monitoring the abyss

Generally, money creation reallocates productive capacity (wealth) -- and normally to the benefit of those in control of the money supply.

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In saying this, I have to correct an error in my earlier analysis.

My contention is that a relatively large amount of money creation can be absorbed because of the vast human excess productivity. But, I added to this the hypothesis that there is an ongoing need for money creation in order to fuel productivity.

I think those are both true statements, but they require some refinement. My hypothesis started from a very "micro" analysis of two "workers" and a single meteorite-talisman representing money. In that scenario one could argue that additional talismen would fuel greater productivity.

If we take a more macro view -- a snapshot of world currency at any given time, a more relevant question is whether there is an adequate money supply to fuel productivity at that specific point in time. Are there enough "talismen" to fuel productivity and trade?

The answer is probably, "yes." How could commerce adjust if more money were not pumped into the system? We could simply have a downward shift of prices. If an item costs $2.00 initially and is re-priced by the marketplace to $1.00, then we have effectively doubled the money supply. If we re-price it at $.20, then we have created a 10-fold increase in the money supply.

(Of course, the extent of revaluation depends upon the rate at which money is simply absorbed into the system; and the true rate of leverage. If we assume money is deleveraging at a 30 to 1 rate, what is the necessary adjustment? To provide a 30-fold increase in money by revaluation, our $2.00 item might have to go to $.07, which may be an unmanageable devaluation. But then again, presumably ALL money is not deleveraging at 30-fold rate, just particular aspects of the money supply.)

So, a threshold question is, "what would happen in the absence of money creation?" The answer probably depends on the umbrella of other social rules in effect, since there are other social rules that impact wealth allocation along with monetary policy. Absent ANY intervention, probably all wealth migrates to the best snake oil salesman. But, in our present-world economy, were can we hypothesize money will migrate in the absence of viable monetary policy manipulation?

The overall impact on society is not in the total number of talismen available (we have lots of pennies, at least in theory), but on the percentage allocation of the talismen. The relative "value" of a single dollar is irrelevant if you have 0% of the allocation. You cannot buy ANYTHING. If you have money approaching "100%" you can buy everything.

In a highly leveraged financial market on a downward trajectory, all those holding leveraged assets are losing real wealth at the rate of the leverage. At 30 to 1, a dollar loss on the balance sheet represents a $30 loss in purchasing power.

What that means is that the relative buying power of those in the financial market is shifting away at a rapid rate. That means someone else's buying power is going UP in relative terms.

True, rapid change destabilizes the marketplace. Pricing of goods and services does not instantaneously adjust. The market has to respond to a fall of demand from those who are losing relative buying power -- but this should be countered by demand on the part of those whose relative buying power has increased.

At the same time, the leveraged money literally "disappears". This should cause some price deflation, due to overall reduced money supply.

And, then on the other hand, one can anticipate lost overall productivity, which would drive the price of goods and services up, in real terms. If it takes more work to produce goods, then we should see diminished demand.

Some questions we would need to answer: Where is the equilibrium point and how long does it take to reach it? Does a deflationary process cause people to be less productive -- in other words, what is the psychological effect of diminishing money supply compared to increasing money supply? (One of the benefits we saw in increasing money supply was simply to get people to work at all. If the money supply is decreasing -- but nevertheless, fully adequate to monetize transactions by downward price adjustment -- is this a psychological dis-incentive?

All that said -- and recognize a vast desert of unknowns here -- what can we say about creating more money and handing it to the deleveraging financial players? If their collapse was effectively reducing the relative buying power of these players, then the primary effect of re-capitalizing them is to maintain their relative buying power.

This is completely consistent with the more obvious impact of handing major players very large financial bonuses from the newly created money. Whatever might be said about efforts to get "money into the system," literally handing it to a few undeserving executives directly supports their relative buying power, which otherwise would erode substantially as the result of normal market influences. And, that appears to be precisely the social policy that is being pursued by world governments.

So, it's reasonable to conclude that the purpose of re-capitalization is to protect the relative buying power of those vested in the crashing financial markets and not "to save the economy." But, determining who is "vested" in these markets is complicated. For instance, the retirement and pensions of a very wide swath of people is tied to the financial markets, and specifically, to the deleveraging assets. What that means is that a lot of people will find themselves working very much harder in retirement than they anticipated.

But, the totality of the financial marketplace is pretty wide. Absent money creation, we should expect to see both a re-allocation of relative buying power AND and overall downward trend in productivity. We should therefore be able to predict some specific changes:

*loss of market for high end goods and services
*increase in relative buying power for those directly involved in food production
*decreased "gobalization"
*greater competition for control of arable land, water for agriculture and the like
*increase in market for low end goods and services
*increase in buying power for those who can keep government and union jobs (which have a damper against downward wage adjustment).
*increased role of military as a career track. But, at the same time, we can expect a decrease in adventurism and empire building, as the result of financial realities and more "sane" individuals electing to serve in the military as a career goal.
*suffocating taxation as the result of government's inability to adjust downward
*broad inability to comply with government regulations and taxation, increasing the impact of "gray" markets and lots of regulatory penalties and loss of property to the government.
*a great deal of stress, as vast numbers of people are compelled to adjust to lowered expectations
*reduced value of higher education -- or at least, adjustment as to where higher education will have useful value. Skills useful to government and companies that deliver "low end" goods and services should increase.

However, currency is not the sole reallocator of wealth. There are other allocators, both via government and via private sector. We can expect currency manipulation to become less effective and consequential, especially as the end result of the massive effort to maintain the present relative buyer power of those in the financial industry. The effort is out of control and unsustainable. Power players will migrate to other avenues of wealth allocation manipulation.

Some of the foregoing predictions seem to be underway at present. We can see a decrease in globalization, smaller market for high end goods and services. Some sustained market for low end goods and services (discount chains, fast food). We see taxation rising (as in the increased California sales tax that took effect today). I'm not certain my other predictions are sustained by real evidence. And of course, we do not have a "neutral" market. We have a market that is sloshing full of fake capital designed precisely to prevent the market from taking its natural course.

Since monetary manipulation has been used worldwide to create great disparities in wealth, the appropriate social policies would be to undo those disparities -- and therefore to move in the direction I suggest, albeit in a more controlled manner. But, telling the wealthy elite that "we are going to gradually make you less wealthy; and the alternative is to make you less wealthy much faster" is not a refrain likely to gain much support in the halls of power. And, because a broad segment of society perceives (rightly or wrongly) that their well-being is tied to the well being of the financial markets, we can anticipate substantial resistance to the necessary policies.

My guess is that end result is unavoidable either way -- and that a controlled descent would be preferable to an uncontrolled one for all concerned.