Oct. 23, 2008

We're back

The long hiatus from blogging was due to more than my usual procrastination. I have been computer-less for the last two months after an unfortunate incident involving a cup of coffee and an inexcusable lapse of mindfulness. Sorry about that.

Brother can you spare $700 billion?

The financial markets reflect the cumulative result of millions of individual decisions. Regarding decisions, The Buddha said that they should never be made on the basis of greed, anger, fear or delusion. It is obvious how greed and fear have poisoned the well, but I would like to focus on something a little deeper, how delusion has worked in creating the present financial collapse.

Specifically, the whole scenario demonstrates the truly amazing power of mental formations in human history. Money itself is an abstraction. At some point in the distant past people agreed to believe that this shiny rock was worth two cows, even though the real, utilitarian value of a cow is considerably more than the real, utilitarian value of a shiny rock. Paper money is an even more refined level of abstraction. This piece of paper with the queen's face, or a spooky eye-in-the-pyramid design or whatever, is said to represent so many shiny rocks, which are worth so many cows. Eventually, they dropped the bit about the shiny rocks.

Having gone off the "gold standard", such currency is sometimes called "fiat money," meaning that the value is purely by government fiat. This is not really accurate. A dollar bill doesn't have value because the government or the central bank says so. It has value because the people believe it does. It is faith-based currency. It is not surprising that paper money was first used in China, a civilization deeply affected by Buddhism and Taoism, and used to philosophical subtlety.

Consider what is happening here; material goods and hours of labour are freely traded for an agreed convention. Something on the material plane of reality is being surrendered for something on the purely abstract plane of mental formation, which is void and without substance. Maybe that eye-in-the-pyramid is telling us something.

Fast forward to the dawn of modern capitalism in post-reformation Europe. The "real economy" of goods and services was becoming complicated, involving more, and more kinds of goods, some of which were being shipped literally across the planet. To facilitate all this action on the plane of material reality, various new kinds of mental abstraction were invented, usually represented by fancy bits of paper. Insurance, promissory notes, bonds and company stocks all came into being, each representing a contract between parties to fulfill certain obligations.

The stock market, in it's original manifestation was not very far removed from material reality. If you bought a ten percent share in the East India Company it represented something close to ten percent of the ships and goods of the Company and entitled you to ten percent of the profits made. The value of the stock would, in theory, go up only if the Company acquired more ships and trade goods.

Of course mental formations, although void of substance, have a powerful energy when millions agree to believe in them. From the earliest days of capitalism the phenomena of "speculative bubbles" made themselves felt. As company shares traded hands, the value become divorced from the underlying reality it was supposed to represent. The value of a share was no longer based on how many ships the company had, it was now based on what the buyer and seller mutually believed it to be. If the buyer believed he could later resell it for more to somebody else, he didn't care about the underlying value.

This is sometimes called the "Greater Fool Principle." If the value of a company share in terms of the real goods it represents is, say one hundred dollars, a person would be a fool to pay one hundred and fifty unless there is a greater fool out there to whom he can sell it for two hundred. The value of the share becomes a pure abstraction. You might as well be trading tulip bulbs. Or "credit-default swaps."

The problem, of course, is that inevitably you run out of fools. Then the whole bubble bursts with frightening rapidity. The whole thing would be comical if the abstract world of imaginary numbers on bits of paper or computer disks didn't rebound back on the real world. Many 17th century Dutch burghers had sold real assets like land or ships to "invest" in tulip bulbs. Many, many people today have put the earnings of their labour into the stock market or other financial instruments that were pure bubble. Real goods thrown into an imaginary realm.

Now, after several centuries of elaboration, we are into a fantastic realm of abstractions of abstractions. Fractional reserve banking creates money which is based on nothing at all, not even bits of paper. And understanding the levels of abstraction involved in derivatives is a special science. The "value" of the derivatives out there is said to be ten or fifteen times the combined GDP of the whole planet. Tulip bulbs.

The imaginary nature of the financial world is very clearly illustrated when you hear, after a market downturn, that so many billion or trillion dollars of wealth have disappeared. That "wealth" was never there in the first place. What has disappeared is the agreed upon mass delusion that such wealth existed.

It will be interesting to see what happens next. So far the world leaders seem to be reacting out of panic and fear. Huge sums of borrowed money are being pumped into the bubble in a mad attempt to keep it inflated. The Stadtholder is buying all the tulip bulbs with money borrowed from Venice.
The state, really the community as a whole, has now become the greatest fool, the fool of last resort. The question is, what effect will all this movement of imaginary numbers have on the real world of work, clothes, food and housing? Real goods will probably become scarcer for most people either through higher taxes to repay the stupendous debt load or through hyper-inflation of the currency to eliminate the debt that way. There will be pain, material existence will become bleaker and harder and all because of the shifting fantasies of purely imaginary conventions.

In the various schemes to restart the big ponzi scheme, you keep hearing the phrase, "restore investor confidence." That gives the game away; the goal right now is to get people believing once again in the magic money tree. Eventually, we will have to face the need to get the real economy of goods and services working. It may have to wait until the bubble economy collapses back to it's natural state. Then there may be a general realization that you can't get something for nothing, no matter how inflated the imaginary numbers are.

If the collapse is as complete as it looks like being at the moment, there will inevitably be a restructuring of the world economy. What shape will it take? What shape should it take? I don't have the slightest idea. I've long ago stopped believing in political utopias; this is samsara, after all, it's supposed to be broken.

It might be worthwhile, though, to consider some basic values. Capitalism, at least before it switched from managing production to flim-flam schemes, worked pretty good in some respects. It did keep a very complex economy moving on a global scale, and that is no mean feat. However, it was not so good at other things, very important things. It has no built-in mechanism to conserve the natural environment, and that is starting to become critical. It was never very good at distributing goods to those who needed them most, and in recent decades the gap between the richest and the poorest has been growing.

When thinking about an economic order, we should remember what an economy is for; human comfort and health primarily and the satisfaction of lawful sense pleasures secondarily. The first priority should be to make sure that every person gets the sufficiency of a decent life, i.e. the four requisites of food, shelter, clothing and medicine. After that, the surplus should be rewarded to those who are most energetic and creative in producing wealth for the general community, certainly not to those who are most clever at manipulating mental abstractions like derivatives and futures. In other words, reward production and creation, not speculation.

In any case, we are in for some changes, but that's always been the case.


What's all this about tulip bulbs then?
Image is Hogarth's "South Sea Bubble." Full size version.