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Saturday, November 13, 2010

Would Henry I Have Castrated Goldman Sachs?

Even primitive medieval economies understood the importance of guaranteeing the integrity of currency;  Henry I of England imposed the penalty on castration on counterfeiters.

Bad money drives out the good” – Gresham’s Law

Gresham’s Law is the formal name economists give the common sense notion that counterfeiting is a bad thing and should not be encouraged.   The upshot is that the phony money undermines your confidence in all the money in circulation, even if the bogus bucks are a relatively small portion of the total ‘dollars’ in circulation. 

You need to KNOW for a fact just how much real, tangible value you can expect to receive in exchange for those ‘dollars’, and that’s entirely independent of any action on your part.  At least in the short term that’s entirely dependent on how your fellow market participants perceive the value of that currency.  Even if you accept some shiny beads as payment in a real estate deal, you shouldn’t really be shocked when you’re evicted for offering the same as a rental payment to your new landlord the following month.

Not exactly a super-complimicated egghead theory fresh out of some high powered thinktank.  This is, and has been since time immemorial, just basic, fundamental stuff. Christ, Gresham could see it and he grew up before the invention of toilet paper.

So why can’t Paul Ryan (R-WI) and the other Republican’ts see it?  Why do they seem so oblivious to the Wall Street counterfeiting operation that's hamstringing the economy?

Two Simple Ideas
To truly understand the Ryan-enabled counterfeiting scheme, you have first to understand a little more economic theory.  Just two simple concepts should make this all clear.  Read these carefully, because they'll help you get a whole lot more out of the rest of this piece.

1.  Money isn't just the green stuff you use to pay for your morning coffee.  It's also the stuff in your checking account, your savings account, and money market accounts.  That's basically what egghead economists call "M2".  And "M3", the broadest definition of money even includes some larger deposit and money market fund balances and other longer-term instruments, the valuation of which depend crucially on the creditworthiness of the instituion at which they're held.  The idea is that, in theory, the value of these items is so un-controversial that they are all expected by be accepted on an equal basis with the old fashioned coinage. 

Before you go on to the rest of this article, be sure that you really understand the potential gap between appearance and reality for these two:  M2 is, if not actually printed by the Treasury Department is at least guaranteed by the FDIC up to $250,000; with M3 you're often taking your chances on the strength of some corporation's balance sheet.  Good luck with option #B, there.

2.  Money doesn't do you any good if you don't use it at some point.  An old workmate of mine used to have a colorful turn of phrase to describe the possession of something that is ostensibly praiseworthy but practically useless:  "That's like tits on a boar hog."  Economists have a more formal way to discuss the extent to which nominal money may or may not in actuality be like "tits on a boar hog":  The Velocity of MoneyThe Velocity of Money is a measure of just how often a particular dollar gets spent during the year, and the more often the better. 

As a radically simplified illustrative example, let's imagine a small, isolated island where the only recognized medium of exchange is the conch shell.  You can't really print them at will, so at least in the short term there are a finite number of conch shells in circulation.  While that's great from the point of view that there's next to zero possibility of counterfeiting them, the downside is that only 1 person can own any specific conch shell at any given point--implying some real severe limitations on our island economy's ability to expand.  You and I can't both have the conch to spend; either you spend it on a new bamboo cross country bicycle or I spend it on a Starbuck's coconut latte.  Can't have both.

Well, actually, under certain conditions, we CAN have both--just not at precisely the same time.  See, if the material resources and skills of the islanders are broad enough, it's just possible that I am an expert maker of bamboo cross country bicycles and that you are a top notch coconut cafe barrista.  I can accept the conch shell from you in exchange for the bike, and later you can accept the shell back in exchange for the coffee.  We have exchanged this one, single conch shell twice within the day, both doubling the Velocity of Money for our currency and increasing our Gross Domestic Product ("GDP")by one bicycle and one coffee.

Economists have recognized this mutually beneficial relationship between GDP and the Velocity of money that they've come up with a simple equation to describe it:

GDP / Money Supply=The Velocity of Money

So one decent thumbnail statistic you can use to monitor the health of the economy is the Velocity of Money as measured by M2.  The higher the better, because it means that money is going to practical use.  And it correlates fairly well with employmnet--the faster M2 moves, the lower the unemployment level.  For the period that statistics are available, the correlation is about 67% between M2-fueled Velocity and employment, and even greater, 77%, between the change in M2-fueled Velocity and employment.  See details here.

On the other hand, M3 is cearly the bad guy; growth in M3 actually INcreases UNemployment.  See details  here.

And, as if you hadn't already noticed the how the Dow Jones is topping 11,000 once again while unemployment remains flat, here is absolute proof that the Reaganauts' "magic of the markets" actually destroys the economy:  Increases in the Dow strongly correlate with increase in job-icidal M3.  See details here.

Okay, got all that?  We want our money supply to be good; more M2 less M3.  Because the healthier our money supply, the faster it turns, and the lower unemployment is.  Policies that surrender the public's regulatory function over financial markets create more bad M3.  Focus on that, 'cause you're going to need to in order to keep yourself from being fleeced by Paul Ryan's buddies at Goldman Sachs.*

Gresham's Law Redux
Do you see now how Wall Street's loosey-goosey, under-regulated Wild West approach to securities marketing is tantamount to counterfeiting?  By getting the likes of Paul Ryan to stonewall against any and all attempts to regulate financial markets, that leaves walking shitstains like Goldman's Fabrice Tourre to get real hardworking Americans to throw billions and trillions of the good green stuff at him in exchange for bogus "securities" that are supposed to be invested for their retirements.  By preventing the American government from effectively policing its own monetary system, Paul Ryan is enabling Wall Street banksters' efforts to flood the country with bogus M3.

Yeah, maybe the "Fabulous Fab" will get away with a slap on the wrist, a fine to be paid out of some executive malpractice insurance fund.  But even if he does get convicted and does real time**, it'll all be too late.  It couldn't stop him from forging hundreds of millions of dollars in fraudulent M3--and decisively undermining everyone else's confidence in the U.S. monetary system.  Not that Fab's the only one.  Far from it.  Any account of the highlights (or lowlights) of the bankster perp walk, in my opinion, would not be complete without mentioning:

Magnetar:  This Chicago-based financial firm bundled tens of thousands of bad mortgages into M3 securities and fraudulently market them to the public--all the while making a bet with JP Morgan Chase* that the mortgages would default. 

AIG:  Ryan eventually voted (pleaded is more like the word) for the $80+ billion handout to these fumblenuts who bet more on the ponies than they had in the bank in honest, god-fearing M2.

There you have it.  Pretty simple.  Ryan's utter failure to address the real villains in this economic story, the under-regulared Finance and Real Estate sectors, has resulted in a perfect illustration of Gresham's Law.  Counterfeit M3 money is contaminating the economy, leading to a panicked sclerosis and seizing up of the nation's financial arteries, making good M2 money unavailable for down-to-earth productive small businesses and driving up unemployment. 

Far from doing anything to actually help the situation, Ryan's actually trying to shove yet MORE money into the corporate sphere by defunding America's popularly-elected government through big corporate tax breaks.  See my inaugural post on that very topic.

So my guess is that yes, Henry I would have castrated the Wall Street banksters and their Right Wing enablers.

A Call to Action
What can you do?  A lot, as it turns out.  Call and write your representatives and senators immediately and often telling them that Ryan's "Roadmap to Ruin" is a horrible mistake and a distraction from the real issue--punishing counterfeiters on Wall Street and introducing for-real regulation.  Don't take any guff.  You know that you know what you’re talking about.  If you have to, send them a link to this blogpost to clear it up if you don't think they're quite smart enough to get it without drawing a picture. 

*During this last election cycle, Paulie boy was a big favorite of the banksters.  His clients included not only Goldman, but CITI, Bank of America, JP Morgan and a host of other F.I.R.E.  (i.e., "Finance, Insurance and Real Estate sector) companies and trade groups.  In fact, he got about $246,000 or 25% of his total PAC money from these guys.  See details here.  Who knows how much else he got INdirectly through Orwellian-ly named PACs or individual contributions?

**Say, can a stay in a country club prison be considered "real time"?  If the worst punishment the state inflicts on criminals here is to limit furloughs to less than one week, stop prostitutes from trolling the grounds and limiting the amount of money perps can spend in the commissary, how bad can it really be?

[December 2, 2010:  See item #1 in Addenda, Updates, Revisions here regarding the updated calculation of M3]

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