September 2012 - Richard 'Jerry' Haworth: Is money wealth?

Wikipedia tells us the following about John Law, the “father of paper money”:

“John Law (baptised 21 April 1671 – 21 March 1729) was a Scottish economist who believed that money was only a means of exchange that did not constitute wealth in itself and that national wealth depended on trade.”

Say what! This is the same man who advocated for the following:

“Since, following the devastating War of the Spanish Succession, France's economy was stagnant and her national debt was crippling, Law proposed to stimulate industry by replacing gold with paper credit and then increasing the supply of credit, and to reduce the national debt by replacing it with shares in economic ventures. Though they failed, his theories ironically live on 300 years later and captured many key conceptual points which are very much a part of modern monetary theorizing".

So did he really believe money is wealth?  He said he did not but instituted policies which said he did!

A question with important implications

If money is wealth then central banks are doing a great job of creating money/wealth and we should encourage them to do more. If it is NOT then they are charlatans, creating an illusion of economic well-being by distorting the price/risk/value discovery process by creating money and credit. All the while, knowing the general population will buy it as they suffer irrational biases which, against all logic, cause them to wish-fulfil a pleasant result and avoid the pain of reality.

We believe the latter. Money is not wealth. We are being duped.

If money was or is wealth, why even irritate the populace with that silly notion of taxes? Why not just create enough money to sustain the government and all its agencies every year?  Ditto counties and states?

Is John Law believed it wasn’t, then why did he create an elaborate scheme in France to dupe all its citizens that it was? He must have known he was effectively milking, on behalf of Louis XIV, these irrational biases, these childish beliefs, wishes and hopes that money is wealth.

This is the key concept/delusion that underpinned MOST of our economic hopes for the future. It has been in existence since 1987 when Alan Greenspan first fired up the printing press to get out of a recession so no wonder we cannot see it clearly, it has become part of our landscape. But the delusion has become more fragile post-2008 as the stakes have been ramped up as the unsustainable credit bubble popped and central banks were forced to go “all in“ and print an extraordinary amount of money to keep the financial economy from collapsing under massive deleveraging pressure.

The next important question: what is the end game?

If central banks were to stop printing money they would effectively acknowledge that money is not wealth and by implication they were duping their citizenry. We don’t believe that is imminent. More likely they will keep the economy just off-colour enough to warrant infinite money printing but not so ill that it snow-balls into the next 1929. Collateral values will eventually rise and inflation will cover all our past excesses.

The best laid plans of men and mice….

As a manager of funds that try to monetise volatility, these policies are not ideal as central banks artificially suppress volatility by their actions.  But the good news is that they create a pressure cooker effect where little or no volatility is seen until either prices rise precipitously and uncontrollably once deleveraging forces are overcome and central banks forget how to take their foot off the gas pedal OR the delusion is brought to light by some unforeseen consequence such as social unrest and prices fall in the same manner. We believe that going forward volatility events will have bigger and bigger consequences and higher payoffs.