Friday, April 8, 2011

QB or not QB

I've been reading these guys' letters for almost 3 years now, ever since they came through our office trying to raise money for their fund.  Eventually, the Big Picture and a few of the other widely followed contrarians picked them up (dare I say syndicated them?).  I think they have many good points, and they have definitely helped me to develop my own thinking about the practical realties of monetary policy and monetary regimes.  Also, they give good (if long) letter.

Unfortunately, to borrow a phrase from somewhere I cannot remember, they manage their persona better than their portfolio; if they're so smart, why aren't they rich?  Last time I checked, these boys weren't even keeping up with the S&P500, let alone the price of gold, despite how much they yammer on about the bankruptcy of the modern monetary system and praise that barbaric yellow relic, and even despite the incredible run it has had over the last 2 years. 

I see two reasons why these guys are better off writing incendiary columns than managing money:
  1. They have religion about their thesis.  Confident contrarianism is one thing, and probably a necessary thing for producing excellent returns.  Courage of your convictions is another thing, and is usually the kiss of fucking death.
  2. They are wrong.  They simply haven't thought through this problem all the way, despite discussion of "war-gaming" their central thesis.  So, credit them for getting to second base when the vast majority of the world is still on first, but don't get too convinced that they have seen how the whole game develops.  It's long and complicated and contingent and they have stopped in the middle -- they outline one possible monetary future and call it inevitable.  It reminds me of Nozick's pithy phrase regarding a priori truths in philosophy, "Lack of invention is the mother of necessity".
Exasperation aside, let me address point 2 in a more substantive way.

US dollar are debt, technically (Federal Reserve Notes) and in practice.  Their ongoing value is supported by a system of government oversight that ultimately relies upon convincing private counterparties to use them in transactions.  As all modern global currencies are directly or indirectly benchmarked to the US dollar, they too are unreserved debt, literally and functionally owed by sponsoring sovereign governments and backed by the full faith and credit of their taxpayers.
The fundamental question all global commercial counterparties must answer upon each transaction is, "will my currency maintain its purchasing power until the next time I need it?"  If a quorum of economic counterparties begins to answer negatively, the currency in question will soon lose sponsorship and fail.

This may sound insightful to small children taking their first steps into the wide world of political economy.  Wow!  Money, like reality, is nothing but a collective hunch!  Let's throw off our clothes and run free through the fields of hard asset backed currency and pick daisies!  There's nothing to fear but everyone else fearing fear itself!  Revolution!  Mister T pities the fool who doesn't buy gold.

Good try, but this is NOT all there is to money, any more than all there is to the government in general is our collective decision to obey it.  Yes, sure, if we all woke up tomorrow and decided that cigarettes or leaves are money, then they would be.  And if we decided to have a revolution and throw off government oppression worldwide, we could.  While an valuable thought experiment, this is a lot easier said than done of course.

In the case of money, what is difficult is the fact that we cannot collectively decide what constitutes money independent from collective deciding what constitutes acceptable government.  You cannot ignore that money was invented by governments, for governments, in order to collect government taxes.  You cannot talk about money without talking about taxes and politics.  The bedrock reason we all primarily use government backed currency is because that is the only thing they accept as tax payments, and if you don't pay your taxes, guys with guns come and put you in a very unpleasant little cement floored cage opposite a shackled man in an orange jumpsuit.  This fact is not incidental to money.  It is the fucking DEFINITION of money.  It is the crystal out of which the money network condenses, as it were.  To write about what money supposedly is without mentioning taxes is not an oversight.  It is a fundamental error.  They are not just early.  They are wrong.

In short, money is inherently political, like everything else.  The change of monetary regimes is therefore also inherently political.  Economics and politics intersect, no doubt, but one does not determine the other.  If you want to predict the trajectory of either, you have to understand both. But if you really want to focus on something, I still think that politics precedes even being.

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