In an update to his popular post, which is causing some interesting commentary on Twitter, my co-blogger Karl Smith has this to say:

My argument is no, this isn’t just another bad experience. Its a failure of our most basic institutions and is leading to pure loss.

Indeed, I think that the wrong way to think about the problem of recessions is that there is a fundamental problem with market economies, or that recessions (no matter how deep) represent a market failure. To me, this recession (both the depth and length) is fairly clearly a monetary failure…and if you catch me on a bad day (or a good day, depending on your disposition I suppose), I’d even go as far as to claim that the type of money system we use makes our economies prone to the types of failures we have recently experienced. In fact, financial crises are not rare. The World Bank has identified 96 banking crises (large enough to cause economy-wie problems) and 176 monetary failures since the dismantling of the Bretton Woods in 1971.[1]

Even before the termination of gold convertibility, massive crashes were remarkably common the world over. From the Holland tulip mania to the Great Crash of 1929, these crashes have happened with frightening regularity. Being as these types of economic issues span countries, time periods, regulatory regimes, and degrees of economic development; I think that it is safe to say we should begin turning a inquiring eye toward the one system that permeates all of these societies throughout time and location.

That, of course, is the type of money we use, the characteristics of which have been replicated by nearly every society since the relinquishment of barter, and the dawn of what we would consider “modern money”. This recession is, of course, no different. An increase in the demand to hold safe assets (of which the medium of exchange is generally the safest, at least in developed economies) causes a disconnect between workers and factories. People and machines sit idle. Productive capacity dwindles, along with hours worked. Price and wage stickiness facilitates a real downward adjustment to market clearing rates to cause grinding deflation (or disinflation, which under a regime of positive trend inflation is similarly problematic).

Is there a bug inherent in the money system that is used the world over that causes these disconnects? I think that analyzing the dynamics of the flow of biomass through natural ecosystems can provide useful insights into how the money we use causes the economy (or sectors of the economy) to become brittle (too brittle to sustain?) and prone to failure.


[1]Caprio and Klingebiel, 1996

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