I’ve been a long-time reader of Rondam’s Ramblings and this is one of his best posts. It is well worth your time to read this tome and get a nuts and bolts understanding of what’s really happening in the economy. Here’s an excerpt:
All of the events of the past year have been, at root, bookkeeping problems. Let me explain what I mean by that. There are two aspects to any economy. There is the actual physical production of goods and services. And there is the bookkeeping that keeps track of who is entitled to what. The former is “wealth” and the latter is “money.” (Paul Graham has a really good primer on the distinction between the two here.) People fret over money, but at the end of the day what really matters is wealth. Money is just a token, a bookkeeping tool. I do not mean to suggest by saying that it is “just” a bookkeeping tool that money is unimportant. It isn’t. Money (and the bookkeeping it enables) is absolutely vital to the functioning of a modern economy. You can find breathless expositions on the web about how money is “really worthless” or “just debt” and that the whole of the modern economy is one big con game with a shadowy conspiracy of bankers at its core. But money introduces enormous efficiencies into an economy, indispensable efficiencies in fact. And in that respect, money provides (and therefore has) actual value. Saying that money is fundamentally worthless because it’s printed on paper is kind of like saying that software is fundamentally worthless because it’s “just bits” and doesn’t have any tangible manifestation.
The problem is that money has both actual value and a “proxy value” insofar as money is exchangeable for other forms of actual wealth like cars and sandwiches, and it is extremely difficult to separate the two. This can be seen with a simple parable: three kids (call them K1, K2 and K3) go trick-or-treating. Each ends up with a different kind of candy, C1, C2 and C3 respectively. Trick is, each of the children has a different taste in candy.
You might wonder about the image of the character Gordon Gekko from the 1980’s film Wall Street. That’s my addition to Ron’s post, the whole situation is exacerbated when bad actors like the Gekko character are inserted into the candy market. The presence of such people catalyzes the downside as the market crumbles – they knew exactly what they were doing…It all smells the same as Enron and their “round trips” when fleecing California energy buyers out of billions at the turn of the century.
