Ok, we all know that anyone who says “this time it is different” is to be treated at best as misinformed, at worst as a fool. “They are the five most dangerous words in the English language” etc. etc. But, to repeat my question: “Are things always the same?” Mostly, yes. Modern housing bubbles are not unlike 17th century Holland’s Tulipmania, government debt crises have not changed all that much since Henry VIII reduced the gold in coinage, greed, profligacy, irresponsible plutocracies are always with us.

But in global finance there are some things happening that are genuinely different. Dangerously so. It is becoming a hall of mirrors, money referring to itself in an infinite regress. Little wonder that people are attracted to gold, because gold seems to be a tangible, solid measure of value, something we can rest on in an environment where everything seems relative. Yet this, too, is an illusion. The yellow metal only has value because it has a history of being deemed to have value. It is no more an objective measure of value than the pieces of coloured plastic, notes, that make up legal tender.

To explain what I mean, let’s start with a definition of what money is. It is rules. Rules about value and obligation. Those rules are usually based on legally enforced structures, although that need not be the case. In the case of cross border capital markets, the enforcement is informal because there is no supranational government to impose penalties. Disputes are resolved by a handful of law firms, the main penalty is to be prevented from participating for a period.

Now if money is rules, then what does it mean to “de-regulate financial markets” as was claimed in the 1990s? Can you de-regulate rules? Obviously not. So what happened? The place where rules were set shifted.

Instead of government for the most part making the rules, the traders started making the rules. The logic was, as Alan Greenspan argued, that because everyone was acting in their self interest then nothing could possibly go wrong. Pricing would be accurate, the less formal self organisation of the market would be superior to the formal oversight of governments (what would governments, which are always bad, know?) and everyone would win. Free lunches as far as the eye can see.

So the rules proliferated, especially after the advent of the Black and Scholes pricing of risk, a clever piece of maths based on what is probably  circular argument, but one that is sufficiently concealed to give traders the impression that they are handing off risk accurately. This led to the explosion of derivatives and securities markets, including such instruments as collateralised debt obligations, credit default swaps and endless hedging games (my personl favourite is a derivative on “volatility”).

Now the point about rules is that they are based on agreement, and their creation can be without any limit provided traders are prepared to agree, to trust each other enough to transact. They are not finite in the way that, say, gold is.  And so the rule making exploded. The global stock of derivatives is $US600 trillion, about twice the capital stock of the world (all the shares, property, equities, bonds and bank deposits). Far from deregulation making the rules of finance more more streamlined and more efficient — as if the efficiency of money could be measured anyway, given that it would mean measuring money with itself — the rule making expanded wildly. And we all know what happened when the trust that underlies those rules collapsed. The Global Financial Crisis. We are lucky to have a financial system left.

This era of meta-money, I submit, is different. It is “different this time”. Some versions of it have appeared on the margin before. Hedging has a long history, for instance. But meta-money has never been the centre of the action before. In the past it has always been, for want of a better phrase, “normal” money: bank debt, equities, bonds, property and so on.

The massive volume of meta money, the ever expanding hall of mirrors, now dominates and distorts more conventional forms of money. For instance, the $3.8 trillion that is transacted every day in the US dollar makes the annual budget deficit of over $1 trillion look like chump change. About 8 hours trading. There will not be a crisis in demand for US debt, causing an economic collapse, while there is such intense demand for US dollars in the foreign exchange markets.

What is happening instead is that the logics of “normal” money are being used by the meta traders as a game (a game mainly of signs, semiotics) to try to make profits out of their exploitation of the rules of meta money. If the US government looks like it will reduce its government debt, then traders can make a play in the foreign exchange markets that the US dollar will rise. So the US dollar rises. Not because an imbalance is being corrected, changing the dynamics of supply and demand, but because a signal has been sent that an imbalance has been corrected, giving the traders something they can exploit. The rules of normal money are being overridden by the rules of meta money.

That is the world we are now in. It is why such huge distortions are appearing in areas like quantitative easing, extremely low interest rates, an ailing cost of capital, the hankering after something solid in precious metals like gold and silver, equity markets whose pricing seems strange. Governments have given up oversight of the financial markets, handing it over to the traders. We must now suffer the consequences as the traders try to outdo each other in an infinite game of pass the parcel. Or, more accurately, taking out bets on who will pass the parcel to whom.

Eventually, I suspect, GFC version 2 will come along, and the rules will finally collapse. Governments will have to come in and re-set them. There will be a huge re-regulation backlash. But how is it that governments allowed it to get to this stage? What ever happened to governing?

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  1. Deus Forex Machina

    yep…i’m on board…the worst thing to happen in markets was the repeal of glass steagel in the US…i think you just charted the future

    the cme’s actions on silver was just the start of trying to reign in these rapacious “meta money” guys…

    excellent post SoN

  2. Excellent post SON….

    First order logics being applied to second order processes usually results in “Surprise” outcomes that were unlikely.

    And if the power of this meta-product is anything to go by, leverage (de) will remain the order of day no matter how hard we try to interpret the fundamentals..

  3. brilliant stuff SoN

    to me the defining point about regulations is that the rules are not even enforced when you are caught.

    look at the battalions of traders, firms, lawyers, ratings agencies etc etc etc who broke the rules during the GFC – where are they now?

    driving Maseratis.

    All stable robust systems need rules, agreed upon by all parties (that is the very definition of a free market – the free means “Freely agreed upon”, not free for all bedlam).

  4. Sandgroper Sceptic

    How did they let it happen? By pursuing short term fixes against long term ones. Kicking the can etc. Australia did the same, we avoided GFC1 through Rudd/Swan spending all the surplus and then piling on the debt and then China spending a pile of extra dough of investment they didn’t really need (driving up our exports of iron ore, coal and other materials). Look for our Government amongst others to do exactly the same to fix the next crisis. A sharp recession in 2008 would have cleared out a lot of our malinvestment and balance sheets would now be a lot healthier.

    The interesting thing is that in the absence of governments exchange still occurs and at some point societies turn to some medium to facilitate exchange. Money comes from the ground up.

  5. I also think this is an excellent post and bit of a window into the future. But whilst we may not believe that this time is different perhaps the solution could be.

    Regulation in the future may not focus on rules of what must be or not be done but provide a rules based infrastructure in which free and open markets can operate.

    After all that’s generally how modern society operates.

    But very good thoughts

  6. Great post SoN.

    On the whole I agree with the premise that the markets have been handed over to the traders and that a reset will be the eventual outcome. So I have to wonder if not Gold then what other asset or money should anyone be holding for guaranteed (or as close to) safe passage through from the system that has been setup for collapse to whatever comes next?

    To some degree I also agree that Gold only has value based on historical precedence, but probably one of the best explanations I’ve come across (of where Gold gets value) was in this clip from a movie “The Treasure of the Sierra Madre”:


    Where a prospector provides the example of 1000 men that go looking for Gold, after 6 months only 1 of them is lucky. The value of the Gold not only represents the value from the labor of the one man, but also that of the 999 others that didn’t find anything (total 6000 months, 500 years worth of labor).

    We do things a little differently these days, but the principle remains the same. We have Gold miners today digging up 5-10 tonnes of earth (sometimes more) to retrieve an ounce worth of Gold let alone all the processing and refining that follows!

    • Bullion Baron, great explainantion!

      Gold has always been the currency of the elite class, so in my opinion it is the safest hedge. If the system ever implodes and the US dollar is trashed, then there will be a call for a new world based currency. This new currency will most likely need to be backed by something tangible – gold. How would they administer this new currency? Probably along the same lines as the Special Drawing Rights (SDR’s) countries have with the IMF.

      The SDR is an artificial basket of currencies and domestic currencies can be weighted and pegged to this SDR. For more info : http://fx.sauder.ubc.ca/SDR.html

      One name I’ve heard bandied for a new world currency is the BANCOR.

  7. My thoughts:

    1) Money is firstly a moral phenomenon; and then it is a psychological one (built on the chosen moral foundation – trust, etc). ie. the value of said money only exists because of perception, belief, trust, etc…else it will fail as money, as a medium of exchange.

    2) Secondly, we look to govts too much – they can only “make” things happen monetarily as much as the people who use the currency/money every day ACCEPT (read: believe, trust) the money to have moral and psychological value; else, again, it will fail as money. Hence, their abilities to “fix” (read, regulate, etc) are limited by the points of Point (1), which they cannot, largely, control.

    Hence, my conclusion is this: if govts cannot “regulate”/form/etc a system of money that people can and do trust (to hold its value, be stable, etc), then they will, eventually, fail in all their monetary pursuits.

    It is therefore, i contend, why all fiat systems, systems based on fractional reserves (etc), leveraged meta-money-systems and the like will all eventually fail…because one day people realise that the “promises” that the system, its components and its users make, are seen and rendered as no better no part-truths, often unwise, presumptuous and sometimes outright lies…and people lose confidence in them, thus devaluing them as mediums of exchange and “assets”.

    So, if we want govts (as opposed to people, from the ground up, which is another perspective) to make and regulate for us a monetary system, it needs to be one that is both morally and psychologically robust – that is, one not built as notions of money as debasable/inflatable, leveraged, allowing immoral dilution (in effect, theft) of people’s holdings, allowing people to on one hand make what seems to be a fair promise, but on the other actually promise more than they can rightly, in the long run, deliver.

    Additionally, if govts want stable money systems, then facilitation of escape, partially or even fully, for those that are responsible for the mistakes, should not be permitted. Grace to helping those that have made mistakes is another issue, so help can still be extended – but allowing rationalisations to avoid consequences for one or few is, essentially, an unjust, unfair practice.

    And that is all a fundamentally moral issue, like it or lump it.

    Hence, if we look to govts for our money system, it must be on a fundamentally just moral framework…and do they have what it takes? Do people at all? More food for thought, eh?

    My 234cents.

    • Well said Stewart.

      Paradoxically, all the “flaws” that made gold a poor sovereign currency in inflating economies makes it a possibly good one for sustainable zero inflation economies that are more and more likely the new paradigm for the future.

      I want to see us move away from a slavish devotion to GDP growth (based on inflating population, money supply and debt whilst reducing finite resources) to a system of zero annual “growth” but 5% yearly productivity gains with zero inflation – all of which makes more of us prosperous both now and for future generations.

      • Taking our eyes off GDP growth is a GREAT idea to me! So may bad political and economic decisions made in the name of preserving and increasing that very wishy-washy, vague figure, with even more vague significance: GDP.

  8. For someone new, the world of dervitives is a maze and i would like to understand how the combined forces work and the effects on a credit system.

    I remember watching sometime ago Niall Fergusons The Ascent of Money and the fall of the derivtive market in the late 80’s, what quant finance didn’t count on was human irrational behaviour and Black and Scholes went running to Georg Soros who counts on human irrational behaviour.

    I previously posted that i had just finished reading a book by Ron Paul back in 1982. Sanctioned by the US Govt. A Case for Gold, A minority report. it was fascinating that through the US monetary history, people go back to gold because they loose faith and trust in the value of the currency of the day.

    I wonder if history will repeat yet again.

  9. You have managed to crystallize much of the muddled thought bouncing around my mind since the last time I climbed out of a derivatives pit for good.

  10. Top post SoN. Sounds like we may yet live in even more interesting times.

  11. Thanks SoN..made me leave a desk propped,a
    glass floored and run through peep holes in Chinese walls,and catch the Lift..cheers
    Have a good one.. JR

  12. Yes, “leadership” was bought – that is what they do – bureaucracy was bought – that is what they have become as corruption always starts at the top.
    Gold on the other hand belongs to Main Street and Asians, who make up ~75% of the global population trust Gold. I trust Gold (and Silver).

    Your fiat is only as good as the coherent structure and organization of your Government.

    And, since your (collectively – global governments) are now dystablized or unstable (take your pick) – fatally corrupted beyond redemption (take a peak), and those holding onto power desperately (selectively and publically murdering anyone that adds to the popularity scales – Fiat is reaching – worthless.

    Fiat and meta (read: meaning beyond) money belong to the condemned and insane.

    Gold belongs to reality and natural physics and here I be.

    This time it will be different – that which is coming is the harshest and darkest Dark Age ever imposed on mankind (demographically expressed) – by the hand of “economists” like Bernanke, Geithner, Summers, et al – who wield fraud, crime, racketeering as the tools of the economist.

    Any hit-man at Mafia Central could have done a better job and had no need to have wasted the University time.

    The Profession of Economics is a sick joke (I speak in general) where “economic theory” is purely *seen* and witnessed as “stealth, deception, theft, lies, and deceit”.

    Gold is Trust, that is, the glue of socio-economic harmony – the rest is incoherent noise.

    • Peter, I’m on your wagon!

      What has not been discussed so far in this blog is the other function of money – control.

      When individuals amass so much money that it would take them generations to spend – what keeps driving them to accrue more wealth? The greed for power. The more money one has, the more control they command.

      “Power is the ultimate aphrodisiac,” —Dr. Henry Kissinger

      When you get a small group of powerful individuals together who have a common phylisophical cause – then a power structure is formed called an oligarchy.

      These oligarchys have the necessary means at their disposal to influence governments, educational institutions, religious organisations etc. As for one example, 95% of our world media is ultimately in the hands of 5 individuals. What would happen if this group was to somehow collude? We know media is a powerful tool that can influence our views and shape our opinions. Having said this, there is always competition within these groups to be the top dog – so sometimes common causes can be fraught with suspicion.

      I read a book 3 years ago called SuperClass by David Rothkopf. Rothkopf stated that 5000 individuals through their various organisational structures in effect control the entire planet. But what if there was a hidden group above them which was able to nurture this group of foot soldiers through a compartmentaised structure? There are numerous publications avaliable on the market such as Tragedy and Hope that disect this type of conspiracy.

      These publications convey the mechanism used to gain this control – the Hegelian Dialectic ideology – to divide and conquer. This functions on the principle of a left and right: idea, group, belief, etc.. and a predetermined outcome when these opposing forces are thrown against each other. Create the problem; manipulate the reaction in order to provide the predetermined solution.

      So is there an ultimate endgame?

      Conspiracists will tell you it’s about a 95% reduction in the world’s population once all control structures are in place. The Geogia Guidestone (a stone monument located in Georgia USA constructed and paid for in total anonymity) indicates the ideal world population is 500 million. Controlling 500 million economic slaves/servants is easier than 7 billion. Ted Tunner has called for a 95% population reduction and Prince Philip has said that when he dies, he hopes to come back as a virus and kill off a large portion of the population. It makes you wonder how many other sociopaths dressed in $4000 pin-striped suits displaying a false fascard of respect are out there? Because most people are moral individuals and care for humanity it is hard to image being a phsychopath. If a tree in the forrest falls and no one sees or hears it, has it still fallen?

      I must say when you do the research and the numerous rabbit holes it takes you trying to piece together this jigsaw, the evidence and the conclusion is fairly depressing.

      • What I forgot to add is: Will this goal be achieved?

        I doubt it because of the historical essence of humanity to rise above adversity and the number of unknowns and unknow unknowns.

        But it doesn’t mean we won’t be going through a great deal of geopolitical and economic pain in the process.

    • Will Richardson

      If society/government collapses gold will have no ‘value’ or ‘use’…the only thing that will have value if we return to subsistence is access to food and clean water.

  13. Why are there no serious attempts by Governments to tax (stamp duty on notional value) derivative and insurance contracts? These are the tools of the meta money trade. Capture, corruption or plain incompetence?

  14. Sandgroper Sceptic

    “Paradoxically, all the “flaws” that made gold a poor sovereign currency in inflating economies makes it a possibly good one for sustainable zero inflation economies that are more and more likely the new paradigm for the future.

    I want to see us move away from a slavish devotion to GDP growth (based on inflating population, money supply and debt whilst reducing finite resources) to a system of zero annual “growth” but 5% yearly productivity gains with zero inflation – all of which makes more of us prosperous both now and for future generations.”

    Hear Hear! I suspect that is where we are headed, although the status quo will attempt to impede any moves toward such a system and make the resultant crises even worse. Debt based money has enabled humankind to use up a far greater proportion of its resources than would have been possible under a hard money system.

  15. In the movie “McKenna’s Gold” as Gregory Peck rides off into the sunset he says “If the world was made of Gold men would kill each other over a handful of dirt”

  16. Great post. The meta-money (speculative economy) is really just a giant leveraged brokerage play – gear it up and take a cut – doesn’t really matter where the risk falls for the players in the industry because it’s all about taking a bite out of a big big number before the music stops.
    Of course, when the GFC hit the mugs in the tangible economy found out pretty quick who was providing the security behind the leverage.
    It seems almost incredulous to say it but the system does appear to be cracking. The existing rules can’t cope with the speculative economy, leading to a lack of consistency and evaporating trust.
    It is possible to flip around and look at it through Greenspan’s eyes and see how one could hope that a meta-market of self-interested traders would help create a level of economic homeostasis in the speculative economy. Why did it fail? Perhaps because, as you point out, money was never a self-centering concept to start with – but rather a set of rules designed for a social goal and therefore exists out of equilibrium.

  17. Burbwatcher hits the nail on the head,
    1) Money is firstly a moral phenomenon; and then it is a psychological one (built on the chosen moral foundation – trust, etc).
    I just finished reading a book on the Economic collapse of Argentina in 2001. Where societies lack a trust and respect for their fellow citizen you have a clear opening for breakdown. The collapse of Argentina is being played out like groundhog day a mere 10 years later in Southern Europe and Ireland. The positive spin the IMF is putting on the bail outs of Greece and Portugal is to ensure a “civilized” default of these societies so they don’t collapse into Anarchy as did Argentina. All there societies share in common a lack of trust for each other. The GFC has ensured that this particular malaise is tainting the once revered Anglo Saxon economies. The financiers of New York and London could be responsible for the decay and social apprehension befalling these countries spelling moral disaster for future generations.

  18. Wow SoN for what was, for me, quite a revelatory article.

    And in Burbwatcher pointing out that money is effectively a moral system reveals what is really wrong with all modern systems from the ground up.

    I can’t help feel that we are in a period of renaissance and enlightenment akin to the late 1600’s. Many of us feel there are systems of economics, religion, etc in place that are clearly past their use by, so fundamentally out of touch with the way the world should actually work, but are at a loss to imagine a world in which they wouldn’t exist.

    I would go as far to say that trust does not actually exist at all anywhere anymore, as long as religion exists.

    Morality needs to be completely unwound from religion.

    Otherwise people in finance and policy are going to be continually forgiven and excused for being greedy pricks based on some olde worlde folk-tale version of right and wrong. We need to reinvent morality outside of religion and government – which are ostensibly the same thing.

    • “Morality needs to be completely unwound from religion.”

      Removed from “relious-ity”, so to speak? maybe.

      Removed from the notion of a “Worldview”, akin to a Theology? No.

      Unfortunately, that’s not even possible – all notions are ultimately rooted in some Worldview held, knowingly or unknowingly, by the individual.

    • and gold has an inherent value that comes into its own, when that medium of exchange is devalued.

      any other time it is a relic!

    • that’s correct and meta-money is the medium used by the finance industry to deprive others of the medium of exchange

  19. To me the scramble to gold is driven by an understandable desire to return to stability. However, the belief that gold could provide the desired stability is flawed in my view. For starters, if we assume that every individual on the planet will recognise that gold is the best place to store wealth…there isn’t enough of the stuff to convert all existing currency (assets) into gold….and there never will be. Hence the price will soar to atmospheric levels in those currencies we wish to exit and ordinary folk will be denied access to holding the stuff, while the financiers and bankers will be sitting pretty….so what would change for most of us who are facing the prospect of a wipeout of our assets which are held in fiat currencies?

  20. > So the rules proliferated, especially
    > after the advent of the Black and Scholes
    > pricing of risk, a clever piece of maths
    > based on what is probably circular
    > argument, but one that is sufficiently
    > concealed to give traders the impression
    > that they are handing off risk accurately.

    This has been fixed by the finance industry and they handle much better the risk of, errr, ummm, being sued by their clients 🙂

  21. Oil, Diamonds, gold, silver,money, wheat,
    rice, potatoes, all worthless,
    without Water.

  22. Goodbye Betty Battenberg, you cheating old crone.
    hello Gong Li, you sexy thing.

  23. “Eventually, I suspect, GFC version 2 will come along, and the rules will finally collapse. Governments will have to come in and re-set them. There will be a huge re-regulation backlash. But how is it that governments allowed it to get to this stage? What ever happened to governing?”

    Respectfully i have to disagree that it is the markets/traders faults. They are just gaming the system that is in place. Personally i would argue that it is the govt. along with the fed who is at fault for creating a poor structural framework where gaming the system leads to the worst possible outcomes.

    It was the govt and it’s preferential treatment that allowed the systemic risk to enter the banking system. They are the ones who provided preferential treatment to certain lenders and allowed relaxation of lending practices. This coupled with almost free money from the fed (and no regulation on activities of banks—–> i.e. traditional banking, aswell as investment banking and all other sorts of business allowed to happen) caused the problems we are in.

    The govt. again exacerbated problems by allowing this “too big to fail” notion, creating a moral hazard akin to what happened during the Asian Financial Crisis opf the 90’s, but as with all things in the USA on a “supersized” scale, and providing even cheaper money (the fed).

    Actually it has been govt. involvement in the markets that have allowed traders to do what they have done. Within the right framework the greedof Wall Street would work very well. The govt. however (as it does with all manner of things) constructed the worst possible framework, allowing banks to operate all kinds of businesses with impunity, free money and often preferential treatment. And when this failed their cowardice came to the fore by bailing them out.

    These banks and other insto’s needed to be let to die, the govt needed to overhaul the banking framework/regulation and make the Fed more transparent. There would have been huge short term pain, but they would have come out with a genuine recovery at the end, as the market reset.

    What they actually did was postpone (or make worse) this pain at a furture date by giving money to the wealthy (by ROBBING the poor) in the hope they would spend it and drag the economy out of it’s malaise. That doesn’t work and never has. All that money would have dobe infinitely more GOOD if they literally just injected it all into the bank accounts of the poor who would have actually spent it all on food and other services.