December 16th, 2010

I Love Gail Collins

Rachel Maddow has been covering the upcoming speakerdom (is that a word) of the orange guy and his tendency to produce waterworks. It's not always obvious to me how to point to a video clip of Rachel Maddow, however, so I don't necessarily share with my readers.

But Gail Collins produces text which is reliably archived by the Newspaper of Record.

Read it and, er, weep?

There Is a Collective Unconscious

Here's what Krugman posted yesterday in his blog:

Yes, you probably should read it, but honestly, for the purposes of this post, you almost don't have to, because of that helpful URL: What Is Money.

Yesterday, I was watching Bloomberg, intent on a relatively complex policy discussion (which is what they trade in, which is why I watch them instead of CNBC) when B. commented that she should learn about the stock market. We chatted briefly about that, and then later on I had a conversation (viz. me ranting) about how no one seems to understand where money comes from, and, even more importantly, that no one really seems to notice that we don't understand where money comes from and, worst of all, we don't seem to care how all our misunderstandings have a tendency to drive us in policy directions that are at best, woefully inadequate and all to often, catastrophic (for some people and oh, so, deliciously wonderful for others).

I _thought_ I was thinking about money because I was reading a book about the gold standard in the nineteenth century vs. 1920s misunderstandings about same, and contemporary misunderstandings of both. But now, I'm learning towards a collective unconscious.

Where _Does_ Money Come From?

We often talk about how rich people are based on their income, and "rich" people under this definition often point to their overall lack of assets (because they are spending all that they have coming in and perhaps a little more) in an effort to get some sympathy and argue for a definition of "rich" based on net accumulation or wealth, rather than on income.

Right there, it's pretty clear we've got some confusion.

Obviously, we have taxes that are based on income (sales taxes, many business taxes, payroll taxes, income taxes), but we also have taxes that are based on valuation of an asset (notably, property taxes). So it's not like this is just an argument with no relevance to anyone.

Financial planners and advisors engage in an exercise with clients (you, too, can do this and pick your set of rules however you like with lots of books and articles to assist you) in which they attempt to calculate "net worth" by summing up everything they own and everything they owe. Folding green stuff and checking accounts are straightforward, accounts holding liquid assets such as stocks, bonds and funds owning same a little trickier because they are "marked to market" that is subject to change moment to moment in value, nonliquid assets (such as cars and houses) are often easier to figure out what is owing on them than it is to figure out what they are worth. Let's just pretend that stamp collections, jewelry, old books, nice furniture and art work isn't actually worth anything, because if it ever comes to the point where you need to sell it to get the money, you won't actually be able to get the money anyway, or not nearly what you think you will. Altho, hey, the process of finding out what you could get for it (and how) is enlightening, particularly in light of how you probably bought it and what you paid for it. The two experiences are often shockingly different.

Actually, if we pause for a moment, and contemplate the purchase and resale process, it illuminates where money comes from, because money comes from transactions. It always has, and it always will. That is what money is and that is what money does and that is where money comes from. Transactions. Allow me to illustrate.

I have chickens. You have goats. Because it is the 17th or 18th century, we _know_ about coins made of silver and possibly gold and perhaps copper as well, but we don't actually typically see them. Nevertheless, we know that chickens typically go for so many of a particular kind of coin (which we don't actually have, but we know about) and that goats typically go for so many of that or another kind of coin and there's some well-accepted rate of exchanging one of the kinds of coins for the others. Let's say chickens are a dollar and goats ten dollars; the rate of exchange for a ten dollar to a one dollar is exactly what you think it is. At the time, it wasn't quite this clear (paper lightens our load and clarifies the math and helps us cope with the scarcity of metals), but good enough. So when I want a goat for the holiday and you want chickens so you can have eggs for breakfast, we don't have to figure out how many chickens a goat is worth; we figure it in dollars and ten dollars and work it out from there. Really. Honestly. Don't let the barter fans confuse you, and don't be imagining that agriculture exchange in the boonies a few hundred years ago had enough metal coins around to keep it moving.

That is what money is: an accounting system, a way of keeping track. These days, we do it with digital representations and a variety of physical means of showing our authority to speak for these digital representations, because our transaction may take years to complete (30 year fixed on a house) and we don't know each other that well.

You have a house. I have a job writing articles for websites about gadgets and I design iPad apps on the side. (Not really. This is an analogy. Like the goats and the chickens.) I want a house and you want to travel. So we come to some sort of agreement in which I commit a portion of the future income from my job(s) to making payments on a loan from a bank. The bank gives you a bunch of money up front (actually, they put it in an account that you speak for). The government gets a cut and the transaction is carefully documented.

Where did the money to give to you for your house come from?

Well, it sort of comes from the future: my future income, or my future resale of the house to someone else, or the house burning down in the future and insurance paying the balance owing, or whatever. And it sort of comes from the bank, which probably takes it out of a whole bunch of people's accounts, figuring they're not all going to ask for their money at the same time. It comes from a whole lot of other people's jobs; they have money they don't want now but will need later and they'll need a lot more of it later because they, too, want to be the kind of person who can travel and not work, and so they're willing to invest money in really weird securities that carve up bank loans and reassemble them and resell them.

Money comes from transactions. The chickens and the goats with the money as a mechanism for simplifying the process of figuring how how many chickens a goat is worth is pretty clear: the transaction is completed on the spot. But as soon as the future gets dragged into it, and borrowing, and lending, never mind the slicing and dicing, it should be fairly obvious that money that existed sort of for a brief instant with the chickens and the goats is actually hanging around for a very long time with the 30 year fixed or the Pay Option ARM or whatever. If money is accounting, if money is created by transactions, then the way money accumulates is when transactions are, basically, not "completed" in the sense that our chicken and goat exchange was completed.

One more example, because it seems relevant to me often and yet we don't talk about it. Ever. If we all were very sensible, and we all saved up this frozen-in-mid-transaction money so that we could all, as elderly, ailing, non-working people could afford to buy food, shelter, health care, etc., we have to contemplate who will be on the opposite side of that transaction. What will they be charging us for the things we need to buy? Back in the bad old milleniums, adults tried to have enough children that the odds would be good that adult children would be around to care for them if they were lucky enough to live that long. That transaction had an obvious person on the other side, and the debt made sense (I change your diapers; you change mine). Does our debt make sense? Who will be on the other side of our transaction?

Makes you think the Japanese obsession with human-like robots isn't so crazy after all.

All right. I can't really leave it at that, because I brought up the net worth exercise and the brokerage accounts and it turns out there's a bit that matters a lot there. When you calculate what your portfolio is worth, or your car, or your Magritte, or whatever, you look at recent transactions (comps, in housing). When someone loans you money with that as the collateral, the comparable transaction as some leverage: one house sale down the block that lets ten people get home equity lines of credit to go buy TVs with is creating way more money than if those ten people stayed home and played Hungry, Hungry Hippo instead. Whether you think this is a good thing or a bad thing is another matter; what seems impossible to argue is that money was created. If that same house down the street is foreclosed upon and then sold under really difficult circumstances, the amount of money the ten people down the block can borrow on their homes is generally dramatically reduced. If you figure that effect over society as a whole (never mind the knock on effects as people have to sell other things under even more difficult circumstances, to avoid becoming the next foreclosure), it seems relatively obvious that vast mountains of money are destroyed.

Really, how much money would the government have to figure out a way to create (whether by borrowing and spending, or quantitative easing, or whatever), to make up for that vast amount that was destroyed?

Perhaps I'll come back in a bit and explain why inflation is extremely unlikely under such circumstances. And the difference between inflation/deflation and appreciation/depreciation. Stuff like that.

having solved one problem, I am immediately presented with another

In a way, it's just like school.

I'm reading another book from Netgalley on the kindle. This book, again, oh, so beautiful in Adobe Digital Editions. However, my "keep a finger" in the end notes on another device will not work this time, because this publisher chose to use footnotes. You know, bottom of the page style? Let's just say they are not showing up at the bottom of the page in the kindle edition.

I know it is a ridiculous amount of scut work, but anchor tags and targets would _totally_ fix this problem if the publishers could be convinced to use them. Which, I would imagine, they cannot be convinced of. I can't help but feel that this sort of stuff could be usefully crowdsourced, including the checking-to-make-sure-it's-right part.

consider contacting your _Senator_

It looks like the modify-the-filibuster team is gaining some momentum and has an extremely outside chance at getting the Senate rules changed on January 5 at the opening of the new Congress.

If you've been wondering why health care took so long to pass (and became so compromised in the process), and we never got anywhere near cap and trade and other important legislation (and, for that matter, why the START treaty hasn't been signed yet), it's because the Senate, like any other organized group of people has rules. Those rules are game-able, and they have been aggressively gamed for the last couple years.

But rules can be changed, and there has been a group of people pushing to change the number of participants required to filibuster something, and possibly change exactly what is involved in executing a filibuster and (hopefully) getting rid of secret holds (or maybe just making them not so secret). This has been done before, and the current idea is to have a vote at the open of the new Congress on Senate rules, which would involve a simple majority.

I would encourage anyone who has been watching the sausage making and finding it particularly obscene to contact their Senators and ask them to participate in this rule change on January 5. It's one thing to really disagree with and hate something that is being legislated, and stand up for eight hours (or more) and complain about it in detail with slides or props or whatever. But that's not what's involved in a filibuster any more, and It Is Just Wrong to filibuster the procedural votes leading up to something _that you're going to vote in favor of when it happens anyway_. We've been seeing a lot of that kind of heel dragging and it's just lame.