Monday, April 13, 2009

Pig Money vs. Real Money

Just about everyone thinks that all money is the same, that a dollar is a dollar. But that's just not so: like the pigs in Orwell's Animal Farm some money is "more equal" than others, i.e. it has more power and significance in the real economy outside finance. But, unlike in the story, today's money pigs are actually the weakest amongst money animals.

That's a particularly important distinction to understand today, when bailout "money" is going around in the tens of trillions causing much consternation and/or glee to hyper-inflationists and goldbugs. Even worse, it is causing many of us to scream "social injustice" at the top of our lungs, but for the wrong reason.

Why?

Because for the most part bailout money consists of book-entries to replace other book entries that have been deleted in the deflationary credit destruction of the current crisis. Let's call such funny money Pigs (after the pink color of $5 bills in Monopoly, you understand..). And, as we well know, porcines don't fly.

Pigs, in fact, don't fly

Such bailout Pig money stays mostly put on banksties (i.e. balance sheets) and like its bacon buddies it doesn't go for much activity. It doesn't produce any wages and salaries, spending or investment in productive assets because, unlike "real" money, it doesn't get loaned out. It's there today to plug holes left by yesterday's loans gone sour, not to make new ones. One could say that Pigs are there to be seen and heard (oink, oink), not to do anything useful.

Why am I saying all this? Because I hear a lot of activists complaining that this kind of piggish money should instead go towards social programs and/or the real economy. That's almost delusionary, I'm afraid.. Does anyone think that $13 trillion dollars (latest bailout count) could be absorbed by the real economy so fast? Or that so much RealMoney(tm) could in fact be created, if anyone was crazy enough to get it circulating in the first place? No way.

We should simply forget that this kind of money is... money. Let's just imagine it as pigs around the trough.

Hmm.. I wonder what should we call the real stuff? Greenbacks? Thalers? Denarii?

A NOTE ON READER COMMENTS

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This may be a bit annoying for regular readers but it absolutely necessary. I recently had to manually clean up hundreds of such porn, game and Chinese merchandiser ads, one by one no less, because Blogger does not (yet) provide a block delete function.

If your comment is held up for a day or two while I notice and approve it, I'm sorry but we live in a digital age... Hopefully the pests will give up pretty soon. They are already down to just a few a day.

36 comments:

Joe said...

I love your pig analogy because that is exactly what these mega-banks are, large stinking pig-men.

Now, the only reason they did this was to prevent total systemic collapse and chaos.

Problem is, it will happen anyway. Somewhere, some event is going to spark a total world financial collapse, possibly only months away.

Joe M.

Anonymous said...

From RFC 1925:

"With sufficient thrust, pigs fly just fine. However, this is not necessarily a good idea. It is hard to be sure where they are going to land, and it could be dangerous sitting under them as they fly overhead."

Eerily applicable to the current actions of our government regarding certain banking and industrial institutions.

See:

http://www.faqs.org/rfcs/rfc1925.html

Debra said...

After a tiring but rewarding day of sorting through the endless papers and memorabilia that I have inherited from three generations now, to put into some kind of order to pass on to my kids, I stumbled across THIS, which came from my grandmother, born in 1883, died in 1973.

Mrs. A. James,
San Diego California

My Dear Madam,

In checking our records we find that you hold stock in the American Can Company, The San Diego Water Company, and The Southern California Gas Company.
Our advise to you, Mrs James, is that you sit tight on your American Can, hold your Water, and let your Gas go.

Yours very truly,
Squat and Leavitt Company
by I.P. Daley, Pres.

PS : May we add that today Scott Tissue touched a new bottom and thousands were wiped clean.

Sigh. That was my grandmother for you.
She was such an UNUSUAL person.
Enjoy.
TODAY WE ARE ON HOLIDAY.
But the French are so good about holidays.
Here we celebrate Republican holidays AND church holidays.
It's what's called having your cake and eating it too...

Debra said...

I LOVE this post, Hell.
I (modestly) think that I have been converting you.
Actually, I am looking forward to the day when I can take out my Monopoly money and go to the store with it.
If pigs can fly, then why can't I use my Monopoly money ? (Whine, whine, winge, winge...)

Thai said...

"Because I hear a lot of activists complaining that this kind of piggish money should instead go towards social programs and/or the real economy. That's almost delusionary, I'm afraid.."

Thanks for pointing this out. I often see this mistake repeated by the comments of some on this blog.

And Hell, the blocking software is again blocking my comments on other posts. Most annoying

George said...

You are on to something here. Something that has really bothered me about this.

It all seems so simple. Just generate book entries to wipe out losses. In a way, it is no different than bankruptcy in that the bankruptcy process erases debts. Here the same is sort of happening it is just without the inconvenience of bankruptcy. It is like a big "do over" as if the casino just gave you your chips back and said "sorry about that - start over please"

So you are right in that this will not really "stimulate" anything. But even as a book entry, I still think that this money needs to be repaid by the taxpayers? Which would drain the future economy (think deflation in way because less money in the economy chasing after things). But I guess the Fed could just print the damn stuff (figuratively in the sense of buying treasuries out of thin air). But I still think we need to pay it back? They are still buying government debt. But I guess they could just "forgive" the loan right? Tear up the t-bills they bought with paper leaving the bank balance sheets intact.

what happens then really? I find it hard to believe that there would be no impact on the economy. But you are correct in that the "absorption" f the money in the economy would not happen therefore no inflation.

But then why not just do it all the time?

I am missing something. Unfortunately I think we will all find out before I figure it out!

Thai said...

George, I don't think you are.

Imagine a Smithsonian researchers discovers tomorrow a plant in the rain forest which contains the following properties:
1. It prevents senility for an additional 20 years
2. It prevents cancer and vascular disease for an additional 20 years
3. It maintains our muscle mass for an additional 20 years

Then as Krugman rightfully reminds us all, as long as we work during these new found years, the % savings that would personally be required of each of us over our lifetimes to "cover" things like:
1. childrearing
2. retirement
3. health care

would be greatly reduced.

If you truly knew you didn't need to save as much, then of course you wouldn't need to save as much.

Nothing changes with all this money accounting/"quasi printing" because fundamentally nothing is changing, except our trust/willingness to cooperate with each other (or more fundamentally our trust/cooperation with certain amongst each of us).

marcus said...

So AIG gets $60 billion from TARP, FARF, BARF, whatever, and transfers $30 billion to Goldman Sachs and then Goldman Sachs issues bonuses to their execs and dividends to their shareholders with these "profits" (with no attendant pesky Peasants with Pitchforks), and then these execs and shareholders go to the Shop Rite and buy their curds and whey, but its not real money? I don't get it.

The real problem in my mind is not the fixing of the financial system but its the lack of disincentive or consequence for the dealers that bankrupted the system. What is to prevent these players from doing this again, under different cover, with new "sophisticated" derivatives?

marcus said...

William Black says it better:

"We have failed bankers giving advice to failed regulators on how to deal with failed assets. How can it result in anything but failure?"

http://online.barrons.com/article/
SB123940701204709985.html?page=1

Debra said...

Actually, there is a rather simple EXPLANATION for all this behavior, and when Freud started looking at it carefully, he was fascinated and unnerved about the implications.
The psychological phenomenon is called "splitting" (careful, here, now, I'm not talking about psychosis, or schizophrenia or that kind of stuff, I'm talking about phenomena which are readily observable in John Q. Public, you know, the one who is supposed to be NORMAL).
But you can take the fancy name off it, and understand it simply as the expression "the left hand doesn't know what the right hand is doing".
There. Now everybody can understand, right ?
Things are even more complicated when COLLECTIVELY, we want to maintain the attitude of "the left hand", because, WE ALL KNOW (in our LUCID moments at least...) what the right hand is doing. And this makes us despise ourselves.
And it also means that we keep shoving the problem just a little bit closer to the edge all the time, while hoping that it will disappear.
I see NO reason whatsover to operate under the assumption that we need to pay back all this vitual loot, nor that our children will need to pay it back either. (Well, it's true that this may entail war with China, but these days we have become more savvy about war, and I don't see the Chinese ready to attack us on this one...)
The dancing numbers on the accountants' pages DO NOT REPRESENT ANYTHING.
So... THAT at least is an advantage.
If they don't represent anything, then we axe them, WHILE PROPOSING ANOTHER MEANS OF EXCHANGE (hopefully not fiat money in any form, and in this, Thai, I am true to myself and my ideas).
Am I really such an utopist ?
Or is it possible that there are a lot of people running around these days who are firmly convinced that they are operating under the "reality" principle (oh ugly word...), and who are far more naïve than I ever was ?
I LOVED Monopoly when I was a child.
But, come to think of it, it really was materialist crap. A kind of indoctrination.
What if many of our problems come from GENERATIONS of baby boomers growing up with Monopoly ?

Debra said...

Oops, that paragraph about the Chinese comes AFTER my proposal to wipe out the figures.
Hell, why can't we edit our comments ?
I never get things right the first time...

Thai said...

Marcus, I think you MAY be misunderstanding. From that perspective of course it is real money.

But remember, these bailouts are for money that was already spent by all of us in the end. We are just immediately socializing a loss we already have. Even if we had let it all collapse on the banker by not having any "TARP, FARF, BARF" as you say, we would all eventually have to take the "hit", only the guy at AIG would have been the first to take it so to speak.

I completely agree with your frustration that the initial and largest "punishment" of this collapse should have fallen on the guys at AIG, etc...
I completely agree with Hell that we should just let these debts collapse.

But again, once the bankers take the hit. so too will you and I and everyone else as we already spent it anyway.

You can't undo something "real". In this regard, money is less than real as Hell reminds us?

It's Hell's comment, ask him for clarification if you must.

yoyomo said...

The $13T figure is misleading as it includes guarantees of more than half the $13T so that amount is not money yet. Of the rest, the portion that went to salaries, bonuses, dividends, purchases or rent payments by firms that would otherwise have gone bankrupt is new money and is making it's way into the real economy. The Fed purchases of Agencies and Treasuries is also real money because private holders now have an incentive to cash in while prices are high but it's true that it doesn't yet begin to offset the amount of debt destruction.

Deb,
My grandmother lived almost exactly at the same time as yours, 81-72.

Anonymous said...

It all seems so simple. Just generate book entries to wipe out losses. In a way, it is no different than bankruptcy in that the bankruptcy process erases debts.Cooking the books is distinctly different from bankruptcy:

First: Fraudulent accounting is actually illegal.

Second: The bankruptcy process is transparent which would, IMO, reveal massive amounts of fraud *already* committed - which obviously did not "work".

Third: It is a tried & tested process.

Second & Third are the reasons the arsehats in charge prefer "unconventional measures" geek-speek for "stupid stunts that does not work".

marcus said...

Thai, where your argument falls apart is the aspect of deflation. If we let the banksters default on their debts money would evaporate and cash increase in value. Those with leverage get punished those with cash rewarded.

Incentives against destructive risk taking and leverage are maintained in this scenario--not in the current regime.

Thai said...

@Marcus, I am confused by your response???


Why would you think I don't understand this and/or that my point does not take this into account?

Edwardo said...

The thesis of Hell's post is perhaps the most succinct argument you will find, outside of Antal Fekete's work, that makes the case, whether it intends to or not, for why the present economic debacle is not even close to being over.

First, because all the "money" in question, though certainly having material effects, has an essentially unreal ("flying pig") quality such that it can not be deployed into the general economy, and second, because even were it available (to a greater or lesser degree) for absorption into the economy, our economy is now at a point where the marginal utility of debt makes taking on yet more debt counterproductive.

Well, that is what I am taking away from it anyway.

Anonymous said...

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yoyomo said...

Folksy but no-nonsense video lecture on the terminal effects of growth/depletion aimed at the mathematically dis-inclined or those who might want/need help convincing them:

http://economicedge.blogspot.com/2008/12/spend-some-time-with-good-dr-bartlett.html

Thai said...

Thanks yo

It really illuminates why war is fractal in a very scary way!

yoyomo said...

Bad news $ fans, the crack-up boom may recommence sooner than expected:

http://www.telegraph.co.uk/finance/comment/ambroseevans_pritchard/5160120/A-Copper-Standard-for-the-worlds-currency-system.html

yoyomo said...

Oh Greenie, if you're out there somewhere, this is for you:

http://www.independent.co.uk/news/world/asia/1500-farmers-commit-mass-suicide-in-india-1669018.html

I feel so idiotic to have ever hallucinated that this ever happened.

dink said...

"the otherwise pristine thought environment of readers' comments"

Yes, my South Park observations musn't be marred by neighboring spam.

So, in last night's episode the Earth came across some stolen alien "space cash". The Earth nations lie to the space cops, go on wild spending sprees, and nuke Finland when it says its going to confess out of guilt. Anyhoo, it was just an alien test of our specie's moral character and to see if we were dumb enough to assign the "space cash" any value. I wanted to yell at the TV. If its agreed upon by the participants, then its a currency. Plus it was in finite supply and cool looking. It was fair to place value on.

So, is everyone else done reading "World War Z"? I don't want to write any spoilers on this zombie sci-fi tour de force.

Pristinely,
Dink

yoyomo said...

"our specie's moral character"

The moral character of our coins?

Shiner said...

It is hilarious reading all you quasi economists. What is happening is very very simple. You don't need lots of big words or grand ideas to express it.

In 1979 the USA became a net oil importer. Since then the thieves on wall street have came up with bubble after bubble to increase the money supply to buy oil. The fact we enjoy world reserve currency status has as allowed this to continue longer than most fiat moneys would have been allowed too.

Now that the jig is up default is in our future. This is clear to anyone who looks at it rationally.

To pretend there is a way to fix this crap is foolish. After the default the rest of the world will not trust us for decades.

Also the main thrust of this whole post is false. The bankers WILL be collecting their 6% on every one of these new dollars. therefore it is real money. They will attempt to tax us and our children and their children to pay for if they can.

It is time to stop pretending that anyone can fix this . Austerity is in our future. It is time to face it and get to work. Think1st

Thai said...

Hell, you like thermodynamics so I thought you might appreciate this.

Does Krugman realize he is disproving Keynes in front of the whole world?

He is describing a perpetual motion machine and it violates the second law of thermodynamics. Keynes (and Krugman) is not accounting for the energy needed from outside the system to put the bottles in the ground in the first case, nor does he seem to be accounting for it in subsequent bottle plantings.

I checked ALL the comments on the post and not one person seemed to recognize this so I left one myself.

Amazing

Greenie said...

Although even a single suicide is a sad loss of life, in terms of statistics, farmer's suicide over debt is nothing new in India. You understand that it is a vast country and even a train crash can cause over 1,000 deaths, and yearly floods often cause 50,000 or more deaths. So, unless I see yearly numbers, it is hard to read anything from this report.

yoyomo said...

Reasonable response, better than being called an idiot. According to Arundhati Roy on Democracy Now, the avg. for the past 10-12 years is between 15-20K with the govt trying to exclude as many other suicides from the farmer/debt tally. For example, the wives of farmers do not get counted when they kill themselves because the govt position is that they were unhappy with their marriage and not because of debt even if the husband is already dead.

Also I'm surprised you're not more more worried about the exhaustion of aquifers in India, mass famine is a dry season away once no more ground water can be pumped and from that story that day seems to be fast approaching.

Debra said...

Hell, where ARE you ?
Dink, I LOVED your comment.
Shiner, I HATED yours...

Two nights ago I had dinner with an old friend who I hadn't seen for many years : raising children entails cultivating mommy friends, and decreases your availability to other friends...

At some point in the discussion, the film LAS VEGAS 21 came up. (Is that the title in English ? The French find such STRANGE propositions for English titles.)
This film is worthy of your South Park, or World War z scenario, Dink (if I understand correctly, but I may be out in left field once again, who knows ?).
The "moral" environment of this film is DISGUSTING, even to me who abandoned Christianity a while back.
And what got me is that my daughter's generation feels NO MORAL OUTRAGE at such rampant cynicism. No outrage about the fact that people in nurturing (teaching) positions seek to exploit their younger charges in every possible imaginable way.
All just to make a buck.
In Las Vegas.
Las Vegas is a pimple on the face of the United States.
But I fear that that pimple has been steadily growing, year after year...
And that this fact "explains" where we are these days, to a very great extent.
Go see the film, if you haven't already.
Even I, daughter of a medical examiner, in the know of the sleaziest aspects of human behavior, was blown away by this film.
Yuccky. (But I must have already TOLD everyone here about this...)

By the way, I want to tell everyone here how much I love this blog.
I PROMISE, I read ALL of your comments.
(I have abandoned Salon, because there is just NO discussion, TOO MANY PEOPLE.)
I LOVE our little blogosphere desert, here...

yoyomo said...

MSM source of figures just in case you dismiss Arundhati as a commie:

"National Crime Records Bureau statistics say close to 200,000 farmers have committed suicide in India since 1997."

http://news.bbc.co.uk/2/hi/south_asia/7992327.stm

Thai said...

yo, I read all these stories closely and even did a little statistics research of my own as I was totally unaware of this issue before you brough it to my attention.

Unless you have more data, I think your "point" actually does go to Greenie. Further IF the trens are linear (and I seriouosly doubt they are), the trends are actually showing lower sucicide rates today.

I don't need to remind you that 15-20,000 of a billion per year is still an incredibly low incidence. We would salivate over numbers like this.

To give you some kind of comparison basis that we might understand as Americans, using these same numbers and NHTS safety data, American's going into indebtiness for car ownership is significantly more than an order of magnitute riskier.

What point are you trying to make?

I am sure I needn't remind you how "ugly" the Scottish Highland clearances were when Scotland went thru it's agricultural productivity explosion (and famines) in the 18tth and 19th century.

dink said...

@Yymo-
"Reasonable response, better than being called an idiot"

;)

@Debra-
"Las Vegas is a pimple on the face of the United States"

Its kind of like Los Alamos/Sandia. A lab placed in the middle of an uninhabited desert wasteland where experiments can be run in isolation. And people run some pretty stupid experiments (trying to run statistics with a near-naked cocktail hostess repeatedly serving you jello shooters). Yet its so surreal and extravagent I can't help but to have an affection for it. Visit in moderation, but do visit.

WWZ-
So its written in a series of interviews with various people (a la Studs Terkel) about 5 years after a virus pandemic created zombies that nearly killed off the human population.

The interview with Xolelwa Azania was stunning. He was in the South African government when reports starting fitering in about strange attacks. It came out of nowhere and there was almost no information on what was happening. After a few hours it becomes clear that something is very, very wrong and the population is in chaos. A military man named Paul Redeker comes up with a plan. People need to get to a geographically defendable place. If the zombies can reach them before they are secured, other groups of civilians will need to go where the zombies are to sacrifice themselves for time. The only way to get them to do this is to lie to them and tell them they are heading towards safety. It works and other nations quickly adopt the Redeker Plan. At the end populations are decimated (30%?), but there are survivors, they kill the zomblies, and civiilation starts to be rebuilt.
I don't recall what Azania said about what happened to Redeker (murder? suicide? still alive?).

As the journalist leaves the interview, he talks to a guard. The name on the cell in the psychiatric asylum is Paul Redeker. Apparently the decision he made was so horrible that he decided he could not be the person who made it. Hence he was Xolelwa Azania who knew Redeker very well but was not him.

There are other really interesting interviews as well. Good sci-fi if you're willing to be caught reading it.

dink said...

JFC! I just wrote this incredibly long post about yymo's post, Las Vegas, and WWZ and I lost it because I misentered the Word Verication twice.

I'll rewrite it later.

dink said...

Oh wait, "Your comment has been saved and will be visible after blog owner approval". Is that for just the last comment or for both of the previous comments? JFC.

Edwardo said...

Well, Shiner, let this quasi economist help you with a bit of history. We were well along the path of being able to expand our money supply at will, with no counter discipline, as of 1973, when Nixon closed the Gold window.

All this by way of saying that your '79 start date is something of a red herring.

dan said...

This has got to be the most comprehensive article that I've read. and, I read a LOT of them. The most important point in the article is the "window of opportunity" Few people understand or appreciate just how fast things are moving.
Given current Chinese perceptions,,, and given Wall Street desires,,, the window won't be open for very long. I don't see anyone in the admin who seems to be aware, let alone concerned about the disintegration of the producing economy. Once the price of oil takes off, there won't be any easy resuscitation of the producing economy. Here's a link to an article that postulates a complete change in the perception of wealth. It might be an epiphany for some.
http://fofoa.blogspot.com/2009/05/mona-lisa-or-ben-franklin.html
Hope it's allowed, Dan