borrowed an increasingly absurd amount of money in the last several months, the interest expense of all the borrowing is significantly down.  the yield on treasuries is zero and in some cases even negative.  in the middle of the meltdown we are literally paying the government to take and invest our money....  why?  because with so little transparency into the value and dependencies of various 'assets' it increasingly seems like there is nowhere else to put our trust.  the abstracted inter-dependencies of fund-of-fund-of-fund-of-funds is the only thing that enables something like a madoff, and the only reason the government is able to now borrow literally trillions of dollars at zero cost of capital.  many have been talking about this - but if you will, please allow me bit of a saunter towards how i am considering the situation with an information theory spin on the equation --

money is a medium of exchange & perfect information would actually render m0 meaningless

while i would like to think that i remember large swaths of my college economics courses, watching the economic events of the last few months i can't help but going back to just the first week of ec10.  specifically - i remember that currency has no underlying value, isn't 'real' in and of itself, it is just a medium of communication to facilitate the exchange of goods and services.  m0 exists because without perfect information and free communication it is too hard to exchange physical value.

thus, if we had perfect information there would be no need for currency (m0) -- instead of paying $10.00 for lunch, i could simply trade on the fly to get a sandwich for 4 sheep in the hills of albania that were fed yesterday and vaccinated last month.  with perfect information and zero cost of communication then all assets would themselves be fully liquid and money would have no role.

capitalism is really simple.  set aside all of the complicated rules, regulations, policies, and mechanism - it is based on people creating differential value in the world by the sweat of their brows and the power of their minds....  when people create value the world's capitalization rises, when people destroy value the world's capitalization falls.  the entire valuation pie cannot exceed the current value of all goods and services in circulation, plus the future value of all goods and services adjusted by how much the world trusts the future goods and services will actually come into being.

why am i taking the time to rant about this?  because while the internet is actually bringing us closer and closer to trading albanian sheep for lunch in brooklyn (with ever more perfect information and lower communications costs), the world's economy seems to be marching in the other direction.

and, thus, the us government is borrowing trillions and trillions of dollars for free... more precisely, the us government is on track to print themselves a trillion units of communicative credit.  printing this money does not create value.  so, why exactly is it that injecting new money into a system means anything?  if the amount of goods and services stays constant, what do we care if the medium of exchange expands...

because it signals a voluntary rebalancing based on lost faith in our ability to evaluate the total value of other entities.  our information seems bad, far worse than we expected, so we have no idea who actually owns all the albanian sheep, how much we can trade them for today and tomorrow, and who has a reasonable probability of generating more goods and services in the future.  without any information we are creating our own reset by allowing the government to print tons of money, and then use it to buy up all the 'assets' of indefinite value.

if the world was comfortable valuing assets, if we had better information, it would be basically impossible for the government to print money for free and buy up all the current and future goods and services in the economy, but while people feel they lack enough information to effectively use currency, buy the government will....

this isn't the end of money, but it is voluntary nationalization, because 'in nothing else do we trust'

more thoughts about fundamentally why this happened based on a social miscalculation of the impact of tech on economics in the last 20 years (i do blame tech companies for this crash), but now off to work.  for the record, i am stealing the concept of playing on 'in god we trust from atlas shrugged, which seemed appropriate' -- but not the specific device.

original swl blogposts and letters 2007-2010