(Week 8 - Tuesday, Sept. 16)
During the recent Bear-Stearns (BS) meltdown, a stock trader friend told me about the billions of dollars that had supposedly been lost, and asked incredulously, "Where did all that money go???" The answer I gave him was "It didn't go anywhere. It wasn't money. It was the air in a speculative bubble." Let me explain.
The morning of the BS crash its stock was trading for $60 (before it fell to two dollars later in the day). This represented a supposed "net worth" for each share then of $60. The next question is "Where was this $60?" The simple answer is that it was an abstract number that was calculated from an anticipated "price-earnings ratio" (i.e. the ratio between the price an "investor" pays for a stock and the amount of money he expects to "earn" from holding it), much as the "value" of bonds, bundled mortgages, and other investment vehicles are reckoned respectively from their "discount rate", "interest rate" or "rate of return".
The concepts these financial expressions refer to are not money. They are only promises (or anticipations in the case of stocks) to pay a "return on investment" at some point in the future. The "value" of stocks expressed in dollars is a theoretical number based primarily on calculations by traders of dividends expected to be paid by the stock, and a subjective estimation of the "risk" that such proceeds might not be realized.
Stocks may have the illusion of being money because, while there is still life in the stock-market game, one can redeem them for cash. This is to say that the owner of a given stock may assume that there is someone out there who will be willing to bet his own cash-in-hand against the prospects that a given stock will pay dividends at a rate that is at least as high as what other traders in the current market expect, and/or there will be other "investors" coming along that will anticipate an equivalent or higher dividend in the future, and thus be willing to pay even more for the stock, thereby allowing the current "investor" to "cash in" (sell his stock) at a profit.
Within a market where participants imagine that they can expect a "10% return on investment" (given the range of financial opportunities available where the "investor" could put his money), for a share stock of in BS to be "worth" $60, there must exist momentarily in the trading culture an anticipation that it will be paying out $6 at the end of its fiscal year. This is affected by many factors, but in general anticipated dividend and perceived risk govern what price traders are willing to pay. Even the most optimistic "investor" realizes that prices of stocks cannot increase exponentially forever, but they are betting that they can buy into the market, and then sell their holdings for a "profit" before the speculative psychology that drives prices up in market goes bust. When it does pop the expectations reverse, and there ensues a stampede to "cash in" one's stocks, such as the one the market experienced yesterday.
I anticipate that there will be cries in the media about how many billions of dollars are being "lost" through this latest market contraction, but this would not be an accurate characterization of what is transpiring. In previous columns we have already seen how virtually every dollar in circulation is created and issued through the process of someone going into a bank and "borrowing" money which the banker creates on the spot with the "writing of a check." If tomorrow's newspaper headlines try to tell us that 'billions of dollars have been lost to the economy' since the morning before, we should ask ourselves, "Does that mean that millions of people were suddenly possessed to walked into banks yesterday, where they took cash out of their pockets or funds out of their accounts, and paid down the principal balances on their loans, whereby the banker was obliged to extinguish (mark "paid") this money, thereby wiping it off of his books, and leaving the nation with billions of dollars less in circulating medium?"
Common sense would tell us that nothing of the sort happened. It follows, then, that there are essentially the same number of dollars in circulation as there were twenty-four hours before. The only change in the money supply will be the net differential between the quantity of dollars "borrowed from" vs. "paid back to" the banking system, as is the case on any given day. What has really happened is that "billions of dollars" worth of speculative air has been let out of the bubble of (unrealistic) expectations that the actual dollars in circulation are expected to support.
Notwithstanding, as we arise to this new day, the papers and morning shows will no doubt be filled with hysteria about how the financial world is about to come undone. A few minutes ago I turned on the radio just in time to hear a financial "analyst" warn that we may be on the verge of another "depression." Such alarming talk carries with it very real danger if it is not carefully considered in that it can become self-fulfilling prophecy all too easily.
We the people have a choice. We can either believe the catastrophic hype we are being bombarded with, or we can look around and see that, as ever, the sun beams down, the rains fall, the plants grow, the infrastructure persists, and the hands, hearts and minds remain willing and able to do the work. The whole "financial crisis" that the world is experiencing right now is not some objective reality that the universe is laying upon us. It is, rather, an illusion that we as a human race have created, believed in, and sacrificed our very life substance to.
This may seem to many to be an extreme, even bizarre, assertion, but it is something that we would do well to contemplate seriously now, as an antidote to being overcome by fears about money. I do not hereby mean to dismiss the very real suffering that people experience under the boot of the monetary system (I suffer with it also), but we can be free of it if we as a society can wake up what is happening. That is what the discourse about money that is being put forth in these columns is intended to be all about.
The complete set of columns from this series is posted at the following websites: