Dec 212008
 

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.”>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.

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