The Almighty Dollar
The way we think about money has many parallels with the way people thought about the world 500 years ago. We laugh at how everything tied back to God back then and smile at how they could have been so stupid as to hold so many silly theories without supporting evidence. Many still hold these silly theories in 2012, but I don't think it is worth my time to refute them.
What is less commonly realized is that money holds the same grip on our world view, with the same dogmatic blindness This is blindingly obvious when you examine theories about the stock market, but equally true of markets in general. The more unsettling truth is that we utterly rely on the belief that money is real -- a "fact" that is as self-sustaining as the belief that God is responsible for everything that happens or that everything that happens was "fated". All these beliefs vanish with unsettling ease once seriously questioned.
Basically, money is a symbol of trust. If you don't trust a currency, you want to trade it for something you DO trust, like gold or some other currency. If you don't trust any currency, you tend to buy things that are solid like real estate. Even if you do trust your currency, you can be impacted in serious ways when other people cease to trust it, an experience that its common enough to shed light on the fact that currency is a figment of our shared imagination, like God. After all, there were times when you could be burned at the stake for announcing your doubt in the Church -- an experience that was sure to teach that there are real consequences that flow from shared imagination.
I have provided links below to some classic works that discuss "bubbles", the situation where something imaginary, such as the "price" of stocks or the "value" of real estate is run up beyond all reason by "speculators" who plan to cash in on the "rising" value of whatever it is. This always leads to a crash. Most recently, the belief that real estate values MUST go up forever was one of the causes of the terrific crash of 2008 which still reverberates around the world (in Spain for example).
The fundamental error that people (including myself in some situations) make when it comes to "markets" is to think in physical terms -- prices "going up", "going down" etc. Maldelbrot gives a more accurate picture of what is happening. The bottom line is that markets are far more unstable than our models (formal and informal) predict. Crashes are not only likely but inevitable because of the nature of the situation. The "problem" is feedback -- the fact that the market is really a market for beliefs and expectations rather than anything in the real world. With a little effort, this can be easily seen about the stock market. With more courage it can be seen about money in general. After all, the very purpose of money is to make a huge market in just about everything work and markets are by their nature subject to wild swings, crashes and miscellaneous disasters.
So ...
My "liquid assets", such as cash, stocks, mutual funds etc. rely for their existence on the commonly-held and urgently protected common dogma that these assets are real. While this delusion persists, I am able to trade numbers in a trusted computer for things I can eat, sleep in, drive and otherwise enjoy in the real world. I am also free to enjoy real experiences that have somehow slipped between the cracks of the "economic" system, such as the "information" goods and services available on the Internet that can be exchanged for ridiculously small amounts of "money" or no "money" at all.
Such insight also allows me to sleep soundly when the "price" of my Apple stock swings wildly or the value of my real estate drops precipitously in response to declining expectations of economic "growth" in the region. It helps to keep an eye on what is really happening and listen to the expert "economists" with the same ear I use for the prophets of God's wrath.
For more on chaos theory, see here
Many of the thoughts in this blog arise from reading the following books:
Misbehaviour of Markets -- totally destroys the theoretical underpinnings of mainstream economic theory. Author, Maldelbrot, is one of the leading mathematicians of the 20th century with a special interest in the way markets work.
Crash of 1929 wonderfully written, amusing and extensively researched by one of the acknowledged experts on the the subject. This book is full of insights into the broad context of the '29 crash, which is not JUST about the financial markets.
Soros on the crash of 2008. Soros is used to people taking him seriously. He is bitter that his "theories" are not taken more seriously. In fact, this is because they are obvious, not original and/or wrong. However, his hands-on experience in the world of high finance makes it worth the effort to plow through all the bullshit about why things happen the way they do.
The Singularity Is Near, a "must read" for anybody who expects to live another 10 years into the future. Among many insights in this book is the simple fact that "money" is "stands for" "goods and services" that cannot be copied. Any given orange can have only one owner at a time. This is increasingly not true of a larger and larger proportion of what is bought and sold. This means that "money" will have a declining importance in the real economy of the human race. Think. It is (slightly) illegal for me to copy a song, but still actually illegal to copy the currency I might exchange for one copy of the song. Songs are not like oranges or cars. This is something new. This reflects a crack in economic theory that is widening at an exponential rate and that's what the "Singularity" book is about.
What is less commonly realized is that money holds the same grip on our world view, with the same dogmatic blindness This is blindingly obvious when you examine theories about the stock market, but equally true of markets in general. The more unsettling truth is that we utterly rely on the belief that money is real -- a "fact" that is as self-sustaining as the belief that God is responsible for everything that happens or that everything that happens was "fated". All these beliefs vanish with unsettling ease once seriously questioned.
Basically, money is a symbol of trust. If you don't trust a currency, you want to trade it for something you DO trust, like gold or some other currency. If you don't trust any currency, you tend to buy things that are solid like real estate. Even if you do trust your currency, you can be impacted in serious ways when other people cease to trust it, an experience that its common enough to shed light on the fact that currency is a figment of our shared imagination, like God. After all, there were times when you could be burned at the stake for announcing your doubt in the Church -- an experience that was sure to teach that there are real consequences that flow from shared imagination.
I have provided links below to some classic works that discuss "bubbles", the situation where something imaginary, such as the "price" of stocks or the "value" of real estate is run up beyond all reason by "speculators" who plan to cash in on the "rising" value of whatever it is. This always leads to a crash. Most recently, the belief that real estate values MUST go up forever was one of the causes of the terrific crash of 2008 which still reverberates around the world (in Spain for example).
The fundamental error that people (including myself in some situations) make when it comes to "markets" is to think in physical terms -- prices "going up", "going down" etc. Maldelbrot gives a more accurate picture of what is happening. The bottom line is that markets are far more unstable than our models (formal and informal) predict. Crashes are not only likely but inevitable because of the nature of the situation. The "problem" is feedback -- the fact that the market is really a market for beliefs and expectations rather than anything in the real world. With a little effort, this can be easily seen about the stock market. With more courage it can be seen about money in general. After all, the very purpose of money is to make a huge market in just about everything work and markets are by their nature subject to wild swings, crashes and miscellaneous disasters.
So ...
My "liquid assets", such as cash, stocks, mutual funds etc. rely for their existence on the commonly-held and urgently protected common dogma that these assets are real. While this delusion persists, I am able to trade numbers in a trusted computer for things I can eat, sleep in, drive and otherwise enjoy in the real world. I am also free to enjoy real experiences that have somehow slipped between the cracks of the "economic" system, such as the "information" goods and services available on the Internet that can be exchanged for ridiculously small amounts of "money" or no "money" at all.
Such insight also allows me to sleep soundly when the "price" of my Apple stock swings wildly or the value of my real estate drops precipitously in response to declining expectations of economic "growth" in the region. It helps to keep an eye on what is really happening and listen to the expert "economists" with the same ear I use for the prophets of God's wrath.
For more on chaos theory, see here
Many of the thoughts in this blog arise from reading the following books:
Misbehaviour of Markets -- totally destroys the theoretical underpinnings of mainstream economic theory. Author, Maldelbrot, is one of the leading mathematicians of the 20th century with a special interest in the way markets work.
Crash of 1929 wonderfully written, amusing and extensively researched by one of the acknowledged experts on the the subject. This book is full of insights into the broad context of the '29 crash, which is not JUST about the financial markets.
Soros on the crash of 2008. Soros is used to people taking him seriously. He is bitter that his "theories" are not taken more seriously. In fact, this is because they are obvious, not original and/or wrong. However, his hands-on experience in the world of high finance makes it worth the effort to plow through all the bullshit about why things happen the way they do.
The Singularity Is Near, a "must read" for anybody who expects to live another 10 years into the future. Among many insights in this book is the simple fact that "money" is "stands for" "goods and services" that cannot be copied. Any given orange can have only one owner at a time. This is increasingly not true of a larger and larger proportion of what is bought and sold. This means that "money" will have a declining importance in the real economy of the human race. Think. It is (slightly) illegal for me to copy a song, but still actually illegal to copy the currency I might exchange for one copy of the song. Songs are not like oranges or cars. This is something new. This reflects a crack in economic theory that is widening at an exponential rate and that's what the "Singularity" book is about.
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