Tuesday, September 28, 2010

The (Unholy) Trinity Of Money: Holy Smoke!

Money as religion?  Well, of course, since modern money is all about faith (lat. credo > credit) imposed by fiat (therefore, fiat currency).  Therefore, it strikes me as very funny that money exists in three concurrent states, just as Christianity has its own holy trinity to make up one god.  (If you are more scientifically oriented you may also draw a parallel with the triple point of water.)

Let's see:
  • Money is a medium of exchange for goods and services.  This function of money is the oldest and most important in our daily lives, at least for the vast majority of us (see further below why it's not so for everyone).  Money-as-go-between goes back thousands of years to Mesopotamia and is at least as major a human invention as the written word and the wheel.  It greatly facilitates the smooth functioning of the barter part of every economy, allowing for the formation of cohesive societies.  It really does not matter what "money" is, as long as everyone agrees to a common convention and it has an element of scarcity.  Cowrie shells, salt, stone tablets, precious metals.. all can and have been used as money in the past. This is the state of money that everyone understands, even a six-year old.  Let's call this the Father State.
  • Money is a storehouse of value.  This state came relatively quickly after money became widely accepted and circulated.  The Athenian silver owl was probably the world's first global reserve currency, right around the fifth century BC.  In this state, people accumulated money instead of valuable resources such as food, fuel, livestock or land.  They did so because money was easier to store (e.g. in a small strongbox instead of earthen jars full of wheat) and - very crucially - because they believed they could readily exchange it for valuable goods and services with minimal, if any, loss.  In simple terms, a silver coin minted by Athens was assumed and expected to always be exchangeable for a given quantity of wheat or timber, all other things equal.  This is when the concepts of inflation, seigniorage and debasement came into play, followed by monetary imperialism in the heyday of the Roman Empire.  Most people are familiar with this state of money, too, because they are still mentally stuck with popular images of vaults full of gold backing our money (it's not true).  Let's call this the Son State.
  • Money is an asset.  An asset is something that produces regular, periodic returns: a piece of land   tilled or grazed by animals, a herd of domesticated animals, equity in an operating business that produces valuable goods and services, etc.  However, the concept of money itself as  asset (i.e. debt which produces interest), was not widely accepted until quite recently.  In fact, the world's two major religions, Christianity and Islam, considered lending of money at interest a major sin (Islam still does, even if only in theory).  This is money's most pernicious and least understood state, completely ignored by the vast majority of people.  Therefore, let's call this the Holy Smoke! State.  (Aptly enough, water also has a vaporous state.)
I obviously don't have a problem with money's Father and Son states, but Holy Smoke! gives me the willies.  How could money possibly be an asset, for example a bond?

Consider: a government issues an interest-bearing bond denominated in fiat money.  Ignore the principal for a minute, let's just assume it keeps getting rolled over at maturity.  But what about the regular, periodic interest that asset-holders demand?  Where is that going to come from, huh?

We have become so accustomed to such illogical nonsense for so long that we have come to think of  money-as-asset as common sense, day-to-day reality.  But if we stop and really think things through we come to the inescapable conclusion that we are dealing with smoke and mirrors.  Holy Smoke! by golly!

I previously said there are people - a class of people, really - for whom money as a medium of exchange is not very important.  What I meant is that there is a small minority of wealthy rentiers of Holy Smoke!  for whom the other two "states" of money are almost entirely insignificant.  Another way of saying it comes from Wall Street's past: Gentlemen prefer bonds.

As things have developed lately it is this small minority that is calling the shots for everyone else, i.e. the finance tail is wagging the entire economic dog, now more than ever before.  The borrow-consume-grow economic model that was espoused - and is still espoused in the guise of government "bailouts" - led to such an explosion of debt world-wide that Holy Smoke! is now the only form of money that really matters, the state that calls the shots, if you want.

This is completely unprecedented in economic/monetary history.  It is even entirely wrong to compare today with the Great Depression and to attempt to draw parallels, examples, lessons or possible solutions from it.  This is a new reality, so new as to have become invisible to politicians and economists who operate under the principle that if you can't "see" it, it doesn't exist.  (To be fair, that's how most of us operate day-to-day, anyway.)

And here we are today,  just like the Easter Islanders refusing to accept that building ever more stone edifices to our own Holy Smoke! deity does not constitute a real solution.

Moai In Easter Island


    1. Very nice, Hellasious.
      Q: Two financial institutions entering into a 20 year bilateral derivative, and both marking it to positive value: IS this still covered by "Holy Smoke" or do we have to switch to other metaphors ? Animals of the Apocalypse ?

    2. I was being polite. There is another word starting with "s" and goes well with Holy and an exclamation mark in the end...


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    4. "The Father, the Son and.... Holy Smoke...!"

      Great play on words, historically speaking......

      Dios te salve Maria.....! Madre de Dios.....!

      Best regards,


    5. Great post. I love it. (You knew I would...)
      On where the "interest" comes from...
      Didn't you know that THAT is the modern, hubristic equivalent of... the loaves and the fishes ??
      That's some smoke there...
      Just bringing up the credit issue into this post.
      Credit... associates with.. credo, which means.. "I believe". Like in.. "credo in unum Deum..." Maybe you can give us a more precise latin etymology for "credit" itself, Hell ?

    6. Maybe I am misremembering, but haven't we discussed this topic before?

      I just want to make something clear, you are not advocating not charging any interest, are you? Some points:

      I lend you money, and I only get paid back the principle of what is borrowed. Not only am I out the opportunity cost, but I am taking the risk that I won't get my principle back if you default. That is part of what interest is supposed to cover.

      Secondly, if you take my money and invest it in a profit-making venture, not only am I out the opportunity costs spelled out above, you are making money on my capital if the business venture is successful.

      Interest charged on lent money is supposed to reflect the loss of opportunity and a risk premium.

      Now, I'll grant you that the amount charged has gotten completely disconnected from those two values. And, as Elizabeth Warren has pointed out, most income for lenders have come from tricks and traps rather than simple interest.

      Another way that "money for nothing" is being made on Wall Street is charging "investors" (i.e. working people) a "vig" of 6.5% on any money put into a 401K for their "services" of investing the money for the retirement fund. Even though 95% of the funds never beat the market, the "managers" of these funds make money just from the upfront fees. (Gee, why can't I get into this game? I could probably do a better job than most of those bozos!) In fact, very few -- if any -- retirement funds make index funds available to workers. For most people, index funds are far superior to "managed" funds as the "load" funds are far less, if any.

      OK, I'll stop my rant.

    7. Yeah, let's fight this out, Okie.
      I don't know where Hell is going with this, but I think your questions are valid.
      I think that along the lines of Hell's logic (which I share with him..) the INSURANCE EDIFICE is a big part of the problem too.
      The arcanes of the insurance industry have created in our collective eyes the ILLUSION that any kind of risk in our lives, our societies is.. UNJUST and not to be tolerated.
      This is a big pile of horse crap, and is not doing our capacity to innovate and "entreprendre" (from the French, right ??) any good.
      It firmly entrenches us in "business as usual, from cradle to grave".

    8. To me it's never been about the lending. It's always been about the borrower.

      The standard rule of lending has always been.... "Do not lend money to anyone who NEEDS to borrow money."

      It's all about credit worthiness. The less credit worthy, the higher the interest. Right...? I guess that, would make the borrower less credit worthy, that extra cost in servicing a debt that the borrower should have never taken in the first place... The return on institutional debt, is usually growth, as society becomes very innovative in it's effort to come out from under the oppressive burden, you know, a stable and compliant work force. Indentured servants.... It's part of out social contract.

      I dunno.... perhaps I'm just plain old dumb or somethin....

      Best regards,


    9. Dear Econ, re: it's about the borrower.

      Yes, but this principle was stood on its head a few years back.

      Money as asset went into apogee during the Credit Bubble that preceded the current crisis and is almost 100% responsible for it.

      For example, loan originators were pushed into making as many loans as possible, even to the worst credit risks possible (people and entities who could not, should not and would not be able to borrow), because investment banks were screaming for more "product" to package, sliced-and-diced, and sell as CMO, CDO, CLO, etc. to asset-holders.

      Loans were LITERALLY crammed down peoples' throats.


    10. I hope by now you have read "the Merchant". (Somebody elsewhere has called me stubborn. That's right...)
      Act 1, iii, 45-92 on the interest question, culminating in :
      "Shylock : ...This was a way to thrive, and he was blest ; And thrift is blessing if men steal it not.
      Antonio : This was a venture sir, that Jacob served for, A THING NOT IN HIS POWER TO BRING TO PASS,
      But swayed and fashioned BY THE HAND OF HEAVEN.
      Was this inserted to make interest good ?
      Shylock : I cannot tell ; I MAKE IT BREED AS FAST."
      1600, or so...

    11. Hell:

      I agree wholeheartedly, if a little is good, more is better... To stay in the character, the road to hell (not you), is paved with good intentions and no good deed goes unpunished.....

      What would you say is the best criminal enterprise...?

      Counterfeiting of course, wouldn't you agree....?

      Is this covered by any of the Ten Commandments...?

      Best regards,


    12. Hellasious says:

      "For example, loan originators were pushed into making as many loans as possible, even to the worst credit risks possible (people and entities who could not, should not and would not be able to borrow), because investment banks were screaming for more "product" to package, sliced-and-diced, and sell as CMO, CDO, CLO, etc. to asset-holders."

      This is the most fascinating part of the bubble to me.

      The complete insanity is really neat to ponder.

      And of course I personally want money to function as an asset.

      That's why I endure 50% savings rate I currently have.

    13. Great post thank you for sharing this information.

    14. Money is am asset where a debt plays an important role. Debt is when you owe someone money. Debts are becoming more a week if you are also responsible for the best interests.Interest is an additional charge of the original debt.