Wednesday, March 25, 2015

Rules of Uncharted Territory

This morning I was reminded of the early onset of the current debt crisis and the GAAP rule changes which allowed the TBTF's to mark their "default-ables" to fantasy. We have today another iteration of this reminder that when in uncharted territory, you make the rules up as you go along. In other words, there are no rules.

The reminder bears repeating, as it establishes a baseline fact: in an international monetary and financial system (IMFS) where debt is held as a global wealth reserve asset, we have been steering the global economy into uncharted territory for some time.

Globalism itself is relatively new, and we have never, in all the history of civilization seen the debt of a single nation, denominated by the currency of that nation, held so widely, so deeply and so "virtually" (very important) as we have seen over this past 40 years or so.

It is also important to grasp that this system, as it exists today, represents a sand grain atop a vast coastline of beach representing civilized commerce, in terms of its continuous evolution. Less than a single lifetime vs. more than 6000 years of regional economic trade and related monetary and financial activity on planet earth.

So the point of these two important perspectives? I hate analogies when they aren't valid, but ... you be the judge ...

How confident can we really be that a system of any type which has no rules or boundaries is sustainable in the real world? An automobile for example, is a conveyance system. One of the important rules for it's effective operation is that it have "4 optimally inflated tires". If one of the tires experiences a flat, and we choose not to fix it, we CAN keep driving the car, but it's not a very good idea. If we can't fix the flat (or choose not to) and change the rules to "3 optimally inflated tires" we're in for a bumpy ride and other things are going to be affected in a chain reaction, but we'll still keep moving ... for a while ... with our "new" rule in place.

But a car is a "real world" physical system with mass and dimension that traverses time and space to get you from point A to point B within a certain span of time. Thoughts of value are just "expectations, opinions and sentiment" and do not have to do the heavy lifting of the real world. We can represent them with little pieces of paper, saying, "I will trade you this little piece of paper with Ben Franklin's face on it for this nice dinner for two and it will cover our food and drinks, the service and a nice tip." And many fine restaurants will gladly accept this proposition, and it is well and good that they do for now.

But we must ask ourselves about the "realness" of our world at some point in time. If we want to get from point A to point B without all the fuss of a car, we can just imagine that we're driving, we can pretend we have arrived, and we can even purport to have enjoyed all the benefits of actually making that trip, but I don't know how satisfying or sustainable that type of fantasy would be (perhaps Lord Keynes could fill us in there?) since the real world eventually imposes itself upon real people. It certainly has imposed itself upon those little pieces of paper in Weimar, Zimbabwe and about 52 other nations this century.

And so that is the way I view the current IMFS, but with one incredibly substantial difference. Our fantasy system is used to value the real world, world-wide, and we accept those valuations. Those whimsical pieces of paper, in large amounts, buy castles and Ferraris in the real world. A certain privileged few use the advantages of the fantasy to amass real world wealth without hardly working at all, while the great unwashed masses furiously try to keep pace on 6 billion treadmills just to get their share of the crumbs that fall to the floor. Those who amass great wealth from the system will do all they can to perpetuate the system, and those on the treadmill, for the most part, don't really have a clue - they are too busy just trying to deal with the real world.

Yes, we are in the uncharted territory of something that's been done a thousand times before, always failing, always submitting to the physical world in the end, but never having grown so massively global, so universally entrenched, nor so long sustained through nothing more than the collective thoughts of value, confidence, and support among the various economies of the world.

Can the experience of a lifetime without rules or limits trump the experience of 6000 years of reality?

I leave it for you to decide, and for time to reveal.

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