Chaos & Volatility On The Rise

Cycles repeat, because each new series of generations doesn't really learn from history.  We cannot design a monetary system that will work properly "for all time" because that system will have to be guarded in practice by our descendants, who will not have gone through the same experiences, and will feel that the protections we put in place don't apply to their new world any longer.  Hubris to think we can eliminate this basic human cycle and do their thinking for them.  Each new generation must learn lessons on their own.  That's why cycles happen.
Our great grandfathers put in place a fine banking system post-1933 where the banks were absolutely not in control of anything.  You can tell from the stats that the banking industry post-1933 was boring - bankers weren't particularly well paid, they were a small fraction of the economy (less than 1%), deposits were diffuse and no one bank's failure would endanger the system, they were not crazy traders, and banks clearly were servants rather than masters of the universe.  But true to cycle theory we promptly forgot the lessons of our great grandfathers (bunch of old fogies don't understand the modern world, you know), we tore down the protections they put in place, and now we have to deal with the current monstrosity that banking has become.

There are two mind-sets for solutions here at PP.  One is to return to commodity money with no fractional reserve lending - more or less a middle ages solution, effectively burning down the entire banking industry and tossing out elastic money because of our own stupidity in gutting the protections our great grandfathers put in place.  Its a system comprised entirely of base money.  Another is to propose an entirely new money system that will make us all (somehow) into better people.  "If we just had better money, we'd all be better behaved."  And there is a third motivation, which is the persistent myth: "we have to redesign the system because otherwise we won't have enough money to pay the interest."  Thats one myth I used to believe too, until I was shown that this particular myth was just completely wrong.  Once you add in base money, and money flows fast enough (i.e. you model the actual world), everything works fine, but you need to have a basic understanding of how systems work to wrap your brain around it - that, and a willingness to admit a long-held belief of yours might be incorrect.  Usually its the second bit where people run into the most trouble.

Anyhow, both proposed solutions involve revolutions, radical solutions guaranteed to provide huge numbers of unintended consequences.  How would non-elastic commodity money work in an industrialized economy?  How would it function on the downslope of peak oil?  Or - how would a new socially-engineered money system work when confronted with the usual subset of selfish, greedy, people (i.e. most of us) who dearly love nothing more than to figure out all the ways to game a new system "centrally planned" by fallible mortals with the best of intentions?

Tthere is a tradition in the software industry, where you take a largely functioning system that has problems or limitations, and you become enchanted with the idea of rewriting the thing from scratch so you can "do it right this time."  Do you know how well this approach works?  It works so poorly, and it happens so frequently, it has a name: it's called the Second System Syndrome.  I myself have personally experienced this.  The temptation to "do it right this time" is incredibly strong, and it very rarely leads to success.

The second-system effect (also known as second-system syndrome) is the tendency of small, elegant, and successful systems to have elephantine, feature-laden monstrosities as their successors due to inflated expectations.

The phrase was first used by Fred Brooks in his book The Mythical Man-Month.  It described the jump from a set of simple operating systems on the IBM 700/7000 series to OS/360 on the 360 series.

Communism is a fantastic example of a social experiment "second system syndrome" designed with the best of intentions by an extremely clever fellow, the implementation of which turned out completely differently than the original author had intended.  You will be shocked to learn that, instead of following the authors original virtuous intent, people ended up focusing on gaming the system.  It turns out, any system not based on individual self interest has a very difficult time in the real world, at least once you try to scale it up.

IMO, we just need something simple.  Glass-Stegall was 32 pages long, and it fixed banking for a generation.  That's a pretty efficient solution to me.  Why not just swipe that code and reuse it?  We know it worked!  There is a huge virtue in that.

Did it work for all time?  Of course not.  But it worked well for 40 years.  It worked as long as the people wanted it to work.  And if you tell me that 40 years isn't long enough - "oh no, I want a system that will be fixed for all time."  Sorry, that's just not possible.  Each generation has to figure things out for themselves.  All we can do is address the issue for our generation, declare victory, and go home.  A Dirty Harry quote: "A man's got to know his limitations."  We can't do the next generation's learning for them.  That's on them.

What would the 40-year solution look like?  Ponzi will leave banking, they'll go back to 1% of the economy (i.e. an 80% reduction of the industry), banking will return to a boring utility, no more trading or derivatives written with grandma's deposits, diffusion will mean they won't have enough concentration to control government, and largely, everything will return to the status quo ante.  Money won't make us into better people, but then again, I think that's a false promise anyway.  If you can show me a case where such a thing actually worked on a large scale, I'd be more inclined to listen.  Communism is great on a small scale, after all, its only when you go non-local that things tend to blow apart.

And of course I want my tax-free gold escape hatch.  That's my personal tweak to the system that was missing last time around.  Its a check and balance I'd personally like to have in place.  My descendants might decide to remove it - but I can't really address that, any more than I can dictate fashion or anything else.  All I can do is propose a fix for things in the here and now.

That's more than two cents, I know.  But I had a lot to say.

By the way, there are a whole lot of local-only systems that work really well when they stay at the local level.  Communism is one such system that seems to do all right when everyone more or less knows each other.  Likewise, local money systems have done well at the city level too, where local peer pressure, shaming, or enforcement can punish people who step out of line.  I'm entirely in favor of encouraging such systems, which can flourish within the context of a national self-interested regulated boring old elastic money system with a gold escape hatch.
For some reason, however, shaming (or "self-criticism", communism-style) doesn't work so well when you try to scale it up.  I'm not quite sure why that is, but that's how it seems to be.  Maybe shame only works when you really know your neighbors and their daily visible unhappiness at your conduct really can have a moderating influence.

Dave said:

For some reason, however, shaming (or "self-criticism", communism-style) doesn't work so well when you try to scale it up.  I'm not quite sure why that is, but that's how it seems to be.  Maybe shame only works when you really know your neighbors and their daily visible unhappiness at your conduct really can have a moderating influence.

I can add: the neighbors that know you, can (and will) punish you because you directly affect their interest. The police and the court are part of the community and their judgment is based on two things: facts and sentiments. When you scale up things, this is no more the case: you remove from the punishment mechanism the sentiment part. I think absence of shame comes also from this point. You can always fool the system because you can tweak the way facts are presented. You can't do that with your neighborhood that sees you everyday.

We can also add, the less local things are, the bigger they are, and consequently, the more attractive they become to the ambitious?

 

Dave,
My line of thought was to find out what (if any) properties of our current monetary system would remain intact after the wheels come off. I frankly don't see much surviving. Transportation will be limited (and dangerous.) Replacement parts will have to be scavenged. For the most part, fuel will be exceedingly expensive unless it is a local product. Central anything will be a distant memory. Money itself will migrate back to the old time definition. Why will we need banks?

Right now, we have to use Federal Reserve Notes because they are mandated and accepted by our government to pay our taxes. You could pay your tax bill with pennies, but they will all be valued at $0.01 regardless of any numismatic rarity. Even PM coins that were minted by the US mint will only be worth the nominal price stamped on them ($1 for a 1 oz. silver eagle and $50 for a 1 oz. gold eagle.) Precious metals or bitcoin are considered collectibles. Price gains are taxed at the collectible tax rate. It may not seem fair, but it is what it is.

It works reasonably well now. How will it work after the series of failures finally bring all of modern society to its knees? Lots of things that we take for granted now will simply not exist after the reset. The paper currency that we work so hard to procure may last for a short while, but its ultimate use will be for fire tinder or toilet paper. Copper sandwich coins (post 1964) will hold value a little longer. Junk silver (pre 1965) will likely be recognized and valuable for quite some time.

Junk silver and barter will likely be the currency between strangers/casual acquaintances. Within your family/neighborhood/clan/tribe, it won't be necessary. Gifting will be the "currency" and gossiping will be the regulatory system. It will work as long as everyone knows one another and shares in the commonwealth. It falls apart when the population gets too large and diverse.

This really is small scale communism at work. It currently works in most families. The parents earn the income and spend it as necessary. Do you force young children to pay for room and board? No! What would they do to earn money to pay their keep? Young children's job is to grow up to be a contributing member of society. When they get older, parents expect more from them. Would you give the same grace to a 20-something sponging off your goodness as you would a darling pre-schooler? If so, wake up and smell the shit your 20-something leaves behind.

The bottom line is that for now the $ (and the CBs) matters. It won't forever. I suspect that a form of communism will be the best system going forward. With localized communism, there won't be money for a new dam or a new school. Resources will be limited to what the local tribe(s) can produce. They might be able to build a new ditch to bring water to your fields (as long as it isn't too long and the perceived payoff is worth it.) Moon shots will be "so pre collapse!"

Grover

Grover-
I think you describe one possible outcome at a relatively distant point in time, and given that outcome, I agree with the outcome in the scenario you lay out: in a circumstance with little security and no government (except perhaps your local feudal lord to whom you turn for protection from the brigands), banks won't exist, nor will fiat money.  We'll be just barely above the barter level.  Hunks of metal, silver coins if you are particularly well off, think: "dark ages commerce."

That is not the only outcome, nor is it the inevitable outcome.  If we go down the route of more of a "slow burn", what CAF describes, rather than a drop through Mad Max into feudalism, banks will still matter, and much of society's structure will remain intact.  After all, we did all right back in the 1920s, with a whole lot less energy use than we have now per capita, and we had banks back then.  And so that's what I was describing, simply because I think its the more likely outcome.  Or maybe its just the outcome I prefer, its hard to say.

I focused on what I'd implement after the next banking crisis: the system for a still-existing civilization attempting to manage things in a state of peak resources.

 

Dave,
I appreciate your thoughts on this. I agree that my scenario is only one possibility. There are too many variables to be considered. The next crisis will have fewer variables to consider than any subsequent ones. Banking systems likely will still be functioning in some capacity. If our "leaders" need to modify the system, it will be sold as a "one and done" type of solution. It will work until it doesn't.

I'm in the stair step crash camp. CAF's slow burn implies a more uniform rather than a herky jerky transition. To me, the response to 2008 was what I expect more of. In nominal terms, we may have recovered the prior level of economic activity, but in real terms, we are still languishing. Silicon Valley and other unicorn islands may be in full glory, but most of the rest of America (e.g. Detroit) hasn't recovered. When the next upset happens, we'll be starting from a lower overall economic level.

This can only go on for a few cycles at most. Our systems have evolved to be efficient, not resilient. Break a few links in enough chains and modern commerce fails. Will the police be there to protect citizens when there isn't any pay? Who will keep the electricity running? How will food get to the cities? At that point, the slow burn turns into a self cleaning oven.

That is my reset point. I don't know when it will happen. Shoot, there may be some technological advancement that figuratively expands our petri dish world. I'm convinced that we'll eventually find one or more other limiting factors. We've already overshot sustainability levels without converting energy into edible calories. We can't go back to the relatively placid 1920s with this many people on earth. Something's got to give.

So, I don't worry too much about the intermediate steps while you focus on the next banking crisis. You'll likely gain far more from the next crisis than I will. As long as the system functions, I'm set up to do just fine. It's fun to postulate and speculate on which cog will break first, but it is more or less morbid curiosity for me. My dog isn't in the hunt. It is lounging on the living room rug.

Grover