So how is your future shaping up today? If you answered just fine then you are:
a) inordinately wealthy and have made money in the recent volatile markets,
b) holding all of your wealth in cash under your mattress and have no debt,
c) broke and happy anyway
d) delusional
e) too young to worry or too old to care any more.
If you answered a or b you might want to read on, if you answered c you need to read on, if you answered e do read on, only those who answered d are excused from this exercise in frustration.
The human mind can be a dark and wild place so it is fitting this is Halloween today. This is a story too scary to tell anyone in the light of a beautiful day unless it is on a day already dedicated to the macabre. This is a story of a failing paradigm that affects all of us and may go on affecting us for a long, long, loo,ooo,ooo,ooo,ooong time. How much money is one hundred trillion dollars? It sounds like a lot to me. That is, in point of fact, on the close order of the total wealth in the world today, if it is measured in dollars. Can you say lost in the space of one small error in thinking?
What is money? In one way of looking at it is the yardstick of wealth that can be transferred and measured. So what is the best measuring stick we use to define the wealth held generally in the whole world? It is the total of all the currency in the world if you believe the statement printed on our dollar, "Legal tender for all debts public and private." In fact that is a telling statement what stands behind our money is the ability to repay debt. As long as people generally believe that motto our paper money continues to have meaning.
What stands behind our currency in this richest nation on earth? Surely it cannot simply be the total of all the debt in our nation? If you think it is gold or silver you haven't read a newspaper in nearly fifty years. If you think it is productivity then you flunked economics 101. It is in fact debt. Our money is an IOU at its basest level. What stands behind our money is actually the capacity to repay debt, our capacity to repay debt in point of fact, we the people.
So what happens if so much of the debt in the world is uncollectable that banks fail and hedge funds fail and even governments default on their debt? The world economy as we have known it fails. Not just short term but until we can rebuild confidence in that little motto, "Legal tender for all debts public and private."
Liquidity thy name is currency. Cash is the ability to easily transfer wealth around our economy; it is the ability to easily measure value. Our money is the basis for valuing work and is the functional measure of every transaction's value. So what is happening now that we have established these facts, money is debt and the measure of value for every transaction? We are quickly losing the value of our money to un-repayable debt.
Every debt that goes unpaid hurts the common value of our faith in currency. We are nearing a very scary tipping point. Everyone in the treasury department of every nation in the world is frightened. Of course they are only politicians and bureaucrats, what do they know? They know that we are staring over the precipice and out of the fog and mists below are staring back a lot of very hungry eyes filled with despair.
How does this story end?
Stay tuned and we will all find out together. One thing is certain. People who are losing their homes, ten percent of the mortgage holders in the USA are in danger of doing just that, are also losing their faith in this system of measuring wealth. They are also losing their incentive to repay any of the rest of their debts that may remain. Their precious credit rating is damaged beyond recall at least for a five year period. This is still getting uglier on Main Street even if the full faith and value of the US treasury is standing behind Wall Street.
Maybe we need to rethink the basis for currency that is common in the world today. Debt may not be the best possible basis for currency. Of course it may actually be the only one we can come up with that lets us grow the world economy. But this crisis of confidence will not be helped by enriching a relatively few wealthy investors. If enriching the wealthy among us is done at the continuing expense of a lot of ordinary people the center will not hold.
The people who are now paying for homes that are worth considerably less than when they took out that loan are not going to be happy any time soon. They may do what they need to in order to avoid paying for those yachts that they never get to ride on anyway. If you want to see real class warfare in the USA here is one way to incite people to start one in earnest. Just stop lending money to people who can repay their debt and start this credit economy on a real downward spiral. That is happening today.
If no one who owns money is willing to lend it then the government will have to step in and release some money through the banks. Wait; that is already happening and the impact on credit is thus far not very encouraging. Maybe everyone involved in this deal needs to take a haircut on what they own. The people who own the debt need to work out a new deal with those who own the homes and cannot pay for their excessively expensive mortgages.
So far they have no incentive to do that and the government keeps enabling them in that recalcitrant behavior. So this drags on and on and more and more people are abandoning their debts and their homes and starting over. The point where people stop trusting anyone is not too far ahead and trust is at the basis of most of the world's wealth. Trust in our government is at an all time low. An equivalent failure of trust in our bankers and brokers and hedge fund managers is not far behind. Trust in our currency is coming closer to being a problem every day. Watch that first step over the precipice folks, it is really ugly at the bottom of this decline. Happy Halloween.
