Michael H. Goldhaber

A couple of years ago, I pointed out that in some ways money was losing its hold on reality. Routine activities and producing things to which can be assigned some relatively stable amount of money now occupy far less than majority of human effort — while more and more energy goes into the new attention economy, which is only loosely connected with money or markets. At the same time, the growing financial sector takes on the possibility of treating money as a pure symbol, without any underlying or inherent meaning. Financial money can grow or shrink, and this has real effects in what is left of the market economy, but many of the shenanigans within finance do not really do anything beyond the purely symbolic.

Now the future of money has become more imbued with the excesses of money’s dream life. To the extent that markets do require money, they also require mechanisms for the insertion of money where needed, and that depends on trust, which is the basis of all loans, investments, etc. Trust is now rapidly leaving the system. The mysteries of derivatives, of the vast variety of new financial instruments, and of things like hedge funds are a perfect cover for the most rudimentary sorts of scams, including the recently unveiled Ponzi scheme of one Bernard Madoff. (A Ponzi scheme requires ever-more investment into it, as current investments are used to pay earlier participants, though this is only necessary if the early investors actually take money out. Like roulette bettors who just let their money ride on a certain bet as winnings pile up, investors in a Ponzi can be fooled by entirely fictional increases in their holdings to leave all their theoretical winnings in, and they might also be likely to add more to the fund, and tout it to their friends. )

Madoff, who caught many who should have known better, as well as a considerable number who could not have been expected to see through his deviousness, was actually apparently quite limited in his methods of covering up his scheme. To whit: he claimed nearly the same yearly growth from one year to the next, which after a few years becomes statistically very unlikely. A more astute Ponzi scheme could vary the growth. This has its limits, of course. You wouldn’t want your Ponzi scheme to issue reports that are too downbeat, because then investors might leave. Still, greater sophistication in reporting incomes so as to evade questions certainly seems possible. Thus, how do you know that your next investment vehicle will not turn out to be a Ponzi scheme or something perhaps honest but hare-brained?

The obvious answer might seem to be to diversify investments. But in the Madoff case, some investors thought they were investing in different funds entirely. Any company can do what it likes with any extra cash on hand, so how do  you know that an apparently reliable company that makes what seems like a real and straightforward product is not investing in some other dubious scheme? Even a company which does nothing of the sort must take increasing risks in new investments as the climate of creativity heats up. You cannot rely on this year’s popularity to get a company through competition that might not even exist yet but will be quite evident in a few years. The speed at which new kinds of products and services can be put on offer renders the “long term” increasingly short. This past year also shows that such supposedly safe and durable investments such as land and raw materials like petroleum can be highly speculative, because speculating on futures in all such areas can play havoc with the prices there too, if at a high enough level.

The net result of all this is that trust has fallen to lows not seen since the Great Depression.

But new means of speculation, based on the likes of the Internet and advanced computation are not likely to disappear. Thus a return to “fundamentals” cannot be counted on — ever again. Regulation is unlikely to be astute enough to keep track of all the new means of engaging in new kinds of investment, and nothing can stop these except a complete freeze of the monetary system. That’s where we may well be headed. Alternatives to money and the wide-open market are likely to proliferate.

Crash-free No Longer

In a recent post, I discussed the current problems re sub-prime mortgages and the credit crunch in connection with ignorance in high finance and in general. The complex entities that are investment banks, which were supposedly highly knowledgeable as organizations, actually were quite in the dark, quite ignorant in fact, when it came to the mortgage problems. I argued that someone has to be knowledgeable and interested for a problem to be understood — some specific person, that is. An organization that has no one paying attention can’t function in a knowing way, in other words, and as we move further towards an attention economy, there are additional reasons to stay ignorant of what is not essential to grab an audience at the moment. As I was thinking about those issues, it occurred to me that there seemingly was a clear counter-example, namely the complex organization that is responsible for the fact that there have been no major US airline crashes since 2001.

Now, airline crashes are prevented by a combination of knowledge of what keeps planes airworthy and prevents collisions, and this knowledge as embedded in a mixture of physical  instruments, physical mechanisms and careful adherence to complex inspection and control protocols that make sure the instruments and mechanisms  are in good working order and are used correctly. But this too does not happen without there being dedicated people who pay attention to keeping all these protocols actually functioning. In the piece I was drafting, I was going to write that if no crashes occur over a long enough period, inevitably attention will shift and the the protocols will stop being followed so assiduously, so that eventually further air crashes will  occur, even though we now apparently know extremely well how to prevent them. We will lose that knowledge as active knowledge  over the course of time, because we just won’t think we need to know it if we never have crashes to remind us.

Well, it now turns out that in fact this disintegration had already begun. Luckily enough, there was enough redundancy left  in the inspection system — apparently, in this case Congressional oversight— for someone to notice that the chief federal agency in charge of airline safety had stopped doing its job. In fact, the successful period of no crashes was already the result of past momentum, not current care.  It could be that the alarm caused by the recent revelations will keep someone connected with the system making sure for awhile that it holds together, but for how long? Currently, American Airlines is in financial trouble and passengers are very annoyed because many flights have had to be canceled while forgotten inspections are finally performed. How many times would this have to happen, before passengers would insist that inspections are not really necessary? The inspectors in this way might eventually be forced to be more lax until an actual crash occurs. You cannot have knowledge without attention, but the need for attention also promotes ignorance, as I showed earlier.

Pfffffffft

Meanwhile, what of the financial system? Could it be that the “masters of the universe” who run it are so ignorant of the actual workings of what they do that a much more complete meltdown than has already taken place is possible? (After I drafted this very post, I learned today that George Soros has just come out with a book proclaiming the breaking of a super-bubble in the money economy.)  Why the possible meltdown? What would the ramifications be? As with the Enron collapse, and as with the recent sub prime debacle, the people running things seemed awfully smart and knowledgeable until it turned out they had vastly overestimated their own knowledge, or at least convinced others to overestimate it. That can happen, perhaps, to the whole current financial system. What has happened is that just as the Internet in the broadest sense permits all sorts of new social inventions with unpredictable effects, such as Facebook, it also permits a wide variety of new financial inventions,  which in reality do nothing but allow money to be moved around in new ways, and perhaps merely create new, purely numerical wealth, wealth that can certainly be turned into goods, but which stems really from nothing other than mathematical legerdemain with various complex financial instruments.

If we look at the apparent growth of the US economy since 2001, it is quite possible that most of the so-called additions to  GDP were actually only growth in the “products” of financial firms, as measured by their overall earnings. In this case no real extra anything — except numbers — was actually created. Furthermore,  these numbers only have value to the extent that the “instruments” behind them remain sufficiently credible to enough players. In other words, financial performance can be viewed, increasingly, as indeed a performance, a form of theater, which works only while there is a sufficient “suspension of disbelief” while the audience is transfixed and mesmerized. If and when that stops, the air can just go  “pfffft” out of the balloon, in much the same way as it did for Enron.

Nowhere Safe to Park?

The new rich, the old rich, plus things like university endowments and standard pension funds —  and other forms of insurance for that matter, all have to “park” their monetary wealth somewhere. Mattresses are decidedly out of fashion, since they don’t keep up with inflation. Of late, the parking lot of choice has been more and more in these new financial forms — hedge funds, buyout firms, or other exotic schemes. The alternative is mostly more traditional forms such as corporate stocks, mutual funds, bonds or even government-backed bonds. None of these is actually secure, at present. Nor, by the way, are even the more old fashioned holdings such as gold. (Gold retains its worth only if the industrial world swallows it fast enough, which requires a high level of industrial production.) Because finance is now such a large part of everything, all these supposedly reliable old-fashioned forms of wealth can fall if the financial sector falls far enough. Hedge funds and buyout firms very much need leverage in the form of extensive borrowing, but if there is no assurance suddenly that they can pay back, the value of these funds can quickly disappear. But if that happens, ordinary stocks, also based on confidence in future performance are much more vulnerable now than in the past. Very few firms simply are made up of solid assets such as factories that have fairly definite break-up values. Instead most firms today rely on the promise of innovation yet to come to retain their current value. (For all stocks, there is a ratio of price of the stock to current earnings that is often of the order of 20 to 1. That means that for an average  investor just to break even, the stock will have to pay out the same earnings for twenty years, or alternatively the profits will have to grow over a shorter time frame. In today’s world, twenty years is a very long time horizon. Meanwhile while shorter-term growth is always risky to assume, and especially so in a downturn of any duration.)

Also, current stock valuations are very tied into the workings of the financial sector these days. For instance, bankers are constantly flying first class around the world. If banks slow down, so do airlines, and numerous other related industries. Because we no longer have a (money-based)  economy that primarily produces things, and still less, fairly necessary things, a large part of it can become completely unstuck quite fast.
Since the US government, at least, has been run on substantial borrowing even during a supposed growth period, while facing increased payouts for social services such as medicare and social security even if it does nothing. So its indebtedness may become too great to pay off. There goes the reliability seemingly safe investments such as treasury bonds. Pension funds, increasingly necessary for an aging population, since they have to rely on funds parked somewhere, yielding some  not-too-small rate of return, may not be able to hold up either. That would mean a disastrous meltdown that would strorngly affect amlost everyone in the US.

Glooom, Doom,and the Bloom of the Real Attention Economy?  Away from Money?

Now, maybe these visions of “doom and gloom” are unwarranted. Quite possibly  the whole system will easily stave off collapse. For instance, it could be that the tremendous flexibility of Internet connection will allow credit crunches to be overcome with new kinds of assurances and money routed in new ways. It is possible that alternative currencies, informally constructed, will be able to replace the dollar. And so on. It is even more possible that the collapse will not so deeply effect the euro or the renminbi, etc. But given the still pivotal role of the US, it is also possible that the doom and gloom would spread across the globe. If so, we will suddenly begin to find ourselves in a new world. It could be that what emerges from the mess will be a much fuller Attention Economy with money playing a much less key role, and eventually virtually no role at all. That , while definitely no utopia, may be the best that one could reasonably hope for.

Here, I am of course speaking of the real Attention Economy, or Attention System, Epoch, Society or World which I have been discussing in the is blog and elsewhere for years   —  and not the advertising-based  much less important system that other people who use this term have come to mean. This real Attention Economy already is quite important, as I have tried to show earlier, when I pointed out that attention “transactions” are already far more common and influential for most people in the advanced countries than are money transactions. The standard economics profession as well as most people who focus on business have remained utterly blind to this fact. But the real Attention Economy, based of course on the scarcity and desirability —for persons— of the attention that can only come from other human beings, is entirely differently structured and organized than is the monetary, industrial-based or capitalist economy. That is why this new system  ultimately does not run on money in any form.

In the next installment, I will explain in detail why the (real) Attention Economy probably can only grow at the expense of the standard forms of the money-industrial system, and why both probably cannot co-exist for too long. This is another reason we may be headed there now. If it is coming, thought must go now into how to mitigate its bad features, while still benefitting from its good ones.