Things hidden in plain sightSat 11:21 am +01:00, 6 Jun 2020
1. Things hidden in plain sight
2. A Fourth Turning
3. Limited Resources
4. It’s different this time
Things hidden in plain sight – Part 1 of 4
John Kenneth Galbraith explained that banking and credit creation is so simple a principle that the mind rejects it – because it is something for nothing, the proverbial free lunch stemming from the principle of banks creating deposits by making loans.
Thus at a stroke, the world is divided in two: into those who can see the world through bankers eyes; and those whose minds reject that vision.
When nothing much happens in years, our notion of normality moves in lockstep.
These days, though, I experience difficulty in making my loved ones aware of changes in plain sight, and of the pace of change that picks up toward a time when decades happen in weeks. The banking principle is well known and has existed in its present form for decades, if not centuries. But our times are moving into a confluence of different principles that will demand the holding of conflicting ideas in our heads, creating a sort of cognitive dissonance squared that cannot easily be resolved, though those who can choose to see the world through Banker’s eyes adjust quickly.
Maybe you’ve had that sense of unreality? As if life is beginning to imitate Art, and somewhere, cameras record a script being played out for real.
Maybe it’s that moment in Ghostbusters – earlier, in the library there was a moment of chaos – and now the hero researchers, the ghostbusters-to-be, are examining the scene : “That happened to you before? No? First time?“
This Bank of England paper (2009) referencing 2005 might phrase that differently :
“We are seeing things that were 25-standard deviation moves, several days in a row”
To provide some context, assuming a normal distribution, a 7.26-sigma daily loss would be expected to occur once every 13.7 billion or so years. That is roughly the estimated age of the universe.
Here’s the punchline :
“All of the other assembled bankers began subjecting their shoes to intense scrutiny.”
To understand the humour of the situation, you would need something that was omitted for your education. We are taught about the circulation of money, Taxes, Households, Firms, but Banks are omitted. Banking is discussed as if it happens on Mars, despite our high streets filled with Banks, some fronting like Greek or Roman Temples. There is a reason for this: throughout history, up until the modern nation state, temples also functioned as banks. You might say that the Bible’s Book of Leviticus should be called the Rules for Priests, or you could say the Rules for Bankers. So how banking should appear to our eyes is perhaps carefully obscured, though hidden in plain sight might describe it better.
These are things you can see, in much the same way that a map can be read once the knowledge of how to read it is given. There are other things that we are taught to accept. If we go into a cinema to see Ghostbusters (1984 version), or another film, we expect to walk out a couple of hours later with the complete story. We accept the scene setting in the beginning of the film, the pace quickening as the plot unfolds and as the script rolls on, and as the finale is reached, events happen so rapidly that they overlap. We never stop to consider how much of our suspension of disbelief depends on context, or whether the framing within a defined timespan alters our insight into the film’s message.
Chekhov’s famous advice to playwrights that the pistol in the first scene is to be used in scene four, is also an admonition to pare the play down to the essentials. Real life contains many more distractions but over time, life’s capabilities do not go unused. In this respect Art imitates Life, but because each individual has, in effect, their own event horizon, it tends to be only in retrospect that a complete series of events can be viewed. Bigger events take longer, but they all follow the same pattern. As in the quote from Earnest Hemingway’s “The Sun Also Rises” – “how did you go bankrupt?” Two ways. Gradually, then suddenly.
The Banker’s close inspection of their shoes was a warning that went almost unheeded. A sign that the pace of the play had quickened.
I will not trouble the reader with the arcane detail of banking, or that part of history surrounding the creation of the Bank of England, and the creation of the Federal Reserve Bank, though the reader should note that the US Constitution specifies only gold and silver as money.
Albert Einstein famously said that compound interest is the most powerful force in the universe. He said, “Compound interest is the 8 th wonder of the world. He who understands it, earns it; he who doesn’t, pays it.”
There is a connection between Energy and Money. The price of gold consistently reflects the quantity of energy needed to mine it. Similarly, there is a relationship between compound interest and inflation, and the actions of the Central Banks, though, as the Wizard of Oz would say, “Pay no attention to the man behind the curtain”.
Literally today the man behind the curtain is Jay Powell :
“Meanwhile, we look like we are blowing a fixed-income duration bubble right across the credit spectrum that will result in big losses when rates come up down the road. You can almost say that that is our strategy.”