*NGM- Non Government Money
A standard bubble begins when one investment has a more productive rate of earning than any other in the economy.
In other words when lots of people can make more money investing in one particular thing (as opposed to anything else), a bubble begins.
In the first phase of a bubble, surplus (discretionary) wealth in invested; people put their spare cash in.
When that round of inputs is exhausted new people enter the bubble; investment wealth is put in. Now the bubble is at its maximum ‘credibility’. Investing at this stage is seen as common sense.
When investment cash is used up, credit is obtained and invested. At this stage the bubble changes its character because now the investment is valued not against other investment opportunities in the economy, but against the investment value of money itself. As more and more people try to get in on the bubble using credit, interest rates rise and the supply of money dries up.
The bubble deflates.
In the housing bubble that is supposed to have led to the credit crunch, the money in question was NGM.* There was an inexhaustible supply of NGM because the financial institutions kept creating it. This made the Credit Crunch bubble fundamentally different from what had gone before. The bubble could not end on its own because there was no limit on the amount of NGM money that could be printed and moved around on the back of it. (Does this remind you of anything? It does? There is a reason for that….)
The more NGM that was created on the back of housing, the more opportunities there were for ‘earning’. The more opportunities for earning an investment offers, the more investors it draws in and the more NGM is printed. It is like a financial Black Hole collapsing under its own gravity and sucking in more and more material forever!
But the Credit Crunch ‘problem’ actually started when the exchange rate between state issued money and NGM came under scrutiny. The banks refused to lend STATE ISSUED MONEY (SIM), to each other when they asked this question: What is this NGM actually worth in comparison to SIM? It got so bad they were not even prepared to lend to each other SIM overnight. The risk was not worth it.
I had thought that the Credit Crunch appeared to have left the supporters of NGM with two difficulties:
1. The bubble relationship between housing and NGM This unique, unprecedented ‘sovereign’ bubble allowed the production of NGM to spiral out of control.
2.And the value relationship between NGM and SIM.
I now realise that the bubble problem is actually an expression of an economic problem in the exchange rate between NGM and SIM and the value relationship between NGM and SIM is actually an expression of a political problem in the exchange rate between the two.
Both these problems are really the political and economic expressions of the same problem: The exchange rate problem.
Look at the solutions that have been adopted.
First the bubble relationship between housing and NGM.
The solution to this problem requires that the value of NGM in relationship to housing has to be raised or at least maintained. This means that somehow the supply of NGM has to be cut off, (The equivalent of raising interest rates in SIM). But by definition the state cannot control the issuance of non-state money- that’s the whole point of NGM after all. So what can it do instead? The authorities can force the banks to carry more state issued money for the NGM that they issue. In a bizarre way they really did ‘force’ the banks to accept free state money! By forcing the banks to acquire SIM in relation to the amount of NGM they have they are effectively enforcing an exchange rate between NGM and SIM.
The second problem is that the value of NGM in relationship to state money has to be raised or maintained. At the moment the democratised money gang want the exchange rate to be 1:1. It follows from this that to the extent that NGM is worthless then state money has to be worthless. Printing seemingly endless amounts of SIM and then swapping it for NGM moves you along this road. But remember this is a political statement of support for NGM and carries with it political problems.
The key point to understand is that Q.E. is NOT a ‘negative’ interest rate. It is NOT extending zero interest rates into negative territory. This is mindless and impossible.
It is trying to manipulate the exchange rate between NGM and SIM.
This helps us to answer the question: How long will Q.E. go on for? Which brings us to the Democratised Money Conundrum which is this:
Individual instances of NGM must be allowed to fail but NGM as a principle cannot be allowed to fail. In the same way that individual businesses can go bankrupt but capitalism cannot.
And that is the present problem. Since there is only one major type of NGM available at the moment (mortgage based), if it collapsed it might take the entire principle of democratised money with it. And that can’t be allowed to happen.
This is what all the radicals cannot understand. The proponents of NGM are fighting for the establishment of an economic and political principle- the principle of Democratised Money. What you have seen so far is not a ‘mistake’. It’s not nasty bankers buying corrupt politicians. It’s the birth of a new political and economic structure.
Individual NGM has to be allowed to fail-its a matter of principle, but NGM as a class cannot be allowed to fail-its a matter of principle. And at the moment there is really only one viable individual example of the class of NGM. Funnily enough, again it calls to mind a Black Hole, where the world of relativity and the world of quantum somehow exist in uneasy mutual contradiction.
But the contradiction does allow us at least to answer in part one question: How long will government intervention go on?
The answer must be until there is more than one kind of NGM. I would imagine that when there are say, over ten types of different NGM the state will stop managing the transition. Then there will be room for individual NGMs to collapse without damaging the principle of NGM as a whole.
Or until someone stops them.
*NGM-Non Government Money