The Great Divergence

[kandrathe]

I think it's more as just that. The value of 'real' money is guaranteed by authorities, as you say, but the value of 'phantom' money is only promised by its users. Real money cannot be issued by just anyone, while phantom money can simply be created by inventing something abstract and assigning it a value, which is 'backed' mostly by already owned phantom wealth, and only for a small percentage by real wealth. Such 'sophisticated' methods typically require a constant influx of new capital, like any other pyramid scheme, so the total amount of phantom money needs to grow. This is what mostly drives the divergence, imo.

Could you give an example? Most of the esoteric financial instruments in use are pretty clear, based on real things, however much they're aggregated, shuffled, or disassembled. They're either someone's debt, sliced and diced and repackaged, or they're insurance against something happening (essentially, a bet), or they're options or obligations to buy or sell something or another at a future date. None of that should require a constant influx of capital, although most peoples' bets are strongly in favour of the economy growing (tough to be an investor if it isn't.)

With these simple tools, they construct the tower of babel.

Well... I don't think it's all that sinister a plot. There is this mechanism called "price", which is not the value set by the seller, but is the amount of currency or trade that any individual is willing to pay in exchange.

Buyer beware! Collateralized debt obligations weren't being bought and sold to Joe middle class. The bankers and brokers doing the buying should have been the ones knowledgeable enough to assess risks correctly. Many of these "bets" are in buying future value with today's currency.

When the currency, (say the $, £, or the Euro), is in massive valuation flux due to devaluations, its hardest on those of use whose lives are denominated in that currency. We work for X$ per hour, or X$ per year salary. Many prices are now beginning to make life difficult, untenable, unfeasible, or impossible. We are seeing everything sucked into this deflationary black hole in spite of interest rates pegged at zero and quantitative easing, which results in selected commodity inflation.


Commodity spike queers the pitch for Bernanke's QE2

Wrapping my thoughts earlier together with what Zenda said, we are essentially thinking along the same lines, although with our own distinctive perspectives. I have been saying that the bubble economy was mostly fictitious since 1980. We have regulated away manufacturing in the US, and now with the latest health care, and FinReg legislation, we've regulated away portions of the future value of medicine, and banking as profitable industry.



The speculation on future value failed to materialize, and at least in the US, we did not invest our speculation money into *real* capital things (e.g. raw materials (land), machines, plant capacity, educating workers) that have a *real* impact on productivity. We did invest in soft capital things, like business strategies, software, etc. Yes, we can do math, or business really quickly now with near zero inefficiency. But, near zero x zero is still zero. But, as Iceland quickly discovered, at the end of the day, it really comes down to how many fish you catch.

Nothing will change until we begin to measure ourselves by what we produce for the world, rather than what we consume.

P.S. Writing this made me think back to a time when I went through the whole interview process, and was offered a lucrative opportunity with a corporation, and I turned it down. The company makes the wrappers and containers for the fast food industry. It struck me that I would be a part of the industry of converting raw materials, into something of temporary utility, that would eventually become roadside trash, or fill a garbage dump. It was a mental turning point when I began to see so much of what is produced in our world as the equivalent utility and quality of happy meal toys, most of which is also destined for land fills.

P.S.S. I found an interesting appropriate quote on instapundit (talking about why college costs are growing above inflation);

"The government decides to try to increase the middle class by subsidizing things that middle class people have: If middle-class people go to college and own homes, then surely if more people go to college and own homes, we'll have more middle-class people. But homeownership and college aren't causes of middle-class status, they're markers for possessing the kinds of traits -- self-discipline, the ability to defer gratification, etc. -- that let you enter, and stay, in the middle class. Subsidizing the markers doesn't produce the traits; if anything, it undermines them."

P.S.S.S. I found an article on how in the US, households and corporations are attempting to de-leverage, while the Feds undo it all by spending borrowed money adding to our deficit and national debt.