Swedish King Charles X Gustav bears a little responsibility
for the U.S.
sequester. He gets the nod this week for
his innovation derived from the Swede’s logistical nightmare of minting copper
coins at par value with silver and gold dalars (named after the Bohemian term “Tolar”
first minted in the early 16th century). When you’re trying to conquer Northern Europe and pay for a war, you don’t want your
ships hauling around a bunch of copper – even if you’ve got it in abundance –
so you circulate notes instead. And it’s
the circulation of notes – or more precisely the idea of circulation attached
to money – that was vital to the king’s aspirations and what invites him into
my observation today.
Inexplicably, the other source of inspiration for today’s
observations come from Sweden
too: Per-Olaf Astrand (a Swede) and
Bengt Saltin (trained in Sweden ).
These two gentlemen together with famous
Danes Dr.
Johannes Lindhard and Dr. August Krogh isolated the physiology of circulation
with a functional discipline unknown prior to their work. In turns out that living systems require gas
exchange – inbound oxygen and outbound carbon dioxide – to function. Lance Armstrong and other inspired Tour de
France cheaters notwithstanding, there are limits to this system’s function
beyond which more doesn’t do you a bit of good.
How does a conquest-animated 17th century Swedish king, a
group of Nordic physiologists and Lance Armstrong all come together? In a word: Currency.
Now let’s think about the mistake we make when we confuse
terms and blend disparate meanings for convenience sake only to add ignorance
to our collective system awareness. Currency
is not Money. Money, properly
functioning, is a temporary storage unit of value. It is an artifact that says that, for a
defined period, trading parties agree that they will recognize an artifact
that, though in and of itself likely worthless, is imbued with representational
value that can be held or exchanged to discharge future obligations. Currency – literally from the English term curraunt describing something in
circulation itself derived from the Latin currentia
describing the bounded flow of a thing – only works in exchange. Whether it is the exercising muscle that can
only metabolize 70mL/kg/min or the circulatable monetary supply (or M2: roughly
$12 trillion when we stopped counting in the U.S. around 2011), there are upper
limits in systems beyond which stockpiling actually does not lead to greater
wealth but in fact leads to systemic failure.
Close inspection of the balance sheet of the Federal Reserve
in the U.S.
highlights some of the challenges arising from a blurring of the lexicon of
money, currency, and assets. While the
utilitarian impulse (think Charles X) to issue a circulating currency that is
connected to copper and the expanding trade network built by war seems to work when
you control the flow of value within a limited geography (money across a trade
network), if you detach either the value base or the scope of exchange from
limits, flow ceases and stagnation happens. Take a look at the graph below and realize
that the Federal Reserve Open Market Committee has decided to continue “investing”
in U.S. Treasuries and Mortgage Securities to the tune of $85 billion each
month. This action evidences a systemic
physiological ignorance.
When investors (and yes, I mean people like you with your
retirement accounts, pensions, etc.) are advised to keep some money ‘safe’ in
low-risk assets, the argument supporting this advice is that assets like U.S.
Treasuries are ‘liquid’. In other words,
if you needed to sell them, there would always be a buyer at or near par value.
However, this notion of ‘safe liquidity’
is an illusion that was exterminated by the current fiscal policy. Injecting illusory money (backed by vast
amounts of illiquid ‘assets’) for the inflated purchase of cheap debt actually
harms the real asset value of these instruments and inflates the inventory of the
same beyond what physiologists call T-Max. T-Max or transport maximum is the
concentration of a substance beyond which exposure does not result in an
increase transportation or utilization of the substance. In the body this means that you can breathe
100% oxygen but your blood simply cannot carry more than its saturation limit. In economics this means that the system can
exchange a certain volume of assets after which more cannot be absorbed by or
liquidated into the system.
Bill Gross, PIMCO’s notorious investment architect, reported
that his fund decreased its holdings of mortgage assets – assets that should
theoretically be cash-flow generating – in favor of more U.S. Treasuries. Bill understands the problem of liquidity
around ‘risk free’ assets. If you’re
PIMCO with nearly $2 trillion in assets, the volume of assets you hold actually
presents its own market risk. If you
ever had to sell them for redemptions, you’d actually dump more supply than the
market could buy at par and so the volume of your ‘wealth’ would harm your
value. He also knows that the Federal
Reserve is not buying real estate and Treasuries because it wants to ‘invest’
but rather to inflate their balance sheet. When (not if) they start selling off assets,
he knows that the pressure to sell will be coming not when they see maximum
investment return opportunities but rather when they have to release the dam to
discharge the gargantuan pool of assets they’ve acquired. And when that happens, the over-supply of
secondary sales around these assets will devalue the assets he holds. Worse still, this could happen coincident
with inflation which would accelerate the devaluation and present fiduciaries
like PIMCO and real people – like you – with large amounts of worthless assets.
Behind this drama is the systemic failure to appreciate the
difference between utilitarian wealth and hoarded wealth. Utilitarian wealth evokes the principle that
greatest wealth happens at a saturation point where all needs, demands and
aspirations can be sated without restriction. Uncoupled from a sense of interchange and
interdependence, hoarded wealth creates the malignant illusion that perpetual
more is persistently better. Regrettably,
hoarded wealth is also sucked into the monochromatic world of ‘green’ where the
only surrogate of stored value is that ubiquitous European / Nordic innovation
known as the dollar, dalar, and tolar. Utilitarian
wealth understands that certain values cannot be stored in, or denominated by,
representational currency. Because at
the core, utilitarian wealth understands that current is a function of
conductivity and flow. Stymie either and
you build up a static load that has to discharge somewhere. It’s nature and in the end, it won’t let you
cheat.
Excellent the government has redefined M1,M2,M3, inflation.I wonder how they will redefine dead, by substitution?
ReplyDeletePerhaps Mr. Gross will define it for them he has certainly built a large enough position. Perhaps the government will redefine retirement which there won't be...
As long as there is a thesaurus all is not lost.