CDXLIV – Judgmental About Tucker

Or, A Grumpy Ramble About The Banks

In keeping with an unintentional theme of increasingly misanthropic screeds against television and media personalities, I have another report to share of things I saw on the gym TV that just didn’t make sense to me.

The funny thing is, my new state is a little more red than my old state of beloved memory, Virginia. So instead of CNN, and MSNBC dominating the televisions, it is a little more Fox News, a little more BBC. Not that BBC is biased the way Fox News is biased but international broadcasts present American news with a little more clarity.

So in the evening it was time for Tucker Carlson to address sweaty news junkies. I couldn’t hear anything my boy Tuck was saying but I could tell the broadcast was about the recent bank-run and the governments response. I am an accountant by trade and interested in matters financial, as long time readers will know, so I my curiosity was piqued by this whole affair. I have a sense of what is wrong with the banking industry, but what did Tucker have to say about it?

Tucker Carlson took this opportunity to decry the source of these ailments: Diversity and Inclusion standards in the financial industry. Instead of a meritocracy we’ve become a adjectiveocracy. Tucker took us back to 2008 and the bail-outs and the Diversity and Inclusion requirements imposed on the financial industry, and traces the origins of this crisis to that crisis.

Here’s the thing–Tucker Carlson might even be right. He probably has a valid point that selecting for people of different arbitrary qualities rather than people with competence and skill degrades the quality of our financial machine.

But that’s not THE problem here. That is A problem. It might even be a significant problem. But it’s not THE problem.

This is where I digress from yappin’ about Tuck and start talking about the financial industry. If you want to read more about Tuck, skip ahead. I’ll put a flag to let you know you’ve arrived.

Banking Bonanza

Here is how for-profit banks work. You deposit a sum of money into your account, along with a bunch of other people. The bank now has a big sum of money to play with. Here is the balance the Bank must strike: How much money does it need to have on hand to supply people with their regular cash needs? Let me amend that–what is the minimum cash balance required to keep on hand to keep the people supplied? There are different answers to the question. Let’s say it’s 10%.

Then what does the bank do with the 90% remaining? It HAS to invest it. It invests in loans–personal, automotive, mortgage loans that almost every bank offers. These are easy, but returns depend on the interest rate which is governed by the Fed. These returns pay salaries, pay interest to depositors, and overall grease the wheels of running a bank. When interest rates are low, everyone wants loans because they are affordable and often a better investment than savings. When interest rates are high, people start having trouble with their loans because they can no longer afford the interest rate. Some loans default, some loans settle, some (few) loans continue to be paid back reliably by belt-tightening citizens with money to spare. If a majority of the banks income is in loans, when interest rates go up the at-risk loan profile of the bank changes dramatically, and a bank can go from solvent to insolvent very quickly.

Another investment for banks is things like the stock market. The stock market is inherently volatile and offers some returns. The returns you can get from the stock market come in two forms: Selling an investment that has matured in value–i.e., you bought the stock low and you can sell it high; or, dividends from long term investments. Dividends are secure and predictable, “buy-low-sell-high” is not really predictable and relies more on horse-sense than science.

Another investment for banks is things like bonds, treasuries, currency speculation, real estate speculation, things like that. Bonds and treasuries are more stable, because they are from the government or other companies; speculation is unstable because it is by definition speculative.

Another thing that for-profit banks do that absolutely boggles my mind is that they go public. This is what I think the biggest problem is.

A for-profit bank will sell shares on the stock market, and wait for their stock to mature so they can get juicy cash from public investments. If the economy is bad, the stock market falls, and it has the opposite effect. Suddenly your equity-generating dynamo starts loosing money and going public suddenly seems like a very bad idea.

Let’s think about this for a moment. What exactly are you investing in? Look at my series on Rai Stones for an in-depth discussion of this. Equity of a company should represent the thing they have that no one else has. When you buy an ownership share of a company, you aren’t just buying a paper instrument, you are buying a part of the whole business. If you are a widget manufacturer, you make widgets. If you are an accounting firm, you sell accounting services. What do banks manufacture? What do they sell? How do banks make money?

Banks make money by investing other peoples money in variously risky financial instruments. So buying a share of stock is buying into the investment of other peoples money so that you can get a cut of the profit earned from the investment of other peoples money. A bank that has a good stock price means that it has a lot of other peoples money or it is earning a lot of income on it’s investments of other peoples money.

When interest rates go up, it becomes harder for a publicly traded bank to make money on its investments of other peoples money, and it’s stock price goes down because it can’t make money the way it used to.

That’s the model we are working with here. So what exactly happened?

Silicon Valley Bank invested in long term bonds. The way bonds work is you pay a big sum up front and earn an income over time, depending on the interest rate. The bonds are optimized for a certain interest rate, so when rates change, bonds can stop being useful as an investment. SVB was stuck with a lot of bonds and interest rates had gone up a lot, so the question SVB had was–do we hold on to the investments and hope the interest rates go back to where they were, or do we sell them as they are and eat a loss and raise capital through another way?

Put another way–do we keep the reduced income because we have sunk so much into it, or do we scrape back what cash we can and try to do better investments? SVB made a logical decision to sell the investments at a magnificent loss and announced to investors that they needed to come up with cash. This scared the investors who questioned the solvency of the bank, who sold their investments which aggravated SVB’s cash needs, and created a death spiral. Not only this, but depositors came a-knocking to withdraw their deposits–the lump sum which SVB was investing in the first place, and so could not provide. A run on the bank precipitated, where depositors wanted all their money out and the bank could not provide it.

Note what is going on here: All of these errors precede government intervention. SVB made a bad investment and had to eat dirt because the economy is a dynamic and changing environment. The bad investment panicked the stock holders because it is a publicly traded bank–error compounds error. The panic led to depositors panicking and trying to take THEIR money out–error compounds error compounds error.

All of this was wrong and broken before we even get to the point of government regulation. The governments response was bad and doesn’t help solve any of these problems. But do you see how there are plenty of problems with how things are set up before we even get to that point?

Talkin’ ‘Bout Tuck Again

Tucker Carlson missed the mark on this specific issue. Diversity and Inclusion is not even the worst thing about our grossly dilapidated financial industry. He picked that topic because it was politically expedient and would get people fired up. But it completely misses the point of what is wrong with the banking industry and with our government.

Other banks are struggling and may fail because of the structural problems with how they operate as banks, and not because regulators recently appointed are of a diverse background. The government response one might suggest even has incentivized failures so that they can maximize recoverable capital while the getting is good.

AMDG

CCCXVI – The World’s Big Bath

I was talking to Hambone about something unrelated and he made a remark which would probably sound shocking to the uninitiated or the uncynical. Hambone and I went to undergrad together and become acquainted due to being in many of the same classes together. We then briefly worked at the same auditing firm together, before parting professional ways. So for context, both Hambone and I are accountants.

“As accountants, we should know that the numbers are all [garbage] anyway. It’s all grift.”

Be very cautious if you take up this line of thought. Many people wield it imprecisely–you might be tempted to think that “Corporations make up numbers”, which they do not. That’s the great thing about accounting: None of the numbers are made up. The numbers are all accurate inputs into an algorithm that churns out results that match expectations. The Accounting Algorithm can only do so much, it cannot make a bad company look profitable, but it can exaggerate mediocre times or mask exceptional times. Corporations do this for a variety of reasons. Auditors exist to make sure that the Accounting Algorithm doesn’t produce results that are too dramatically different from the real inputs, and in many cases are just looking to make sure that this year doesn’t look too different from last year. When times are good, this process works great. When times are bad, they tend to be REALLY bad, and take auditing firms down with them.

The headline that stirred up this line of thought in me was this one, from my Ukraine War source: “World Bank Warns of Global Recession“ caused by the war in Ukraine.

There is an illegal accounting technique–a technique that has been forbidden from Accounting Algorithms–called the Big Bath. The Big Bath is when a firm takes all of their losses all at once, so that the rest of the year looks good by comparison. “Man, there was a hurricane so Q3 Earnings were terrible, but look, Q4 showed huge growth year-over-year!”

There are signs that corporations are already contemplating this. I saw a headline somewhere that said a certain company was forecasting low earnings for Q1 reporting since the war in Ukraine began in February. Other tech firms have been committing layoffs. The sanctions have disconnected Russia from the global economic order and many corporations are terminating their operations there.

There is a discrete and definite impact of all of this on the individual firms and on the economy writ large. But if everyone starts reaching for the excuse “But the War in Russia!” then a Global Recession becomes more than just likely, but becomes certain.

This applies to more than just corporations too, it’s important to note. Governments control the levers of their economies. Debt and taxation have risen to terrible and drastic heights, and being able to take a “Big Bath” in the form of an economic collapse–and being able to blame it on Russia— probably looks like an appealing prospect.

Down that road leads war, unless some other path is taken. A global scale economic collapse with Russia as the scapegoat would create cultural animosity that can’t help but explode. I pray this is not the outcome, but it is hard for me to claim that it is something our politicians would not do even with full knowledge of the consequences of their actions.

The good news is that if we do undertake a global economic reset, there will be no bailouts because there will be no global economic system to rescue anyone. We will be forced to have an economy based on productivity and value, at least for a while–and only the productive and valuable will keep the economic dynamo running. It will be a healthy thing to drain the bad economic humors. We just have to make sure that what replaces it isn’t the same thing we had before.

AMDG

CCLXXXIX – The Morality of Saving

My last article accidentally opened a window into a very confusing area of financial morality, and this area was rapidly and ably pounced upon by DavidtheBarbarian and Tenetur.

The thesis of that article is that the ideal money supply is such that an arbitrary population, after an arbitrary period of time, will have all their needs met and no money in reserve.

As David points out, there are very prudent reasons why one might want money in reserve–emergencies, insurance, long term future planning, and things like that. If we allow for that, then the money supply is not zero after some arbitrary period.

There are two approaches I can take to answer this. In the first, I could double down on the hard teaching, ignoring for a moment practical reality. In the second, I could refine my argument and try to determine what money supply is truly ideal.

The important question to both is this: How much should we worry about the future? The double-down response is “Not at all”; the refining response is “Some arbitrary amount”. We cannot go to the opposite extreme and say “Worrying about the future should be our sole focus” because then we fail to allow for any activity in the present.

The two possible responses seem to me to be mutually exclusive. I note in my previous article that the double-down approach should be undertaken prayerfully and under spiritual direction. But to a certain extent, so should the practice of saving. So should everything. If you are a parent with children, you could not neglect to plan for their future.

I think an error I made in the comments is to suppose that surplus ought to be given away instead of saved–as if that were the only alternative. Surplus ought to be committed to some purpose.

Imagine this: I chop down a tree. It gives me two cords of firewood–it was a big tree. If I am living for today, I will take the logs I need to keep my house warm tonight, and give the rest away to my neighbors. It is easy to imagine that I might need firewood for tomorrow too, and you can’t expect that I would chop down another tree only to take one part of the wood and give away the rest.

No, I would pick some arbitrary amount that would last me for some arbitrary period of time. I might be really concerned about how cold this winter will be, and keep all two cords. I might not be that concerned and keep only one cord. Lets say that it is February and I live in a temperate area and spring is right around the corner, so I make a prudential judgement that I need half a cord to last me to spring. I have 1.5 cords remaining. Ought I give that wood away? I could give some away–maybe my family lives close by, or close friends, I could take care of them. I could host a community bonfire, allow an opportunity for some fellowship. I could take that wood and go have a community bonfire in an area that doesn’t have much availability of wood. I could keep some of the wood and carve it into sculptures or plane it into planks and make furniture.

The point is: once my needs are met, now I can go about satisfying the needs of the community. The individualist utalitarians say that we should either keep all of it for ourselves or take just what we need for tonight. I think a way to reconcile this problem that would be good would be to say that all our resources must have a purpose, and once our needs are met we must see what we can do to satisfy the needs of others. This doesn’t have to be charity–it could be a creative, new use of the resource for which there is some demand. But the use must be towards some good.

Circling back to the question of, what is the ideal money supply. In a utalitarian world, the ideal money supply would be whatever amount results in needs being met and balances being zero after some arbitrary period of time. If we allow for future planning and provision of public goods to ourselves, our family, our friends, and neighbors–then there is no upper bound.

In fact–and this may be opening the door to a whole new line of thought–the money supply has two varieties, potential and kinetic money. Money that is being saved is potential, and has no limit. Money that is being used is kinetic, and must always be zero after some period of time. Money flows from the sovereign, is used actively until it ends up in someones savings. Money flows from Kinetic to potential, in other words.

In a Christian nation, a high level of money-wealth that has been built up means society gradually improves because it is implicitly being leveraged for the public good. In a selfish nation, a high level of money wealth that has been built up means social stratification occurs, because a few people are stockpiling sovereign money and so more sovereign money needs to be issued to meet the needs of the poor.

That is an interesting thought.

AMDG

CCLXXXVIII – The Ideal Money Supply

Authors Note: I went back and forth on whether to publish this. It is a half formed thought without a strong justification, but I think the core idea is sound and I would be interested in feedback from readers, so ultimately that is why I am posting this. Please let me know what you think!

I have asserted that money is the delegated authority of the sovereign to provide for our necessities. Providing for our necessities is a responsibility of the Sovereign, as head of state, analogous to head of household. Because the purpose of money is to provide what we need, and the source of money is the sovereign, and the exchange rate for money is dependent upon the amount of money in circulation, we can use these ideas to estimate the ideal money supply.

Lets create a scenario that is extremely simple. King Alfred is King of a nation with one subject, and that subject is Bob the Peasant. Bob the Peasant works for King Alfred as his gardener, and Alfred gives Bob a wage for his work. Bob’s only need is bread, so the King pays him in loaves of bread–one loaf per week. The money supply in this scenario is zero, and everyone’s needs are met.

If King Alfred did not have a ready supply of Bread, then Alfred could pay Bob a wage of 1 Alfranc per week, which is enough for Bob to buy a loaf of bread from another supplier. The supplier receives the money, and pays a tax since they have no other needs, and the Alfranc returns to King Alfred. Money supply is zero, everyone’s needs are met.

We can keep growing this scenario ad infinitum. The principle I wanted to hammer home is that the ideal money supply is, after some arbitrary period, that the money in circulation is zero, and everyone’s needs have been met. Property is real “wealth”, not money. A surplus of money means you have satisfied all your needs and are able to provide for much of your future needs. A deficit of money means you have not satisfied all your needs, you need more to bring everything home. A balance of zero money means you have satisfied all your needs and you have no provision for future needs.

Some might call that short sighted, others might call that abandonment to divine providence.

This is not investment advice: You need savings to live in the modern world, and if you are going to give up all your possessions and abandon yourself to divine providence, do so under intense prayer and the supervision of a spiritual director. It can be exceedingly fruitful to do: Matthew 19:21-23

What I think would be a good takeaway from this is that real wealth exists in real property, and real financial security comes from having a means of providing for your needs and preserving your real property. If all your bills are paid and you have no money in the bank, you are satisfied–you have everything you need.

AMDG

CCLXX – Render to Caesar the Garbage That is Caesar’s

DavidTheBarbarian’s comment on my previous article is excellent and touches on a lot of points which I noted in my reply to him but which I wanted to expand upon.

First, we need to disambiguate what money is in fact from how it is used. In medieval times, money was made of gold, but it was used to delegate the sovereigns authority to acquire property. Today, money is made of nothing, but is used to delegate the sovereign’s authority to acquire property. The important part of a currency is NOT what it is made of, as evidenced by modern currency being literally nothing. The important part of a currency is that it signifies the sovereign’s authority to acquire property.

This concept coheres with my previous discussion of yap as a unit of value. Anything is only valuable insofar as people want it. Money is the same way. If there was only one coin in the world which bore the sovereigns authority to acquire property, even if it was made of garbage, people would accept a lot of property in exchange for that coin. This is because no exchanges would be possible without it unless they were direct property-to-property exchanges. Exchanges always happen at a yap profit for both parties and sometimes happen at a money profit for one party. If the sovereign printed a trillion such coins, each individual one would not be tradable for very much property.

The important point here is that how much property you can exchange for money is not an intrinsic property of money, but is a consequence of how much money is around. The purpose of the money supply is to facilitate exchanges of property, and the money supply should match the number of exchanges performed by all citizens over the course of a given time period.

Another key point is that as the delegated authority of the sovereign, money properly belongs to the sovereign. When we offer a sacrifice, we are returning to God that which is Gods. When we pay taxes, we are returning to the sovereign that which is the sovereigns. So suddenly, what Christ said in Matthew 22 suddenly makes sense: Render therefore to Caesar the things that are Caesar’s, and render to God the things that are God’s.

Tithing, it’s important to note here, is baptizing the purchasing authority of the sovereign. In other words, it allows the sovereign to satisfy the needs of the Church. Taxes simply give back the Sovereign’s authority; Tithing is committing that authority to the work of the Church.

AMDG

CCLXVIII – Currency as Future Property

I’ve had some time to think about Currency since I wrote this article which included numerous ill-formed thoughts on Zippyist ideas of currency.

I wanted to explore an idea for a moment, tentatively, because it would represent a break with Zippy on what we consider currency. I want to make sure I understand this idea fully before I commit to it, so I’m going to explore it here and once more I’ll invite comment and criticism on the idea.

In my previous article I noted in one graf the thought that currency may represent deferred assets. Deferred assets is not an accounting concept, even though it uses accounting terminology. It describes that currency represents future property–future real assets. I’ve noted elsewhere in a separate discussion that currency is not intrinsically useful. This is kind of what people mean when they say cash is “liquid”: it is easily transferable and functional as a medium of exchange but not useful for anything. Real assets–property of any kind–are “hard” because they are not easily exchanged. I can exchange one dollar for one dollar with perfect ease, but I cannot easily exchange a pack of gum for one dollar, nor can I easily get one dollars worth of other property in exchange for a pack of gum. Real assets are the only things with intrinsic value which is sustained over time.

Why does it make sense to think of currency as future property at all? Especially if we think about it in terms of the government issuing future property?

We have to start by thinking about the true nature of the sovereign. This gets complicated in democracies so lets simplify by thinking about a minute Kingdom. We’ve talked about how all authority is delegated from the sovereign, because the sovereign is the responsible caretaker of his Kingdom. The sovereign is responsible for the national defense, for example, but the sovereign may appoint Generals to discharge this duty in his name. In a way, the sovereign owns his kingdom. Again: not as a dictator or tyrant, but as a responsible caretaker. In ownership, it means the King owns the land of the Kingdom. If a peasant carves out a patch of land for himself, he must buy that land from the King. The King may also fief land to nobles to rule a smaller, more manageably sized chunk of the Kingdom. All of this is a delegation of authority from the sovereign, and not an abrogation of authority. The Peasant has private property, but it is not independent from the domain of the King. Both the peasant qua subject and the land qua property belong to the king, but the peasant is given free exercise of the land insofar as the King respects private property.

The same is true if the peasant chops down a tree. The tree is on land that belongs to the King, but delegated to the Peasant via the purchase of land. The tree is processed and the Peasant carves it into a cart, and goes to buy iron fasteners from the blacksmith. The iron was mined in the kingdom, and so belongs to the King, and was delegated to the owner of the mine, who is a subject of the King, who hired miners (also subjects) who brought out the iron and who sold it to the blacksmith (also a subject) who turned the iron into fasteners which were purchased by the peasant.

Lets cut to the punchline: Currency represents delegated authority to acquire property on behalf of the King. This suddenly makes it appropriate to stamp the Kings image and name on coins–the King is he in whose name an exchange is made.

When the Sovereign issues new coins, he is releasing tokens of his authority to acquire future property. Whether the Sovereign issues new coins to an institutional bank or to the peasants directly doesn’t matter–each coin bears the authority to acquire real property in the name of/on behalf of the King. The King would do all these things himself but he can’t be everywhere at once, authority must be delegated and especially insofar as it pertains to the welfare of the peasants, they know best what they need and so receive delegated authority to buy for themselves food.

Turning our attention now to taxation, in practice this appears to be a kind of rent paid to the sovereign in exchange for bearing his authority to acquire future property. The King delegates authority to the peasant, and the peasant gives some of that authority back. This is simplest (both morally and procedurally) with Sales taxes. The peasant, in the name of the King, acquires some iron fasteners from the blacksmith, and pays a tax that amounts to one coin which he gives to the blacksmith to return promptly to the King. Said another way, the peasant exchanges future property for real property, and some of that future property goes back to the treasury to be used by the state to directly acquire property rather than to do so via delegation.

How can we think about wages? An employer would give you real property if it was liquid but it isn’t, so it gives you these tokens of future property (on behalf of the King) so that you might acquire your own property. Income tax then is a surrender of some authority in proportion to the amount of delegated authority you earned in a given year.

This conception of currency is also congruent with Zippy’s thoughts on profitable interest: If your friend is in need and he borrows some amount of future property from you, the interest is collecting MORE future property than was given.

I think this idea solves some of the challenges of thinking about currency as tax vouchers while retaining Zippy’s moral and financial understanding of currency.

AMDG

CCLXVII – A Jumble of Thoughts on Currency

I finally found a good primer from Zippy regarding currency as Tax Vouchers. I decided to turn my accounting brain to the task of what it would take to create a balance sheet for the US Government. The answer I’ve arrived at feels like cheating so I invite a thorough critique from any and all readers.

The problem with fiat currency–I will call them fiat vouchers form hereon out to avoid confusing myself–started (for me anyway) with thinking of the creation of the fiat vouchers themselves.

Primer: DR = Debit, CR = Credit

Imagine the accounting process one follows when creating widgets. First, you buy the raw materials with cash: DR – Raw Materials Inventory (RMI), CR – Cash. Second, you process the raw materials into finished goods: This is an entry in two parts. Part 1, DR – Finished Goods, CR – RMI. Part 2, DR – Work in Process (WIP), CR – Cash. NB: The first part records the transformation of the product, the second part records the work being done on the transformation. Then, you sell the finished goods: DR – Cash, CR – Finished Goods; and you recognize the costs of what is sold: DR – Cost of Goods Sold (COGS), CR – WIP.

That is a lot of accounting jargon but I haven’t figured out a better way of illustrating this stuff in a blog format yet.

Now imagine creating fiat vouchers. They are printed on paper, but once complete they represent the unit of measure and not an item of inventory. When your widget inventory is $1,000, it means you have one-thousand dollars worth of widgets. You can’t have an inventory of one-thousand dollars worth of dollars–not in any sensible way.

Lets imagine this process was still with a gold coin. First you “buy” the raw gold (pay laborers to mine it): DR – RMI, CR – Gold Treasury. Second, you process the raw gold: Step 1 – DR – Gold treasury, CR – RMI; Step 2 – DR – COGS, CR – Gold Treasury. (NB: I’m simplifying Step 2 because you’re paying the minter to mint Gold coins, that is what is represented by COGS). This works because the Gold treasury is an inventory of actual Gold coins.

When you have a Gold-backed currency, it stays simple. The Gold treasury becomes one step removed, and instead you issue vouchers that are called “Gold Payable”. Issuing Gold-backed currency looks like this: DR – Some Expense, CR – Gold Payable.

So at our simplest form, we are dealing with a Gold Treasury as the inventory of the asset, Gold as the raw material being processed, and Gold Payable as the issuance of Gold-backed currency.

Fiat vouchers removes Gold from the equation. There is no Gold treasury because there is no asset aside from mere paper, but now even paper isn’t necessary. There is no asset so there is no material to process. So we are cutting out the WIP and COGS part of it and we are left with merely DR – Some expense, CR – Fiat Vouchers Payable.

The reason this doesn’t work is because Zippy’s point of view is that all liabilities represent claims on some asset. CR – Fiat Vouchers Payable is a liability, but there’s no underlying asset to claim against.

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This is interesting to me because it feels as if the ideal currency is one which costs nothing to make, which was difficult before but is easy now. It literally represents free money. It makes sense why this would be the ideal and why society–or government–would move towards it. I wonder if the United States even goes through the formality of printing bills before sending money to banks, or if there’s not a computer algorithm somewhere that just adds zeros.

There is a way I could fudge the accounting without breaking accounting rules that would provide an asset that the fiat vouchers could claim against: Goodwill. When a company buys another company for more than their book value, the difference in valuation is referred to as goodwill, and will be amortized over some period of time since it doesn’t represent anything real. This does actually happen, even if it sounds nonsensical. Companies will pay a premium for a brand, or for access to a market, or access to a product. One could argue that the difference between real assets on the books and fiat vouchers payable is goodwill for the government. The government can retire fiat vouchers payable, and reduce it’s goodwill such that it’s assets approaches only its real value. Or the government can issue more fiat vouchers payable and increase its “goodwill”.

But again–it’s not really increasing goodwill in this case. And the operating arm of the government still needs to operate in dollar-denominated slips of paper.

Let’s see if we can simplify further by going back to the Sovereign and the Gold Treasury. If we look at the Sovereign as the owner of the state–not just the ruler, but he holds the title, the deed, for the state and the people and markets within it, then all money is a distribution from his personal reserve. So even with Gold, all money is “due” back to the sovereign anyway–it’s his, and he’s given it to you as a medium of exchange. This is all very simple with a unitary sovereign, but if we accept that the Liberal ideal is that the people is sovereign, collectively, then it becomes very muddled. Whose money is it?

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Here’s another thought I had. Is it true that the ideal currency is one that is spontaneously created out of nothing? It wasn’t possible until the digital age, but now it is. It has no intrinsic value so serves exclusively the role of medium of exchange. A collection of currency represents your exchange power, and as long as everyone else accepts that medium, you can exchange the increments of nothing for hard assets.

In a sense, if you earn an income you are collecting “deferred assets” by collecting an income, and when you trade those “deferred assets” in for hard assets you move them around on your balance sheet. Taxes would then represent giving the Government as an organization some deferred assets.

Furthermore–if the ideal currency is spontaneously generated ex nihilo there would need to be some kind of meta entity responsible for generating and retiring currency, because an ex nihilo currency would need a single-sided accounting entry to just increase or decrease its supply. From the meta entity, accounting would proceed as normal but it takes the problem of currency out of the USG balance sheet and moves it to the meta-entity.

I’m going to need to take these ideas and clean them up a bit but I hope you can follow my train of thought.

AMDG

CCLXII – Further Thoughts on ZippyCatholic

This is a stream of consciousness article because I was reading Zippy again which is always a dangerous thing to do in front of a computer.

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A troll-like gadfly would ask Zippy “what is the value of time?”. Zippy wouldn’t engage with trolls and refused to acknowledge this as a moral consideration for usury. The question stuck with me though, and since I am remote enough from Zippy I think I can attempt to answer without causing too much fuss.

One of the ways Zippy described himself was as a realist–a financial realist, among other kinds of realist. The question of the value of time can be broken down by thinking about barter exchanges. Can I give you my time? I can–by working for you. But then anything you pay me would be an exchange for my labor and not for my time. But I can give you money and you can hold it for me, and then give it back when I return. But in order to multiply that money it must be invested, traded profitably, as in the parable. Time is not a resource that can be exchanged either–it is infinitely available and nonexchangeable.

Really, what profitable interest is saying is “I could have spent this money in a better way and I want you to pay me for the difference”–but that’s not really a value add and that’s not really something you should be obligated to pay for, morally or contractually.

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An important part of this discussion is talking about property. Zippy seemed to take the stance that property was not about unambiguous, unilateral control of a thing, but about responsibility. Because I own a china dish does not mean it is OK for me to smash it on the floor arbitrarily; I have a duty to use my possessions to their full potential, with prudence and justice. This is in line with believing that our bodies are given to us by God and we cannot treat them like they are ours to destroy and remake in our own image, and that our skills and talents must be applied to God’s glory as well.

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There’s more to Zippy’s “submission to authority is voluntary. It is also mandatory” quip than i realized at first glance. Together they offer a picture of our ideal relationship to the sovereign. Just the first clause, taken alone, is liberalism. Just the second clause, taken alone, is totalitarianism. Both clauses, taken together, represent properly ordered moderation.

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As a financial realist, Zippy liked to refer to currency as “tax vouchers”. I really like this because it cuts to the heart of fiat currency. I need to do more digging on his blog to really grok it but constructing my own explanation, it means that a dollar bill is “redeemable” to discharge one dollar of debt owed to the US Government. You get paid in tax vouchers and simultaneously the USG accrues a tax debt. You turn in the vouchers to discharge the debt. If you redeem too many vouchers then the USG will return some vouchers too you.

The tax vouchers can be exchanged for real property, like a house, a car, a couch, a pencil. These things have value but that value is measured in tax vouchers. My previous articles that used yap to approximate value is related to this. The worth of real property is measured in tax vouchers, the value to you is measured in yap.

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Another Zippy-esque idea is that there’s no such thing as money. There is property and there are claims on that property. As an accountant his discussion of balance sheets was particularly edifying. Balance sheets show what real property you have, what liquidity you have in terms of unconverted tax vouchers, and what claims on your property are held by other entities–NB, balance sheets show this as of a point in time. Income statements show the change in property and claims against in a specified period.

Zippy said that the USG cannot have a balance sheet if you conceptualize money as vouchers in this way because it owns the measurement tool. A close analogy would be trying to measure how much flour was used in an already-baked cake–you can’t separate them.

Nevertheless this hasn’t stopped me from ruminating on the idea. Vouchers in corporate settings are kind of like gift cards, which are deferred revenue. But the vouchers as I described them are only redeemable to discharge tax debt. So the main unit of measure in this case would not be cash but debt-bucks. If I work for 10 hours and I owe as a result $10 to the USG in taxes, that means that you could theoretically correlate the hourly tax debt rate for every citizen and accrue a taxes receivable on the balance sheet measured in labor hours.

I think i’m crazy so I’ll come back to this idea. The main premise is that you can’t create financials for the sovereign without changing the unit of measure. I’ll have to do more research on what Zippy meant by vouchers.

AMDG

CCXXIII – The Problem of Money

We’ve got some new ideas to add to an old article that talks about economics and money. In the old article I used Rai Stones from the island of Yap as a metaphor for corporate equity. I described it in this way:

In the original scenario, Rai Stones are a tangible asset. Physical possession of the Rai Stones are desirable, and so people will pay some amount of money to go see them. The Rai Stones are worth what people are willing to pay for them, but what they are is different from what they are worth. In the beginning, people would pay [$1] to be able to see the stones, but eventually people would pay [$5] for the same privilege. The core thing that is desired has not changed: The stones are the same stones. But the value has changed based on the demand.

This is the important distinction I would like to explore: What makes a thing valuable is different from what it is worth. Said more precisely, using the definitions I set down previously: A resource has some value, and a resource has some worth, and those two concepts are not the same.

There is a lot of confusion because we don’t have a good way of talking about value in a different way than we talk about worth: we use money to measure everything. Economists have tried to create a unit known as utils to measure the utility of things but utility is different from value, too.

I am going to coin the unit yap to differentiate value from worth. I am not going to define a conversion rate because then it will turn units yap into dollars and then be the same as money. That’s not what this is. Units yap represents the object economically desired, and is not standard per thing but is standard per desirer. In other words, if I see a canoe, and I am in the market for a canoe, then it would be valuable for me to buy that canoe. The canoe has a value of 5 yap to me, which is only meaningful in comparison to you: You hate water and canoes but could probably use that canoe as a decorative feature in your garden, so it has a value of 1 yap to you. This tells you that the canoe is more valuable (5 times more valuable, even) to me than it is to you. The price of the canoe is $100. Because the canoe is more valuable to me, I might be willing to pay more money for it than you would. The difference in value has a correlation with difference in willingness to pay. Economists over simplify this by saying that if you pay $100 for a canoe, the canoe is valued at $100 and is worth the $100 you paid for it. That loses some nuance, even if it is logically correct.

What something is worth is different still, but can be expressed in terms of money without losing nuance. The canoe is valued at 5 yap to me, but priced at $100. I will buy it if I believe it is worth more than $100. If something is more valuable to me than the money it requires to get it, then I will buy it–this is because Money has value too, it’s just negligible. $100 maybe has a value of 2 yap to me because of my financial situation and general attitude towards money. The canoe is priced at $100, my money has a face value of $100, but I am exchanging 2 yap for 5 yap. Because I view myself as acquiring value, even if I have made a fair exchange in price, I will make the exchange. Worth can be expressed as the list price at which the yap value of the money (or means of exchange) equals the yap value of the item being purchased. If, for me, $100 has a value of 2 yap, we can extrapolate that maybe $250 has a value of 5 yap. This means the canoe is worth $250 to me, but I can get it at $100. If it was priced at $300, but it is only worth $250 to me, it would not be worth the price, because the canoe is only 5 yap valuable to me.

So you can see that yap is only useful as a means of comparison between items or a means of comparison between attitudes, but is not itself an objective measure of anything.

Because we do not use yap to talk about value, we substitute considerations of money and refer to value in terms of dollars. This makes us think of price, and puts us in a frame of mind to talk about transactions. My discussions of economic development involve the idea that we want to maximize yap contained within developing countries, and not maximize money. By maximizing yap, the economic situation of a country will slowly make use of that value, and compound the benefits of that value. Money itself has negligible value because it cannot be used for anything other than as a means of exchange. Maximizing money merely maximizes potential for exchange. Maximizing value provides an actual benefit from that value.

AMDG

CLXXVI – Socionomics

I have mentioned occasionally that I am an accountant by trade so it’s actually surprising to me that I haven’t touched on financial topics more frequently. Like most people, I have thrown some monopoly money into the markets on occasion just to see what sticks. I’ve never really viewed it as anything other than gambling, since I have no detailed knowledge of the investments themselves and I have no reason to believe the markets will behave a certain way other than what I describe as my horse sense about the state of things.

Nevertheless, my inexperience and incompetence in the field doesn’t prevent me from speculating about why markets move the way they do. There are three axioms that serve as a starting point. 1) The timeless “Buy low, sell high”. 2) Markets are efficient. 3) Markets have all information built into the price.

Probably the biggest mover is people’s attitudes about a stock. For example: If I believe a certain stock is priced low and will go higher in a time period I’m comfortable with, I will buy that stock. If everyone believes the same thing and they buy that stock, demand increases and so the price necessarily increases, and the price has gone from low to high. If I sell the stock after everyone has bought into it, I will have made some amount of money only because of the belief that it’s price will increase.

This same behavior plays out but you can substitute any predicate you want. If [some stimulus] and everyone buys [some stock] then the price will increase. You see this with some fad stocks, like Tesla or Apple: these are popular companies and so also popular stocks and their stock price is through the roof. Axiom #3 was most recently presented to me in a finance class and so presumed financial information. But there is Sociological information built into markets as well, including this fad phenomenon.

I am tempted to subdivide Axiom #3 into two parts: 3a) Markets have all information about the company built into the price; 3b) Markets have all the information about the investors built into the price. Neither diminishes the original axiom but clarifies what kind of information you might have. 3b in particular doesn’t get a lot of play.

This leads to situations where companies which produce actual products can have a lower overall market value than companies which are socially popular but don’t produce anything (compare Ford and Twitter, for example).

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I look at market news and see headlines speculating about why the market behaves the way it does. “Stock futures rise ahead of xyz” or “Markets open lower on concerns about pdq”. I usually have two questions I ask myself when I see these headlines: Why today? and What changed? A headline I saw this morning says “Stock futures drop on rising COVID-19, Economic risks” Why are these risks affecting the markets today? What changed about these risks today versus yesterday?

There’s no real answer to these questions. And those headlines usually are written by institutional investors who may be playing a sleight-of-hand game, directing our attention to one explanation when it may, in fact, be another. But no one can know how much the stock market moved because of a specific piece of news. How much lower are futures due to Covid risks alone? It’s impossible to quantify.

The bottom line is that it’s a horse-sense gambling game. More information doesn’t necessarily mean better outcomes, but I believe understanding how people react to information does. Economics, therefore is as much a sociological field as it is a financial one.