Swedish King Charles X Gustav bears a little responsibility for the
sequester. He gets the nod this week for
his innovation derived from the Swede’s logistical nightmare of minting copper
coins at par value with silver and gold dalars (named after the Bohemian term “Tolar”
first minted in the early 16th century). When you’re trying to conquer Northern Europe and pay for a war, you don’t want your
ships hauling around a bunch of copper – even if you’ve got it in abundance –
so you circulate notes instead. And it’s
the circulation of notes – or more precisely the idea of circulation attached
to money – that was vital to the king’s aspirations and what invites him into
my observation today.
Inexplicably, the other source of inspiration for today’s observations come from
too: Per-Olaf Astrand (a Swede) and
Bengt Saltin (trained in Sweden).
These two gentlemen together with famous
Johannes Lindhard and Dr. August Krogh isolated the physiology of circulation
with a functional discipline unknown prior to their work. In turns out that living systems require gas
exchange – inbound oxygen and outbound carbon dioxide – to function. Lance Armstrong and other inspired Tour de
France cheaters notwithstanding, there are limits to this system’s function
beyond which more doesn’t do you a bit of good.
How does a conquest-animated 17th century Swedish king, a
group of Nordic physiologists and Lance Armstrong all come together? In a word: Currency.
Now let’s think about the mistake we make when we confuse terms and blend disparate meanings for convenience sake only to add ignorance to our collective system awareness. Currency is not Money. Money, properly functioning, is a temporary storage unit of value. It is an artifact that says that, for a defined period, trading parties agree that they will recognize an artifact that, though in and of itself likely worthless, is imbued with representational value that can be held or exchanged to discharge future obligations. Currency – literally from the English term curraunt describing something in circulation itself derived from the Latin currentia describing the bounded flow of a thing – only works in exchange. Whether it is the exercising muscle that can only metabolize 70mL/kg/min or the circulatable monetary supply (or M2: roughly $12 trillion when we stopped counting in the U.S. around 2011), there are upper limits in systems beyond which stockpiling actually does not lead to greater wealth but in fact leads to systemic failure.
Close inspection of the balance sheet of the Federal Reserve in the
highlights some of the challenges arising from a blurring of the lexicon of
money, currency, and assets. While the
utilitarian impulse (think Charles X) to issue a circulating currency that is
connected to copper and the expanding trade network built by war seems to work when
you control the flow of value within a limited geography (money across a trade
network), if you detach either the value base or the scope of exchange from
limits, flow ceases and stagnation happens. Take a look at the graph below and realize
that the Federal Reserve Open Market Committee has decided to continue “investing”
in U.S. Treasuries and Mortgage Securities to the tune of $85 billion each
month. This action evidences a systemic
When investors (and yes, I mean people like you with your retirement accounts, pensions, etc.) are advised to keep some money ‘safe’ in low-risk assets, the argument supporting this advice is that assets like U.S. Treasuries are ‘liquid’. In other words, if you needed to sell them, there would always be a buyer at or near par value. However, this notion of ‘safe liquidity’ is an illusion that was exterminated by the current fiscal policy. Injecting illusory money (backed by vast amounts of illiquid ‘assets’) for the inflated purchase of cheap debt actually harms the real asset value of these instruments and inflates the inventory of the same beyond what physiologists call T-Max. T-Max or transport maximum is the concentration of a substance beyond which exposure does not result in an increase transportation or utilization of the substance. In the body this means that you can breathe 100% oxygen but your blood simply cannot carry more than its saturation limit. In economics this means that the system can exchange a certain volume of assets after which more cannot be absorbed by or liquidated into the system.
Bill Gross, PIMCO’s notorious investment architect, reported that his fund decreased its holdings of mortgage assets – assets that should theoretically be cash-flow generating – in favor of more U.S. Treasuries. Bill understands the problem of liquidity around ‘risk free’ assets. If you’re PIMCO with nearly $2 trillion in assets, the volume of assets you hold actually presents its own market risk. If you ever had to sell them for redemptions, you’d actually dump more supply than the market could buy at par and so the volume of your ‘wealth’ would harm your value. He also knows that the Federal Reserve is not buying real estate and Treasuries because it wants to ‘invest’ but rather to inflate their balance sheet. When (not if) they start selling off assets, he knows that the pressure to sell will be coming not when they see maximum investment return opportunities but rather when they have to release the dam to discharge the gargantuan pool of assets they’ve acquired. And when that happens, the over-supply of secondary sales around these assets will devalue the assets he holds. Worse still, this could happen coincident with inflation which would accelerate the devaluation and present fiduciaries like PIMCO and real people – like you – with large amounts of worthless assets.
Behind this drama is the systemic failure to appreciate the difference between utilitarian wealth and hoarded wealth. Utilitarian wealth evokes the principle that greatest wealth happens at a saturation point where all needs, demands and aspirations can be sated without restriction. Uncoupled from a sense of interchange and interdependence, hoarded wealth creates the malignant illusion that perpetual more is persistently better. Regrettably, hoarded wealth is also sucked into the monochromatic world of ‘green’ where the only surrogate of stored value is that ubiquitous European / Nordic innovation known as the dollar, dalar, and tolar. Utilitarian wealth understands that certain values cannot be stored in, or denominated by, representational currency. Because at the core, utilitarian wealth understands that current is a function of conductivity and flow. Stymie either and you build up a static load that has to discharge somewhere. It’s nature and in the end, it won’t let you cheat.