Monthly Archives: September 2017

There is nothing extraordinary about the rise of central banks balance sheets

29 Friday Sep 2017

Posted by in Monetary Policy

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There is nothing more deceptive than an obvious fact.

–Arthur Conan Doyle, “The Boscombe Valley Mystery”

 

  • Major central banks’ balance sheets (Fed, ECB, BoJ) have increased by about $10Tn since the collapse of Lehman Brothers in 2008.
  • There is nothing extraordinary about this fact.
  • This is also how much the IMF estimates the global shadow banking system has lost in about that period.
  • Is this a coincidence?
  • I do not have the data for the shadow banking monetary liquidity globally, but looking at data for the US, shadow banking liquidity has fallen by about $5tn while the Fed’s balance sheet has increased by about $4tn since the 2008 crisis.
  • Still think it is a coincidence?
  • The core of our monetary system is money as credit. If the commercial banks/broker dealers cannot perform the collateral intermediation process as necessary for the monetary liquidity to reach its designated purpose, the central bank has to step in and lend its own balance sheet.
  • The collapse of Lehman Brothers struck directly at the core of the shadow banking system and caused monetary liquidity to collapse as a result. However, in the years that followed, developments on the regulations side (Basel, Dodd-Frank) have further prevented the banks to provide enough monetary liquidity.
  • As long as shadow banking liquidity continues to deteriorate, the central banks will have to plug in the difference just to keep the monetary liquidity from going down.
  • For example, the Fed’s balance sheet stopped growing in 2014 and that’s about when the ECB’s started growing again.
  • Global liquidity is still predominantly in USDs and a lot of that is generated in the offshore dollar market. The ECB, BoE, BoJ have become the de facto dealers of last resort in there. They are providing an extraordinarily formal backstop of this global dollar funding market.
  • This is a good thing. The increase in central banks’ balance sheets is a source of stability, not a reason for concern.
  • We are formalizing the shadow monetary liquidity. As long as this is ongoing, it would be difficult for a sustained rally in the USD.
  • The financial crisis of 2008 has put a lot of economics taboos out for discussion. How money is created in a fiat sovereign monetary system is one of them.
  • Going forward, central banks’ balance sheets may not only not shrink, but they may continue to increase if the central banks allow public (retail) access to them. As the process of digitalization advances and as cryptocurrencies continue to spread, they may not have a choice.

What is the role of surplus capital?

28 Thursday Sep 2017

Posted by in Questions

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Source: Z1 Flow of Funds, US Federal Reserve/Click to enlarge

“For an individual agent, additional income is necessarily accumulated in financial or real assets. The income not spent (the individual’s “saving”), which is initially received in the form of additional settlement medium, is allocated across asset classes. But for the economy as a whole this is obviously not true. The allocation of savings simply represents a gross transfer of assets across individuals: the increase in deposits of income receivers is matched by the decline in deposits of those that pay that income out. It is only when the additional income is supported by issuance of financial claims (eg credit or shares) that financial assets and liabilities are created. By the same token, the popular and powerful image that additional saving bids up financial asset prices (and hence depresses yields and interest rates) because it “has to be allocated somewhere” is misleading. There is no such thing as a “wall of saving” in the aggregate. Saving is not a wall, but a “hole” in aggregate spending.” BIS Working Paper 346

  • There are $225Tn of US financial assets in terms of market value (Chart above).
  • Financial assets growth started to surpass GDP growth in the early 1980s as the financialization of the US economy began. For example, for 40 years between 1945 and 1985, the ratio of financial assets to GDP varied between 5x and 6x. After 1985, the ratio started moving higher and higher and currently stands at record 12x!

Source: Z1 Flow of Funds, US Federal Reserve

  • In terms of ownership, financial assets are split among three major sectors: Domestic Non-Financial, Domestic Financial and Rest of the World.
  • The Domestic Financial Sector started gathering more and more financial assets relative to the Domestic Non-Financial Sector in the early 1990s. But it is really foreigners who began heavily investing in the US as trade flows picked up in the late 1990s and strong globalization trends emerged.

Source: Z1 Flow of Funds, US Federal Reserve/Click to enlarge

  • US households’ direct ownership of financial assets has gradually decreased since 1945 in line with the financialization of the US economy. As absolute savings increased, the financial industry expanded to meet households demand for new products in which to invest them. After the 1980s, the financial industry not only was creating new products but also started investing on behalf of households.

Source: Z1 Flow of Funds, US Federal Reserve

  • Savings are a dead weight on the real economy as they drain funds away from it. If instead they were invested in real projects, arguably, employment and economic growth could have been higher. At the moment, it is the financial sector, primarily, which benefits from this surplus capital.
  • As this surplus capital gets diverted into savings, new money must be created to serve the real economy. This new money gets created as debt. This has generally been a more efficient method of  money creation than most other ones in the past as it matches closely economic activity.
  • However, as the debt stock increases mathematically due to positive interest rates, this efficiency decreases. In addition, not only new money must be created to serve the real economy but also to pay back the old debt.
  • The financial sector gets a cut on both the asset side of the balance sheet (managing the surplus capital) and on the liability side (creating the debt).
  • Looking at the US economy from this sectoral balance point of view, we should be also asking ourselves questions about the role of this surplus capital.
  • For example, what is the need for government bonds in a fiat monetary regime? Are they ‘created’ to fund US government budget deficits, for example, or to meet the demand for positively yielding (protection from inflation) and safe (protection from default) assets as the surplus capital increases?
  • Given that companies generally prefer to fund themselves using internal capital, what is the role of the stock market especially when there is also surplus corporate capital?
  • How far can we go monetizing the real world to create enough financial assets to meet the demand of the increasing capital surplus globally?
  • In the increasingly digital world where the marginal cost of production is zero and in the old industrial world where the marginal cost of production is dropping fast because of the advances of technology, how much surplus capital in aggregate do we need?
  • Do we have so much surplus capital because our income distribution model is broken?

…

Who owns US corporate debt?

26 Tuesday Sep 2017

Posted by in Debt

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This is Part Four of an exercise looking at how the ownership structure of major US assets has changed over the years. Part One (Equities). Part Two (Debt). Part Three (UST).

Source: Z1 Flow of Funds, US Federal Reserve

  • The largest holders of US corporate debt are foreign entities at 28.6% of all holdings. That’s up from less than 1% in the late 1940s.
  • The second largest holders are insurance companies at 25%. Even though their holdings have gone down from 44% in the 1940s, when they were also the largest holder by far, insurance companies seem to continue to play a dominant role in the US corporate debt market unlike so in equities or UST.
  • Mutual funds and pension funds come after at 18.6% and 10.8% respectively. Their roles have diverged since the mid-1980s with mutual funds relatively increasing, while pension funds relatively decreasing their holdings of US corporate debt.
  • Households were the second largest holder of US corporate debt in the 1940s at 31%. Today they are one of the smaller holders at 6.7%.

Source: Z1 Flow of Funds, US Federal Reserve

Luck management

25 Monday Sep 2017

Posted by in The last man standing will laugh

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Investing is all about luck management. There is plenty of luck to go around but it is not distributed equally all the time.

The say the market is irrational. True. But luck management isn’t.

It’s like a video game. Luck has its own rules and ‘levels of difficulty’. However, unlike a video game, the hardest level is the first one. After that it gets progressively easier and easier simply because there are fewer and fewer players left while the quantity of luck does not change.

There are two things to remember, though.

First is that everyone gets their chance. But the trick is we must wait for our turn. So, patience is paramount.

It’s almost like standing in a ‘queue’. But not the orderly queue you have, for example, in Canary Wharf in London at 5:15pm. It’s more like the ski queues in almost any resort in the Alps at 9:15am. We must make sure we manage our place in the ‘queue’ and, just like in a video game, do not drop out before our turn comes up.

Second, when we are up, we have to go for it. We must take full advantage of our luck so that we can get to the next level where there are fewer people in the queue and the luck-go-round is thus shorter. Just like a ski lift takes you up in the mountain and then there is another lift to go even further higher where there are always fewer people on it.

But to take that second lift, you must first take the time to become better. On the ski slopes you must have the patience to go up and down several times on the same run before you feel you are ready to go higher without breaking your legs on the way down.

I should not be saying this but it happens more often than people think: when you are on that lift, do not drop off by doing silly things.

What else? Oh yes, of course, the most important part. The bonus. No, not the bonus you are thinking of. If you are a good manager of luck eventually you should be able to hire someone else to stand in the queue for you while you go on and finally start to contribute to society.

Share the luck back. Give people a chance to play the game. It’s too late when you die, and it is not heritable. It’s the cycle of life.

Random thoughts

22 Friday Sep 2017

Posted by in Uncategorized

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  • In a free-floating fiat currency regime, sovereign bonds are the same as sovereign cash. They do not represent a promise to pay. Rather they are an accounting concept used to measure economic activity over time.
  • There is no bubble in sovereign bonds and the concept of valuation here is meaningless. Bonds are different from any other asset class because they have a terminal value and a maturity structure. They are simple math. No need to put bells and whistles there.
  • If the risk of default of a sovereign bond is 0%, then the only other risk is inflation. If also inflation is 0%? We happily hold risk-free currency in our pockets. Sovereign bonds are just like a savings account with the government instead of a private bank. How much do you get for a 1-year CD with your local bank at the moment? Why should 1-year T-bills yield 100bps more given that it is also better credit?
  • There is no natural rate of interest. Economics is a social science and there are many different equilibria.
  • However, over the very long run, interest rates have fallen from 25% in Babylonian times to almost 0% now in a consistent fashion through the ages. This is a result of the inevitable advances of innovation and the subsequent creation of extra surplus capital accumulation. There is no mean reversion in interest rates.
  • The only time interest rates have deviated from this long-term decline is when there has been a disruption on the supply side which had resulted in the subsequent destruction of capital. Wars and natural disasters or trade barriers and embargoes could be the cause of this. 
  • Negative interest rates are just one state of equilibrium. It may seem that they are central-bank imposed, however, the central bank only follows the market forces in their attempt to manage the debt burden.
  • Every single attempt by the central banks in the developed world to raise interest rates post the 1980s has been unnecessary as the economy has had plenty of surplus capital and labor on the back of years of peaceful technological advancement and no negative supply shocks. It has also backfired and led to recessions because of the increasing debt burdens.
  • Recessions are a balancing act. However, if economic balances are not resolved each following recession becomes more severe than the preceding one.
  • As the economy moves away from manufacturing, which requires heavy upfront investment, to services which require much less investment, and now to digital technologies which require even less investment, interest rates substantially lose their power to affect economic activity.
  • If it were not for externally-driven rising healthcare and education costs, US would have fallen in a deflation already in the mid-1990s.
  • If it was not for the decline in the labor participation rate after the 2008 financial crisis, the US unemployment rate would have been much higher. In addition, the jobs created in the last 8 years are predominantly in the service sector, low-wage, and in many cases, without benefits.
  • Yet interest rates affect the balance sheet of the financial sector. However, the effect is asymmetric. Lower rates push asset prices higher and make debts easier to service, but they do not cause an economic boom. Higher rates, on the other hand, cause asset prices to fall, but do nothing to liabilities which stay unchanged. This creates financial imbalances which eventually also cause economic imbalances.
  • Therefore, central bank interest rate policy may be effective in managing the financial economy but it can become a lose-lose game in servicing the real economy.
  • As a result, on one hand, there is an increasing demand for the medium of exchange from income-poor and debt-laden private citizens and for the unit of safety from savings-rich creditors. And, on the other hand, there is inadequate supply of both from the public sector.
  • This is not a recent phenomenon. We had a similar environment in the early 2000s. The market responded by creating fake-safe private assets (repackaged mortgage CDOs and the likes) which allowed the income-poor to buy real estate while it also provided a seemingly safe-haven for the savings-rich.
  • That did not work out well eventually.
  • The rise of cryptocurrencies in the last few years is just the more modern equivalent of these fake-safe assets. They are a result of the advances in technology but they also are a response to this broken monetary transmission mechanism which eventually led to the current inefficient income generation model.   
  • Cryptocurrencies simply fill in the void left by the central bank in its refusal to extend its balance sheet to the public at large. There is no other way for the public to receive the medium of exchange other than direct from the central bank at no cost: the private debt super-cycle in the developed world reached its peak in 2008, while the Work=Job=Income model broke down already in the 1990s.  
  • In the past, we used to call this kind of money creation by the central bank/government direct, “helicopter money”. It has a lot of negative connotations because of recent historical examples of autocratic rulers printing more money than the economy needed (and often for their own personal use). However, there are plenty of examples in earlier history when “helicopter money” actually worked in restoring and stabilizing economic growth.
  • Examples of that are the Roman Republic and the Song Dynasty in China when there was a solid institutional infrastructure guaranteeing social accountability.
  • The modern equivalent of “helicopter money” is central bank digital cash (CBDC – or some version of that). Given the rapid spread of cryptocurrencies, CBDC is inevitable. I wonder, though, whether CBDC would only be introduced after the next financial crisis forces the authorities’ hand.
  • In the present environment of large capital and labor surpluses, CBDC is unlikely to cause a runaway inflation unless it really is misused. The existence of solid institutional infrastructure in the developed world, however, makes that less likely.
  • However, there are still technical hurdles to the wider use of CBDC. Even with good intentions and with impeccable system of checks and balances, the world is too complex for human central planning.
  • What is the right amount of CBDC to inject in the economy? For how long? Does everyone get the same amount? Etc.  
  • Luckily, harnessing the enormous amount of data we have created using advanced machine learning and with the help of the blockchain to organize and store it, policy makers can draw conclusions about economic activity in real-time and thus supply the medium of exchange on demand.
  • Technological advances causing bigger and bigger capital and labor surpluses, the move from services to the digital economy causing lower and lower demand for investments, the introduction of CBDC making interest rate policy obsolete, what happens to our savings? What use is it to us? Can we live without financial assets?
  • This is not a trick question. Developed world governments have been buying up their own debt back and corporates have been buying back their own shares. Maybe that is a trend reflecting the new economic reality as described above…  

Who owns US Treasuries?

21 Thursday Sep 2017

Posted by in Debt, Questions

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Source: Z1 Flow of Funds, US Federal Reserve

2016

  • The biggest owner of US Treasuries (UST) are foreigners at 37.6% of total. Relative to other holders, their ownership actually peaked in 2008 at 44.2% and they have been net seller in the last two years.
  • The second biggest owner of UST is the Fed at 15.4%. If we add state and local governments to it, the government, as a whole owns, 20.6% of UST.
  • In the domestic sector, pension funds own the most at 14.5%, followed by mutual funds at 11% and households at 8.8%.

Over the years

Source: Z1 Flow of Funds, US Federal Reserve

  • The ownership of UST has changed significantly over the years. For example, at the start of the data in 1945, the financial sector (banks, broker-dealers, etc.) owned 41.9% of the total; in 2016 that had fallen down to 4.8%.
  • Households, the corporate sector and insurance companies have also substantially reduced their UST holdings over the years.
  • Mutual funds and pension funds, on the other hand, have increased them.
  • The elephant in the room, however, is the foreign sector, which in 1945 was the second smallest owner of UST (after mutual funds) at 1%. There was a big jump in foreign ownership in the 1970s and then starting in the mid-1990s.

T-Bills vs long dated US government securities

Source: Z1 Flow of Funds, US Federal Reserve

  • Majority of US government debt has historically been in long-dated instruments.
  • However, in the mid-1970s, there were about as many T-Bills as long-dated government paper. Nevertheless, over the last couple of years, the issuance of T-bills has declined to all-time low.

Reminiscences of a Stock Operator

20 Wednesday Sep 2017

Posted by in Quotes

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by Edwin Lefevre

  • The tape does not concern itself with the why and wherefore. It doesn’t go into explanations… The reason for what a certain stock does today may not be known for two or three days, or weeks, or months. But what the dickens does that matter? Your business with the tape is now–not tomorrow. The reason can wait. But you must act instantly or be left.
  • And right here let me say one thing: After spending many years in Wall Street and after making and losing millions of dollars I want to tell you this: It never was my thinking that made the big money for me. It always was my sitting. Got that? My sitting tight! It is no trick at all to be right on the market. You always find lots of early bulls in bull markets and early bears in bear markets. I’ve known many men who were right at exactly the right time, and began buying or selling stocks when prices were at the very level which should show the greatest profit. And their experience invariably matched mine that is, they made no real money out of it. Men who can both be right and sit tight are uncommon. I found it one of the hardest things to learn.
  • What beat me was not having brains enough to stick to my own game – that is, to play the market only when I was satisfied that precedents favoured my play.  There is the plain fool, who does the wrong thing at all times everywhere, but there is also the Wall Street fool, who thinks he must trade all the time.  No man can have adequate reasons for buying or selling stocks daily – or sufficient knowledge to make his play an intelligent play.
  • If somebody had told me my method would not work I nevertheless would have tried it out to make sure for myself, for when I am wrong only one thing convinces me of it, and that is, to lose money.  And I am only right when I make money.  That is speculating.
  • They say you never go broke taking profits.  No, you don’t.  But neither do you grow rich taking a four-point profit in a bull market.
  • I think it was a long step forward in my trading education when I realised at last that when old Mr Partridge kept on telling other customers, “Well, you know this is a bull market!” he really meant to tell them that the big money was not in the individual fluctuations but in the main movements-that is, not in reading the tape but in sizing up the entire market and its trend. 
  • The market does not beat them.  They beat themselves, because though they have brains they cannot sit tight.  Old Turkey was dead right in doing and saying what he did.  He had not only the courage of his convictions but also the intelligence and patience to sit tight. 
  • Disregarding the big swing and trying to jump in and out was fatal to me.  Nobody can catch all the fluctuations.  In a bull market the game is to buy and hold until you believe the bull market is near its end. 
  • Remember that stocks are never too high for you to begin buying or too low to begin selling.
  • Losing money is the least of my troubles.  A loss never troubles me after I take it.  I forget it overnight.  But being wrong – not taking the loss – that is what does the damage to the pocket book and to the soul. 
  • It sounds very easy to say that all you have to do is to watch the tape, establish your resistance points and be ready to trade along the line of least resistance as soon as you have determined it.  But in actual practice a man has to guard against many things, and most of all against himself – that is, against human nature.
  • Fear keeps you from making as much money as you ought to.
  • The game does not change and neither does human nature.
  • I trade on my own information and follow my own methods.
  • He was utterly fearless but never reckless.  He could, and did, turn on a twinkling if he found he was wrong. 
  • The speculator’s deadly enemies are: Ignorance, greed, fear and hope.  All the statue books in the world and all the rule books on all the Exchanges of the earth cannot eliminate these from the human animal
  • I sometimes think that speculation must be an unnatural sort of business, because I find that the average speculator has arrayed against his own nature.  The weaknesses that all men are prone to are fatal to success in speculation – usually those very weaknesses that make him likable to his fellows or that he himself particularly guards against in those other ventures of his where they are not nearly so dangerous as when he is trading in commodities or stocks. 
  • The public ought always to keep in mind the elementals of stock trading.  When a stock is going up no elaborate explanation is needed as to why it is going up.  It takes continuous buying to make a stock keep going up.  As long as it does so, with only small and natural reactions from time to time, it is a pretty safe proposition to trail with it. 
  • But if after a long steady rise a stock turns and gradually begins to go down, with only occasionally small rallies, it is obvious that the line of least resistance has changed from upward to downward.  Such being the case why should anyone ask for explanations? 

Who owns US debt?

19 Tuesday Sep 2017

Posted by in Debt, Questions

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…and how it is distributed

Source: Z1 Flow of Funds, US Federal Reserve

There was $41.3Tn of US debt in 2016 compared to $26.8Tn in 2006 and $12.4Tn in 1996.

Instruments

In terms of instruments, in 2016 total US debt was split as follows: 38.7% was in US Treasuries (UST), 29.3% was in US Corporates (USC), 20.6% was in Government Sponsored Agencies (GSA), 9.3% was in Municipal Bonds (Munis) and 2.6% was in Open Market Paper (OMP)

Source: Z1 Flow of Funds, US Federal Reserve

US Treasuries issuance as a % of total reached its all-time low in 2008 at 20%; the high was 1945 at 86%. There was a drastic reduction is US Treasuries issuance in the 1990s as Clinton’s administration decided to eliminate the US budget deficit. US Treasuries issuance picked up significantly after the 2008 financial crisis and almost doubled as a % of total by 2016.

Source: Z1 Flow of Funds, US Federal Reserve

US corporate issuance, on the hand reached an all-time high in 2007 at 36%; the all-time low was 1945 at 9%. Between 1999 and 2010 there were more US corporates bonds issued than US Treasuries.

Source: Z1 Flow of Funds, US Federal Reserve

Sectors

In terms of sectors, the largest owner of US debt is the US financial domestic sector at almost 60% of total, followed by the Rest of the World (RoW) at 26%, and the US nonfinancial domestic sector at 14%. Both domestic sectors have declined at the expense of the foreign sector as globalization spread after the mid-1990s.

Source: Z1 Flow of Funds, US Federal Reserve

The biggest holder of US debt in 2016 were indeed foreigners, followed by mutual funds, banks and households. While foreigners’ holdings are close to an all-time high, both banks’ and households’ holdings of US debt are at an all-time low.

Between 2008 and 2016, Fed’s holdings increased by almost x10 (1.6% to 10.2%). The rest of the government’s holdings however halved from 9% to 4.5%. Households and banks both reduced their holdings while foreigners increased them.

Source: Z1 Flow of Funds, US Federal Reserve

Who owns US equities?

18 Monday Sep 2017

Posted by in Equity, Questions

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Source: US Z1 Flow of Funds, Federal Reserve

  • The ownership of US equities has changed significantly since WW2. In 1945, US households owned 95% of all US equities directly. By 2016 that figure had gone down to just 40%. However, households are still the largest owners of US equities direct.
  • Between 1945 and 1985, households switched from directly owning some of their equities to owning equities through pension funds. While in 1945, pension funds had pretty much 0% holding of equities, by 1985 that number had gone up to 27%. Thereafter, pension fund holdings of equities has declined to 15%. In 2016, pension funds are only the 4th largest owner of US equities.
  • After the mid 1980s, with the financialization of the US economy in full bloom, households started investing in mutual funds and closed end funds, and later on ETFs. Mutual funds/ETF holdings of equities rose from just 6% in 1985 to 29% now, and they form the second largest holder of US equities. The share of ETFs rose especially rapidly after 2000.
  • Foreigners’ holdings of US equities also substantially increased after the early 2000s with the process of globalization taking speed and especially so after China entered WTO. As a % of total, foreign ownership of US equities doubled from 7.5% in 1999 to 15% now. Even though foreigners have been net sellers of US equities in the last couple of years, they still represent the 3rd largest holder.
  • The US government has been a holder of US equities since 1996 mostly through state and local governments. In 2008 the federal government acquired some equities as part of the bailout program after the 2008 financial crisis. The Fed also bought equities in 2009 and 2010. Both the federal government and the Fed have been selling equities since then.
  • Banks and insurance companies are the other holders of US equities but their holdings are either small and steady (banks at around 1%) or small and declining (insurance companies’ holdings have declined from 6% in the early 1980s to 2% now).
  • The chart below shows how US equity ownership as a % of total has changed between 2008 and 2016.

Source: US Z1 Flow of Funds, Federal Reserve

 

Frederick Soddy: The Role of Money

15 Friday Sep 2017

Posted by in Monetary Policy, Quotes

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“Money now is the NOTHING you get for SOMETHING before you can get ANYTHING.”

  • This book attempts to clear up the mystery of money in its social aspect. With the monetary system in the whole world in chaos, this mystery has never been so carefully fostered as it is today. And this is all the more curious in as much as there is not the slightest reason for this mystery. This book will show what money now is, what it does, and what it should do. From this will emerge the recognition of what has always been the role of money. The standpoint from which most books on money are written has been reversed. In this book the subject is not treated from the point of view of the bankers as those are called who create by far the greater proportion of money but from that of the PUBLIC, who at present have to give up valuable goods and services to the bankers in return for the money that they have so cleverly created and create. This, surely, is what the public really wants to know about money.
  • In this book the mode of approach and the philosophy of money is expounded in the light of a group of new doctrines, to which the name ergosophy is collectively given, which regard economics, sociology, and history with the eye of the engineer rather than with that of the humanist.
  • To this day we are in the grip of a mercantile system which fritters away in distribution most of the advantage gained in lightening the labour of producing wealth.
  • Money now is the NOTHING you get for SOMETHING before you can get ANYTHING. As a matter of fact, this definition not only answers comprehensively what money now is but answers perfectly satisfactory all that money has always been, whether it has been coin or paper or any other form. From the point of view of the owner or possessor of it, money is the credit he has established in his favour with the community in which it passes current or is “legal tender”, by having given up in the past valuable goods and services for nothing, so as to obtain at his own convenience, in the future, equivalent value in turn for nothing. It is merely an ingenious device to secure payment in advance, and in a monetary civilization the owners of money are those who have paid in advance for definite market values if buyable goods and services, without as yet having received them.
  • Money, of course, is an entirely peculiar form of credit-debt relation from which no one can escape. Its exchange value depends, in fact, simply on the amount of wealth people voluntarily prefer to go without rather than possess.
  • The essential feature of money is that it is given in exchange of a wealth that currently does not exist, otherwise it would have been bartered. So, money is a legal claim to wealth over and above the wealth in existence. The owners of money possess claims to what they have given up, but what they have given up does not actually exist. Thus, the constant need to produce more and more goods. That is why money is virtual wealth.
  • If we examine the history of progress, the direction it has taken appears so often a matter of intuition and conviction, rather than to depend on anything that at the time would have been accepted as convincing or logical proof. One, certainly, of these signs is how what appears nothing so much as a jig-saw puzzle of disconnected events and conundrums suddenly seems to fit together into a picture, to be lost again in a haze of uncertainty, but always returning, each time a little more orderly and definite.
  • [N]ot one of the maladies afflicting the relations of men to-day are due to any real physical insufficiency, such as characterized the earlier epochs of history. They are due to the exact opposite,” over-production,”” glut,” competition for markets, and the like, which renders the continued existence of poverty and destitution a physical absurdity. Where Mr. Baldwin asked “What is the use of being able to make goods if you cannot sell them? ” the new economist would say at once ” Why don’t we sell them? What is money for? ” and so cut at once the Gordian knot of the whole tangle.
  • In brief, we live in a scientific age, the purpose of which is frustrated by the survival of beliefs in money, as the practical mechanism of distribution, which are the exact opposite of those which have made that age possible. The symptoms and repercussions are of infinite obscurity and complexity, but the remedy is neither obscure nor complex. It is as devastatingly simple and effective as correcting an error of arithmetic.

Source: “The Role of Money: What It Should Be Contrasted With What It Has Become”, 1934