The Trouble With Money

In broad terms money has two characteristics:

• It is a means of exchange between goods, services and labor and,
• It stores wealth.

I believe that events during the last several years are leading to money's emasculation as a storehouse of wealth. The reason, in my opinion, is that a wide variety of other, traditionally non-monetary instruments like real estate, equities, derivatives and commodities are becoming monetized.

The link between real estate and money is today quite obvious and direct: the wide securitization of mortgages created trillions in new marketable debt instruments, i.e. money, by the classical definition of credit expansion. But what about the others?

Share markets have become very liquid and deep, helped along by a dizzying variety of index and exchange traded funds, SPDRs, etc. What's the practical difference between "stocks" and "money", if the former can be transformed into the latter at a moment's notice with minimal fuss and transaction costs? And the same can credibly be said about commodities that are traded on major futures exchanges.

Other active derivatives, for example credit default swaps (CDS), can also behave like near-money. Indeed, by their very nature CDSs create money out of thin air, since they are a series of payments against stripped credit risk, i.e. a bond sheep in wolf's clothing.

What does it all mean for "traditional" monetary aggregates as published by central banks? It means they are becoming practically meaningless - there's too much of the "other" money around. That's my definition of the shadow banking system, by the way.

It also means that if/when financial markets move significantly lower there will be a lot less money around than before, with unforeseeable consequences for the economy. Simply put, we have all gotten used to lots and lots of money sloshing about.

P.S. From our "other economic indicators" dept. (the same that looks at food stamp participation, for example) comes this news bit: Delta is cutting more flights. Orlando is getting hit hard. Since this is the one-company town that Mickey built, it does not take much guesswork to deduce why Delta is cutting service there.