Chris Martenson: "The Trouble With Money"

Tyler Durden's picture

Submitted by ChrisMartenson.com

The Trouble With Money

A Broken Narrative

Recently I was asked by a high school teacher if I had any ideas about why students today seem so apathetic when it comes to engaging with the world around them. I waggishly responded, "Probably because they're smart."

In my opinion, we're asking our young adults to step into a story that doesn't make any sense.

Sure, we can grow the earth's population to 9 billion (and probably will), and sure, we can extract our natural gas and oil resources as fast as possible, and sure, we can continue to pile on official debts at a staggering pace -- but why are we doing all this? Even more troubling, what do we say to our youth when they ask what role they should play in this story -- a story with a plot line they didn't get to write?

So far, the narrative we're asking them to step into sounds a lot like this: Study hard, go to college, maybe graduate school. And when you get out, not only will you be indebted to your education loans and your mortgage, but you'll be asked to help pay back trillions and trillions of debt to cover the decisions of those who came before you. All while operating within a crumbling, substandard infrastructure. Oh, and by the way, the government and corporate sector appear to have no real interest in your long-term future; you're on your own there.

Yeah, I happen to think apathy is a perfectly sane response to that story. Thanks, but no thanks.

To understand how our national narrative evolved (or, more accurately, devolved) to become so unappealing, we have to take an honest look at money.

Money is Not Wealth

Money is just a marker for real things. As long as you can exchange your money for real things, your money represents value. Because we tend to conduct all of our most meaningful transactions using money, our perspective can become warped to the point that we think it is the money itself that has value.

The economy is measured in these units, these markers, which we call "money." But money is not the same thing as the economy. Far from it. And money has no value on its own, but only in relation to the things we can exchange it for.

The economy consists of real needs and wants being fulfilled. On one end of the spectrum, we have the basics like food, water, shelter, medical care, and other necessities. On the other end of the spectrum, we have 15-minute neck massages at the airport. Everything else lies in between 

Money, on the other hand, is simply a facilitator of exchanges.

When we reduce the economy to its simplest form, it really consists of a growing number of people trying to meet their needs and wants. More people (~80 million more each year) simply translate into increasingly greater demand for the earth's limited and ever-limiting resources.

Since our human desire to consume is virtually limitless, a key role of money is to provide the scarcity necessary to divvy up a limited amount of goods and services among the population. There has to be a balance between money and the things that humans can produce and distribute, or else prices get out of whack.

So now let's imagine a world where real things are in limited (and limiting) supply, and then compare this idea to our money supply in order to get a sense of where things are headed.

This is a chart of Money of Zero Maturity (MZM), which is the largest and most comprehensive accounting of money in the Federal Reserve system and has been ever since M3 was abandoned.

If that looks like an exponential chart to you, you are correct. Sure, there are a few wiggles and jiggles along the way, but the system of money we've been living under and setting our expectations around is an exponential money system. For it to remain in balance with resources that come from the earth, we need those to expand exponentially, too.  If they don't -- and they can't forever -- things will get out of whack. And it's probably no surprise to hear my view that money is what is increasingly out of whack in this story, not the earth's resources.

One feature of exponential systems is that the amount of accumulation of whatever it is that is being measured increases over time. If we draw a few arrows on the above chart, we can see that money is accumulating in our system at a faster and faster pace:

"Stage 3" in this chart shows what has been happening since 2008. Aside from the little hump there in 2008, MZM is accumulating at the fastest pace in history. Isn't that interesting? Even as employment is historically very weak, income growth is stagnant, the economy is limping along, and inflation is (allegedly) quite low, the US is manufacturing money at the briskest nominal pace in the series.

The reason that we've not experienced massive inflation (yet) is that the money that is being injected into the system is basically just piling up and not really doing anything. It's just sitting there. One measure of this is the so-called 'velocity' of money, which is not actually a measured value but an inferred one, derived by dividing the stock of money into GDP. The higher the resulting number, the faster each unit of money is racing around in the economy trying to do something (which usually means to spend itself before inflation steals its value).

In fact, the velocity of money is at an all-time low and seems to be headed lower. When this money all finally decides to go out and spend itself while it still has some value, it will be quite a process to observe. Just think of stored-up money like potential energy, the same as a massive snow cornice hanging precariously over a steep gully. It's not a question of if, but when it will finally release and cause the value of money to plunge.

And the point I am trying to make is that there are two sources adding to the pressure here. One is the amount of money being piled up, and the other is the dwindling quality of oil. Adding more and more snow to the situation (as the Fed and other central banks are busily doing) is not really helping anything, and neither is a decrease in the net energy returns of new oil discoveries.

Just for kicks, here's a chart of money in circulation (including cold, hard cash and coin) stretching back through time to around the creation of the Fed.

Is that a picture-perfect exponential chart or what?

Now the other side of the money situation is, of course, debt. Here we see something quite remarkable, which is that somehow the Fed has managed to achieve a new all-time high in total credit market debt.

I say "remarkable" because what really should be happening here is de-leveraging, not re-leveraging. We should be seeking to decrease the total amount of debt, not increase it. But of course, that is not the business of the Fed. Its business is strictly to keep the exponential money and credit systems growing exponentially.

Well, that and assuring that the big banks never have to have an unprofitable quarter.  But that's another story for another day.

Yet even with the heroic efforts of the Fed to push, badger, cajole, and horse-whip the aggregate amount of debt higher, its efforts are falling short. Note that we are still many, many trillions away from the trend line, which is what we'd need to get back to in order for things to return to 'normal,' as abnormal as those times really were.

Recall my other main point about debt, which is that it must double slightly faster than once every decade if we want the future to mirror the past four decades. This means that from 2008 to 2018, credit market debt will need to expand from $52 trillion to $104 trillion, or a bit more than $5 trillion per year, to keep us on the same "normal" trajectory.

Part of my skepticism about the odds of things returning to "normal" rests with the difficulty I have conceiving of what exactly it is that the US might find to suddenly go another $50 trillion into debt for.

If the US cannot find a way to go that much further into debt, then all of the many fine and subtle, overt and gross ways that we've come to expect the economy and financial markets to work will no longer apply. Many things will change and will simply operate very differently if no other reason than credit growth has slowed to a relative crawl.

As we are now four years past the 2008 crisis and we've only just managed to eke out a nominal new high in total credit market debt, this means that we are roughly $20 trillion behind the curve. You could do worse than this for an explanation as to why the national budget is such a wreck, why incomes are not keeping pace, and why the nation's infrastructure and capital investment are in such poor shape.

The bottom line is that, as expected and predicted here many times over the years, money creation with an eye towards keeping the credit markets expanding is the name of the game.

And the problem is that money is not wealth. It's only a marker for wealth.  Simply increasing the money supply without understanding where we are in the energy story is an incredibly risky, if not foolish, thing to do. 

That's the trouble with money.

Change Is Coming

Look, I hate to be the bearer of what many will consider to be bad news, but things are not ever going to go back to "normal" if we define normal as the period from 1950 to 2000 during which relatively constant economic growth and slightly-faster-than-that debt growth went hand in hand.

Everyone currently in a position of power honed their skill sets during a period of time when the pie was reliably growing and the skirmishes centered around how best to lay claim to one's own portion of the expansion.

Unfortunately for those with these skill sets, we have entered a brand new epoch, where, for a variety of inter-related reasons, old-style economic growth is no longer possible. These reasons are partly demographic, partly related to reaching the mathematical limit of growing one's debts faster than one's income (or GDP, in this story), and partly related to the end of cheap (and easy) oil.

It is this last part, the oil story, which has almost entirely eluded the intellectual grasp of our monetary and fiscal masters. I don't blame them, as mastery of the physical sciences is not a requirement of any classical economics departments in any of the universities that churn out our PhD economists.

This is very strange, when you think about it, because economics is entirely rooted in the process of extracting and converting natural wealth into material wealth. Without the primary inputs of the earth, there would be NO secondary or tertiary wealth for us to divvy up (via a money-driven rationing process) or develop exotic derivative products around.  Economics should be the study of energy and resource flows as well as money.

Imagine if medical scientists did not have to learn about digestion and nutrition as a part of their training. After such a course of study, they might come across an emaciated patient complaining of low energy and prescribe exercise because that's been proven to boost energy in most people. Of course, they would then be mystified by why the patient deteriorated and did not recover.

Today we find the world's central banks mystified as to why trillions and trillions of freshly-printed fiat units, be they dollars or euros or yen, are not resuscitating the world economic system. The answer might just be grounded in the observation that we are out of cheap and easy oil. The very food of the economy is no longer as packed with calories as it once was, and the patient is losing weight.

What I am describing here is nothing less than a complete and utter paradigm shift that is so profound and so large that it will, paradoxically, escape detection by most people. That's just how gigantic shifts seem to happen: They go largely unnoticed, perhaps because they are too big to internalize.

If an ever-decreasing net energy return is slowly starving our patient, which we might detect each and every time we spend $80 to $200 to fill our gas tanks (depending on whether we live in the US or Europe), then how should we position ourselves for this very different future?

What sorts of things will change whether we wish them to or not? And what is actually under our personal control?

A Crisis Is a Terrible Thing to Waste

Times of great upheaval offer a gift -- the chance to really sit down and rethink things. Certain fundamental questions can arise, such as Do I have the right job? and What should my kids study in college? and Should we really have increased total derivatives by $100 trillion after the financial crisis erupted in 2008?

When faced with the sort of predicament we currently find ourselves in, even more existential questions might dominate our thinking, such as Is there more to life than working hard, buying stuff, taking on debt, and getting older? or even What's the meaning of life? The primary narrative telling us that we are supposed to work hard, consume harder, and keep ourselves centered on the treadmill that we seem to have been born upon is beginning to unravel.

It's a mark of maturity to use a moment of crisis as an opportunity to engage in introspection and as a springboard for personal (or societal) growth and development. Unfortunately, there are virtually no signs that either our dominant culture or our leadership is that mature.

So our opportunity here is to really question ourselves and our actions, hold them up to the bright light of day, and decide what needs to change, what we should keep, and what new things we might start doing.

In Part II: True Prosperity, we explore what constitutes real wealth, both material and intangible, as well as what alternative aspirations we can consider as individuals and as a society if we find the courage to change (or at least step out of) our broken narrative .

With the certain change discussed above headed our way, how do you personally want to enter that future? What will your work be? What will your relationship be to those around you and the place where you live? Where will your happiness come from?

Is your strategy simply to do more of the same and hope for the best? Or do you plan to use the time we still have to reposition your priorities, your behavior, and your resources to meet that new future with as much resiliency as possible?

Click here to access Part II of this report (free executive summary; enrollment required for full access).

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CPL's picture

What is an ounce of gold worth in zimbabwe dollars?

SilverTree's picture

Zimbabwe 100 Trillion Dollar Bill Banknote 2008 Uncirculated in Sequential Number 
Permalink: http://amzn.com/B003XPJOZQ

AldousHuxley's picture

history repeats like this:

 

  1. spoiled sons of the briches take power and spend nation's wealth like their trust fund on stupid shit, rewarding cronies, neglecting real issues, short term idiocy intead of long term thinking.
  2. foreign creditors suddenly decide they have been irrationally exuberant and stop lending
  3. all of sudden country must pay back debt, but can't afford to do that and spend on her people
  4. printing press is on full power
  5. hyperinflation
  6. war to steal real assets and against lenders
  7. tons of people die on both sides, but that means less people to take care of (ie. pension obligations)
  8. repeat until one day you lose and you have foreign military on your motherland stealing away your own assets

 

 

Gully Foyle's picture

AldousHuxley

Instutions are attacked by radicals, in turn becoming institutions attacked by radicals.


engineertheeconomy's picture

Central Bankers mystified???

Hardly.

Everything is going EXACTLY AS PLANNED

Buzz Fuzzel's picture

Wealth is the sum of unconsumed human productivity.  Wealth comes from the labor and creativity of human beings.  Money is a representation of wealth.  More money subdividing the sum of unconsumed human productivity does not equal more wealth, unless of course you have gone down the rabbit hole with Alice.

Pinto Currency's picture

 

Martenson confuses simple concepts such as consumer goods price inflation, monetary velocity, and inflation (i.e. monetary inflation). 

First, there is a very large consumer goods price inflation under way because of the large monetary inflation: http://www.shadowstats.com/alternate_data/inflation-charts

Second, the money is not just "piling up, not doing anything".  Prices are rising despite monetary velocity being low.  Monetary velocity and consumer goods price inflation have no causal relationship.

"These rises or falls [in goods prices] may or may not be accompanied by an unusual volume of speculative transactions. But the volume of speculative transactions merely reflects the extent of differences of opinion or changes of opinion among traders in the market; it has no functional relation with either rises or declines of value. Thus a falling wheat market or stock market may be more active than a steady wheat market or stock market. But so may a rising wheat market or stock market.

Similarly, when we turn to money, increased exchanges (i.e., an increased V) may accompany a decline in the value or purchasing power of money. But there will be no necessary relation between the change in velocity of circulation and the extent of the decline in the monetary unit's purchasing power. In fact (though this happens less often), an increase in the velocity of circulation of money may be accompanied by an increase in the purchasing power of money, i.e., by a fall in prices. This can happen in a speculative collapse, as, say, in late 1929.

This bears repetition in slightly different words. Increased velocity of circulation is not, in itself, even a contributing cause of higher commodity prices. It is not even a link in the chain of causation. Increased velocity of circulation and higher commodity prices are joint results of a change in the value of money in relation to the value of goods. When people value money less in relation to goods, they offer more money for goods; when they value it more in relation to goods, they offer less money for goods. Any change in velocity of circulation is likely to be a result of these changed value decisions: it is not itself a cause of the change in value. The value of money does not decline because its velocity of circulation has increased, though the velocity of circulation may increase, when it does so, because the value of money in relation to goods has declined.

https://mises.org/daily/2916

Seer's picture

Yup.

It's a shell game.  They con and move on...  Their cloak is in latching on to enough "believers" (folks who will attack the "disbelievers") to safeguard themselves: their minions will whack everyone else in order that they can get some crumbs from their master.

PLEASE, can we as a specie learn that we do NOT need "leaders?"  If we can establish this as a core belief then we'll have a chance to move on, otherwise it'll just be a return to what it always has been... look!  another shell game!

darteaus's picture

Same as in Confederate dollars.

I think I need to buy a gun's picture

by the currency chart looks like gold is 36k an ounce. 35 dollars in 1932 X 1000 billion.

It shows that our 20 years olds are a lost generation already by the news every night. ALOT of crime,,,,,,,

Normalcy Bias's picture

Actually, Confederate Dollars are worth a helluva lot more than either Zimbabwe or Bernanke Dollars.

Ignatius's picture

"The road will see so straight and fair to travel, you will kick yourself for stumbling through the brambles for so long, and wonder at your neighbors who still can't see the path, though it is truly a freeway."  --  Aristotle, the blogger

Sustainability, bitches... and gold, get you some.

AldousHuxley's picture

1oz = 16,508,273.42 ZIM dollars

 

country does not even use their own currency anymore since you can use foreign currencies.

 

"The regime is surviving by printing money: at this stage there is no other way."

“” ---Martin Rupiya, professor (war and security studies), University of Zimbabwe. sounds familiar?
CPL's picture

Would anyone actually sell gold for ZIM-Bux?

Au_Ag_CuPbCu's picture

What currency to they use now?  LOL, oh yea...how ironic, the joke is on them!

AldousHuxley's picture

Nazis put their gold reserves in switzerland.

 

Even evil knows the value of gold and to keep it away from their own banks.

Gully Foyle's picture

AldousHuxley

You know if those Nazi's had won they would be considered something like the Chinese now, not evil.


john39's picture

like the Chinese? or more likely the United States government...

TheGardener's picture

They dug up quite a few things in abandoned mining operations... No wasting time searching blasted bunkers and all their other underground facilities: Part of the game and gaming taking place exclusively at their bankers in Switzerland. No gold for you, bunker diggers.

Island_Dweller's picture

Something is seriously messed up with this chart.  Notice that the gold to silver ratio stayed at around 15 to 1 until Oct 16, 1923 and then it jumps to over 150 to 1 starting at Oct 23, 1923 and stays that way until the end of the chart.

I think someone left out a zero for the silver price or added one to the gold price. 

"But what's a zero or two amongst friends?"  Future Bernanke quote.

 

 

mickeyman's picture

I don't recall where the answer to this question first appeared but it is because of various putsches that began in 1923. There was at least one attempt by Communists to take power. Germans knew what happened to Russians (especially wealthy ones) in 1918.  Silver is a reasonable store of wealth until you suddenly realize you have to flee for your life in the night--then gold is preferable.

AustriAnnie's picture

The ratio suddenly changed.

Historians have attributed it to a sudden change in psychology.  As people saw the need to be able to move their wealth, they traded silver for gold because it is more portable.

TheGardener's picture

this Chris rocks , best ever guest post ever

takinthehighway's picture

Ronnie Montrose and Sammy Hagar on "Paper Money"...

http://www.youtube.com/watch?v=LJz1ZaOtbiI

Acorn10012's picture

I could go for some Rock Candy.

bobola's picture

Why indeed...

Because we have become a lazy & mindless consuming society.

People drive half a mile to Quick trip for a pack of cigarrettes instead of walking or riding a bike.

Alcoholic Native American's picture

A lot of the country's infrastructure is set up to where you HAVE to have a vehicle that has to have gas, and you have to use dollars to purchase all the above including the smokes. 

If I want to Drive my fat ass to the store in my huge SUV I can if I want to.  This is the land of the free! Why U hate Merica?

Gully Foyle's picture

Alcoholic Nativ.

Gee bunky could it be because we have a HUGE country where we actually need to DRIVE to get somewhere?

Could it also be, if you want to feed a family of four you require an automobile to haul all that food home?


snakeboat's picture

We need to evolve our cities and towns.  I bike to work every day in Denver (yup, even in blizzards and yes, that is a pain in the arse) one hour each direction.  It's not a problem, it's a benefit in my life.

My family of three (plus 3 cats and a big ole dog) get fed by food that's transported home in a trailer behind my bike.   I stopped buying soda because it's heavy.  The only liquids I truck around are beer n wine.

Anyone, including you, Gully, can do this.  People in general are lazy.  Be the change you want to see in the world.

aerojet's picture

Instead of not smoking.

carbonmutant's picture

The advantage of deflating overpriced economy is that a new generation gets to participate in the next stage of growth.

The problem with Bernanke's plan to prop up the Status Quo means that the new generation of entrepreneurs don't get to own anything without committing to be slave labor to the old debts.

Seer's picture

Next stage of growth?  What part of "declining PHYSICAL resources" did you not get?

carbonmutant's picture

The collection of assumptions based on old usage models.

Growth comes from new efficiencies.

vmromk's picture

The trouble with money is the planet's #1 ASSHOLE (a.k.a Bernanke) is printing too too much of it.

Gully Foyle's picture

vmromk

No, the problem with money is that is an illusion.

It is an intemediary between labor and goods.

Much like attorneys are an intermediary between the citizen and law, or politicians are between citizens and government.

We so enjoy the hands off approach to life.

That allows us something to bitch about.

GeneMarchbanks's picture

'Economics should be the study of energy and resource flows as well as money.'

Economics exists as a narrative by rich white males about how they got to be rich. Spoiler alert: exploitation, also there is a twist ending.

kridkrid's picture

I was watching some Internet video that made a fairly simple, yet profound point... so simple, in fact, that I was embarrassed that 40 years into my life, I had never given it any thought.  The word "economy" that we use to describe the strength of our existence... if the "economy" is growing, that's good... if it's not... that's bad.  But the word is derived from a word that means almost the opposite.  When we are economical with our resources, we do more with less.  If you look up synonyms to economic you will find, "economical - thrifty - frugal - saving - sparing" none of which has anything at all to do with how we value or measure our "economy".  Our enemy is growth.

johnnynaps's picture

Welcome to the .0001 percent club that understands that the "growth" system is the flaw.

MunX's picture

It's more than just the system...

Joeman34's picture

I've often wondered if we could experience similar 'prosperity' in a negative growth environment.  Why is growth for the sake of growth a prerequisite to happy and prosperous existance?

Koffieshop's picture

Outlaw interest.
You will end up with a system like Sharia banking. Borrowing money will still be possible in a way but only if you use it to buy stuff that will generate money in the future or to buy durable, resellable goods (NOT wooden houses, Ipads or cars).
This will cause a MASSIVE slowdown as everybody will mostly have to save before buying, but it will be quite flexible as there is no debt escalation.

Reverting to this can only happen after total destruction however as it goes against the interests of the... eh... currently established powers.

mkkby's picture

He doesn't understand anything except some words have 2 meanings. 

This should freak you out and provide another 20 years of nut scratching -- conservatives do not necessarily conserve.  Whoa!  Scary, eh?

Arnold Ziffel's picture

I told my nephew to read one ZH article every week and give me a short report on all 4 at the end of 4 weeks and I'd pay him $100 bucks.

At the end I asked him what did he learn from reading these articles?

He answered: "I don't want to be a surgeon anymore. I'd rather be Wall Street Banker."

Oi vey!

kridkrid's picture

I saw a Michael Lewis interview where he spoke about his expectation that "Liar's Poker" would somehow cast a negative shadow on wall street and expose kids to just how wrong of an environment it is.  The response was almost exactly the opposite.  Kids on his speaking tour asking him for advice on how to get in.