Category Archives: Business

Value(s) by Mark Carney: Chapter 6 The Market Society and the Value of Nothing: Key Takeaways / Analysis / Citations

Chapter 6 The Market Society and the Value of Nothing

Key Takeaways

The way we value the market has bled into how we value everything in society and that is harmful to public policy, society and quality of life. 

Gift giving is an emotional value that cash cannot measure. Economic value is commodification these days. The reality is market value is taken to mean intrinsic value (the net present value of all future cashflows). And so in the market society, they know the price of everything and (try) to calculate the value of everything. 

There is another way to view reality. Relative equality is better for society, more opportunity distributed to as many people as possible is better for GDP and for happiness within society. Inequality has a negative impact on economic growth. 1% Gini-point increase in inequality leads to a 6% increased chance that economic growth will fall in the coming year. Carney pulls out some social science research (warning: difficult to base conclusions on data science that involves human subjects as we aren’t always rational and will defy expectation because we are awesome creatures!). Carney shows that inequality is bad based on the IMF research etc…over the long term. In the short-term, inequality is shown to be positively correlated to GDP growth. 

Carney believes that happiness is the key to life, not just money. He lists the keys to happiness:

  1. Mental and physical health;
  2. Quality of relationships;
  3. Sense of community;
  4. Job satisfaction;
  5. Income/money;
  6. Society status (freedom, government performance, peace)

A little bit of money to the less well off can truly boost GDP. For example, after about $75K USD a person’s happiness is not necessarily improved with that much more money according to Milanovic’s Capitalism Alone. Happiness does not equal just prosperity. John Rawls veil of ignorance as in, if you were born again but didn’t know under what circumstances you were to be born, what kind of societal arrangement would you want….is the marker that Carney supports. 

Carney argues that Freakeonomics is incorrect when their authors argued that economics is morally neutral. Carney believes that economics is moral. He’s in good company. Adam Smith and Socrates also believed that economics is a moral science. Whether economists realize it or not, they typically are trading in a utilitarian approach of some variation: “to maximize the greatest benefit to the most people”. Utilitarianism is about the happiness of the most number of people according to Bentham. Carney’s point here is that economic growth maximization is not necessarily going to lead to the best welfare outcomes in society. There is a risk as Milanovic argues that the endpoint might be “utopia of wealth and a dystopia of personal relations.” page 137, Value(s).

Carney asks, what about:

  1. Distribution of the gains and losses or
  2. Unpriced benefits and costs related to the dignity of life…..

Carney believes the social capital (altruism, supporting each other, sharing) has been crowded out by economic capital, selfishness. John Kay’s approach is useful here. That the pluralism of capitalism enables a) creative trial and error testing of ideas where the bad ones disappear, b) entrepreneurial energy is focused on wealth creation rather than value capture/rent-seeking. 

Capitalism is the best way to organize society. China and Russia are have capitalism without democracy. A political capitalist society has 1) an efficient technocratic bureaucracy, 2) rule of law, 3) autonomy of the state. 

What was needed to build on the capitalist foundation is: 

  1. A competitive nation state in the form of Thomas Hobbes’ Leviathan. A state could ease these fears;
  2. The rise of the liberal state with a professional class of bureaucrats/civil servants;
  3. The welfare state from Bismarck to LBJ’s Great Society;
  4. Thatcher and Reagan’s revolution unlocked dynamism at the time. For Carney, red-tape, state ownership of commercial businesses, extensive regulations and the states interference in the markets needed to be shaken up. Pro-market ideas shifted the overton window such that the market society became conventional wisdom for Carney as he started out his career. Inequality rose and economic dynamism did as well. The right thinks the state gives too much where teacher unions are prioritized over students and the left thinks the state gives too little with small state arguments to push special interest groups. It’s a false framework.

The Tommaso Padoa-Schioppa Doctrine:

Carney worked with Tommaso Pado-Schioppa as the Italian Minister of Finance at the IMG/World Bank Annual Meeting in Dubai in 2003. His argument was that if the market is deep and liquid it will move towards equilibrium or that the market is ‘always correct”. Tommaso said that this ideal had gone too far. He argues that ”when we grant an entity infinite wisdom, we enter the realm of faith.” page 135, Value(s). In short, policymakers should not simply take their orders from the masters of the universe, the market is not infinitely wise. His major contribution is that:

  • Separation of linked spheres is healthy: The church and state should be separated because these two aspects of life ought not to contaminate one another because when they do it is depravity.
  • Political and economic activity is also linked but also separated. They may determine the fate of the other power and wealth and…..

The Social Contract is Breaking Down:

As Michael Lewis explains to the Princeton graduating class “Success is always rationalized. People don’t like to hear success explained away as luck – especially successful people. But you are lucky to live in the richest society the world has ever seen, in a time when no one actually expects you to sacrifice your interest to anything.” (page 138,Value(s))

Equality of opportunity has fallen as well. Social mobility: 

Gatsby curve. People who get rich generation by generation versus nouveau rich.

Why It Matters:

Carney argues for creating a foundation of inclusive capitalism: 

  • Dynamism: The dynamism is essential;
  • Sustainable: To align incentives between generations, there needs to be sustainability;
  • Trusted: Markets need to be fair in order to be effective and trusted;
  • Accountable: Individuals must be responsible or accountable for their choices. 
  • Solidarity: Citizens must recognize their obligation to each other, there is a need for solidarity.

The Financial Crisis revealed: 

  • Major banks were treated as too big to fail with a “heads I win, tails you lose” mentality;
  • Market benchmarks were manipulated for personal gains;
  • Equity markets support the technologically empowered over the retail investor.

Commodification or Hyper-Capitalist Society that Carney would like to Fix:

  • Erosion of the trust.
  • Money is not that glorious. 
  • Cheating in sports. 
  • Companies typically create shell companies. 
  • There are forced sellers. 
  • Traders only care about money, a crisis of culture. 
  • Voluntary system: payments take away the moral system. Money doesn’t solve all problems:Israeli day-care fines story: the lateness fee actually gave parents the license to be lade. 
  • Paying a child to read makes the act of reading work..

The thesis of the book remains: “How do we learn to be moral again?” – Rabbi Jonathan Sacks with a sprinkling of:

  • We need to grow our civic virtue: Civic virtues are grown, not drawn down. Nicomachean Ethics by Aristotle talks about cultivating virtue with practice…like a muscle that needs to be exercised regularly.
  • We need a scorecard of value: Cass Sunstein’s scorecard competition for all the values that are beyond capital but aren’t calculated in economics or aren’t valued.
  • We’re measuring value incorrectly: The idea that value is measured by the sum of all market prices it’s just wrong. 
  • Pragmatic centrism: Joe Biden says “don’t tell me your values show me your budget” Carney’s solutions are readily presented in this section but you have to expect that involves money being redistributed while presenting his investment banker credibility as amenable to incremental rather then radical and ineffective revolutionary change.
Introduction: Humanity Distilled Chapter 1 Objective Value
 Chapter 2 Subjective Value Chapter 3 Money & Gold
 Chapter 4 Magna Carta  Chapter 5 Future of Money
 Chapter 6 Market Society Chapter 7 Financial Crisis
 Chapter 8 Safer FinanceChapter 9 Covid Crisis
 Chapter 10 Covid Recovery Chapter 11 Climate Crisis
 Chapter 12 Climate Horizon Chapter 13 Your Values
 Chapter 14 Values in Companies Chapter 15 ESG
  

Analysis of Part 1 and Chapter 6

  • The citations are extensive because the claims are more normative (what ought to be the case). We have to wonder, finishing off this section, we should appreciate the analysis but where are the solutions; Woodrow Wilson might have stayed vague about the League of Nations but the hope is that Carney will delineate how you get a trader to “be more moral….”
  • Just as Carney takes us on a winding and fascinating journey to show that ‘money is a proxy for value’ so too does he inch by inch explain that ‘more money tends to lead to more problems after a certain individual threshold’ in this chapter.
  • While the claim that inequality in Ireland went down and the economic growth went up is obviously a data science play. There is no way to know for certain with statistically expressions which cannot reflect the complexity of reality, that inequality declines lead to increased GDP. The thesis is political which by definition means that because it was applied across the entire sample (a country) we cannot validate that inequality is the independent variable (decline in inequality) that drove the dependent variable (rise in GDP). So it is in the realm of “I don’t know if for a fact but I know it’s true.”
  • He has not read the Subtle Art of Not Giving A @$ck and others who view happiness as highly overrated. There is a strong conservative (perhaps) streak that says that the kind of thinking that focuses on making life easier, happier truly ignores the importance of cruelty, fear and unhappiness which can also serve to drive GDP or meaning in one’s life…in the proper dosage per person. 
  • How fair is a financial system that allows for people to put cash that they have saved up or inherited or otherwise to put that cash into the market and then get more money in exchange for risking that capital? 
  • “Greed, for a lack of a better word, is good.” Michael Douglas in Wall Street
  • Cue Matthew McConaughey in The Wolf of Wall Street
  • Carney worked at Goldman Sachs…where is the long list of transgression of that firm?

Citations Worth Noting for Part 1: Chapter 6:

  • John Maynard Keynes, The Economic Consequences of the Peace (London: Macmillan, 1920).
  • Joel Waldfogel, Scroogenomics: Why You Shouldn’t Buy Presents for the Holidays (Princeton: Princeton’s University Press, 2009) and the “The Deadweight Loss of Christmas”, American Economic Review 83(5) (1993).
  • Michael Sandel, What Money Can’t Buy: The Moral Limits of Markets (London: Penguin, 2012). 
  • Johnathan D. Ostry, Andrew Berg and Charalambos G. Tsangaride, “Redistribution, Inequality and Growth” IMF Staff Discussion Note (April 2014).
  • Abhijit Banerjee ad Esther Duflo, “Inequality and Growth: What Can the Data Say?”, Journal of Economic Growth 8(3) 2003. Growth and inequality are non-linear.
  • Shekhar Aiya and Chistian Ebeke, “Inequality of Opportunity, Inequality of Income, and Economic Growth’ IMF Working Paper No 19/34 (15 February 2019)
  • Albrto Alesian, Rafael DiTella and Robert MacCulloch, “Inequality and Happiness: Are Europeans and Americans Different?” Journal of PUblic Economics 88 (2004).
  • Richard Layard, Can We Be Happier? Evidence and Ethic (London: Pelican Books, 2020).
  • Brank Milanovic, Capitalism Alone: The Future of the System that Rules the World (Cambridge, Mass.: Belknap Press, 2019).
  • Steven Levitt and Stephen J. Dubnet, Freakonomics (William Morrow and Company, 2005).
  • A. B. Atkinson, “Economics as a Moral Science”, Economica 76 (2009) (issue Supplement S1).
  • Cass R. Sunstein, The Cost-Benefit Revolution (Cambridge, Mass.: MIT Press, 2018). 
  • Tommaso Padoa-Schioppa, Markets and Government Before, During and After the 2007-20XX Crissi, Per Jakobson Foundation lecture, Basel, 27 June 2010.

Value(s) by Mark Carney: Chapter 5 The Future of Money: Key Takeaways / Analysis / Citations

Chapter 5 The Future of Money

Key Takeaway

Carney opens this chapter by admitting that predicting the future is extremely hard. And so he will be looking at the past as a proxy for how money might evolve. But who knows. The mistake is to think you were right on a prediction because your modelled assumptions reflected reality well. Just considering the changing variables between the point of prediction and the point of evaluating the prediction, if you predict something correctly, then you should admit to yourself that you were to some varying degree “thoughtfully lucky.” Admitting that is easier said than done, especially if your career (portfolio managers, pollsters, policy makers) depends on your claim of superior judgement. 

Revolutions become conventional wisdom in retrospect. Democratization of financial technology is happening all around us, well sort of. Carney admits the institutions typically do not identify innovation positively, and by definition are slow or disincentivized to respond to it. 

Externalities Drive Change:

Digital changes are coming, of course. Mobile telephony could change the future of money. This is why Carney is on the board of Stripe, effective March 2021. Enabling technologies, as the term suggests, allow financial innovation in every era. The telegraph to the stock ticker to the personal computer to the Bloomberg Terminal to the tablet. Cables on the Atlantic Ocean bed enabled messages to travel from North America to Europe…..the Internet ‘s instant information slowly replaced the Pits on the Stock Exchange floors, you don’t need the market makers. There are a bunch of other tools that have played a role in the evolution of finance, often in unexpected ways such as BitCoin. 

History of Financial Technology:

Most prominent innovations start in the private sector then they get nationalized. The private sector is less equipped to manage currencies and the likelihood of debasement is very real as discussed in Chapter 1:

  • Chinese banknotes were developed in 7th century China to avoid heavy copper coins;
  • Marco Polo brought banknotes to Europe and of course debasement was a side-effect. Paper money in the 13th century was a unique innovation. 
  • Medici’s 14th and 15th dynasties of Florence introduced bills of exchange as a way to manage medieval trade between nations and city-states. These IOUs could be used for convertibility of banknotes into other assets. 
  • The Bank of Amsterdam’s 17th century innovation of fractional reserve banking also expanded the risk of debasement once again

In 1694, the Bank of England as the central bank served as supervisors of the private banks. 

  • The most powerful innovation is the ledger which enables record transactions, comparing balances and assessing risks. 
  • Deposit protection is also a nice innovation provided by central banks. 

Money is changing in response to “AI”, cryptography and social media information leakage. Likes could become a ‘social currency’…they already are for advertising revenue. However, the financial system is centred on dealers hubs and payment spokes. Most of the innovation in the West is around: 

  • Payments such as contactless credit cards;
  • Banking apps to replace branches;
  • Mobile wallets….in other words, making digital what was analogue.

For Carney, Bitcoin is not the answer but the universal ledger is interesting. The blockchain subcomponent might have legs. But the incentive of contributing to the ledger in exchange for BitCoin may not be the right structure. Smart contracts could be useful. For Carney, however, the more things change the more they stay the same.

The Evolution of Money:

The underlying payment system is the same. The commercial banks are regulated by the central bank. All transactions in sovereign currencies are cleared by the central bank since commercial banks settle there. This is expensive. Payments can be slow. WeChat in China and PayTM is India cover most of the mobile transactions globally (about 90%) since most of the mobile payment customers are in China and India. Meanwhile, Robinhood may be selling trading data to large asset managers in order to front-run those trades.

So, for Carney however, trust takes years to be build, seconds to break and years to rebuild. For Value(s), maintaining and protecting public money is critical and so Carney won’t be very bullish on cryptocurrencies by definition. His warnings are on point however. 

The Grounding of Private Monetary Innovations:

These private monetary systems are worse than tulips as an asset whose subjective value was out of whack with its price. Pay attention to debasement even with crypto currencies since they aren’t even scarce in the case of Dogecoin which was intended as a joke originally. 

Mark Carney’s test for a new system of Money:

  1. It must be trustworthy and resilient: new money should hold its value (monetary stability), and the institutions that use it should also be reliable (financial stability) and should not have outages; 
  2. It must be accountable and transparent: protecting privacy must be sustained; ensuring finality of payments and define the rules for anonymous versus access to customer information;
  3. It must be democratic and not private: that forms of electronic private currencies wherein the creator of the currency controls a large block of the currency independent of a sovereign actor is not tenable…not that this precisely what BitCoin is a big F.U. to central banks and the PMC (Professional Managerial Class). 

Further unresolved questions from Mark Carney about cryptocurrencies:

  • Does the currency have tacit consent of the society? 
  • Is the currency run by a bunch of non-responsive computers or a private sector actor with narrow self-interests?
  • Does the currency have the ‘unconditional backing of the state’? 
  • Does the currency mimic the physical transaction such that the final decision is irrevocable? 
  • Is the debt cleared as soon as the transaction is complete?
  • Is there a public backstop if this new money fails? 
  • Who will back the crypto users if there is a fundamental collapse? 
  • Will the tulips still have some value or will the collapse be complete? 
  • What institutions will provide liquidity to an anonymous system? 

As this line of question implies, central banks are here to stay in Carney’s opinion.

Evaluating the Three Current Options based on Carney’s Test for a new system of Money: 

Two types of money according to Carney:

account based and token based money. 

  • Token based: have many examples for example the Yap stones to banknotes. The intrinsic value of the token is worthless but the power is institutions that back that token. 
  • Account based: settlement at the central banks where the payer is debited and payee is credited. This hasn’t changed since Amsterdam. 95% of all transactions are account-based.

There are two tiers here: private/commercial banks create private money by making new loans. 

These loans are supported by capital and funded by deposits. And the commercial banks settle with the central bank. 

Argument for decentralized cryptocurrencies being more trustworthy than centralized FIAT money is four fold:

  1. Debasement is not as easily achieved since the total number of coins to be mined is fixed (for most coins);
  2. Private banks aren’t using crypto-currencies and that’s a good thing. Banks charge a commission for most of the global transactions using sovereign money, therefore anything that prevents banks for generating a profit is going to be seen as a powerful consequence/punishment for the financial crisis that spurred these crypto-currencies in the first place;
  3. Those who hold it are anonymous and therefore free from the ravenous eyes of tax authorities etc.
  4. There are fewer intermediaries with a ledger that is publicly available for all to see rather than a ledger managed by a central bank.

Cryptocurrencies and the Role of Money:

cryptocurrencies don’t meet the requirement of the role of actual money: 

  • Massive fluctuations in the value of the currency is a bad sign. BitCoin has a standard deviation of 10 times that of the British pound, therefore it is not a stable currency at all and highly susceptible to manipulation;
  • These currencies do not have intrinsic value or backing from a central bank, obviously;
  • Debasement happens when a crypto-currencies fluctuate in a debasement-like manner  (i.e. the lowering of the value of a currency) even though their intention is to prevent ‘arbitrary printing’ of currency;
  • If all global money was BitCoin, then the ability for society to overcome a depression would be severely hindered based on its non-responsive design;
  • New issuance of crypto-currency is not in response to a reflection of an underlying asset or even an approximation of the economic reality that currencies ought to reflect;
  • Few retailers use these currencies. There is no demand to use the currency as a medium of exchange based on these unstable prices;
  • Transactions are slow, Bitcoin is 7 per second, Etherium 25 and mining (which is the proof of work) is carbon intensive; 
  • Cryptocurrency is attractive as a castle in the sky where new investors support earliest adherents and where early adherents churn the value upwards further through advocacy;
  • Concentration of ownership and or holding is a problem (debasement but also manipulation on an unregulated exchange: thievery), such that you can build a currency to market your particular product through and then that crypto-currency can potentially become a tulip bubble where on the way up, some investors put their net worth and then the market snaps that up at a point that is not correlated with broader NPVs but by some dude’s tweet or a major movement (caveat emptor); 
  • Carney believes that nations will ultimately regulate on crypto exchanges and that there would not be a coordinated effort by the FSB or other international entity;
  • BitCoin is an “algorithm” and LiteCoin is a currency that many new versions split from; including Dogecoin;
  • Blockchain is not proprietary for the creator therefore unlike owning a stock in an underlying company, you do not own any portion of the system that makes the currency possible. 
  • Still mostly about appreciation of a pseudo-currency and then converting it at the top of the peak back into USD or your local currency…There are the risks of using the currency as a digital cash which is great for international money laundering etc as long as the value continues to increase relative to USD or your local FIAT;

Mark Carney drops the A-bomb here which can be expected to be met with hostility: “Cryptocurrencies are not the future of money” page 114, Value(s). Adding to this in the Notes…”in the words of General Manager of the BIS (Bank of International Settlements), Agustin Carstens (2018), ‘Novel technology is not the same as better technology or better economics. That is clearly the case with Bitcoin: while perhaps intended as an alternative payment system with no government involvement, it has become a combination of a bubble, a Ponzi scheme and an environmental disaster. The volatility of bitcoin renders it a poor means of payment and a crazy way to store value. Very few people use it for payments or as a unit of account. In fact, as a major cryptocurrency conference the registration fee could not be paid with bitcoins because it was too costly and slow: only convention money was accepted.” (Page 546, Value(s)). 

But Carney adds that they are useful for the low correlation with other assets in a portfolio and also as mentioned above this blockchain concept may have legs if the incentives and decentralization utilized properly.

Stablecoins:

Mark Carney says stablecoins are more interesting…because: 

  • Retail payment across borders are expensive and that is reducing global commerce which is a shame and is due also in part to protectionism;
  • There is a lack of universal access to financial services around the world both currency but other asset classes potentially;
  • These stablecoins are tied to underlying assets which are typically sovereign currencies (public money) therefore it’s the best of both worlds or the worst depending on how crypto-centric your investment strategy is…;
  • Basically, these crypto-currencies don’t really make much sense as new currencies themselves based on a long history of private bank currency issuance and debasements but if stabilized by being another way to pay GBP to USD with no or fewer intermediaries, then there is an ecosystem there…and he’s not talking about TransferWise or new remittance companies that capture this new efficiency, he’s talking about an end consumer decentralized coin here….of course, the paradox is always (what is the business model for someone to build and market such a stablecoin?)…Enter Facebook CEO Mark Zuckerberg….
  • Tether (tied to USD) and Libra (rebranded to Diem) which is a payments system rather than a money since it derives value of sovereign currencies are what Carney is entertaining as a possible future of money IF those mediums of exchange are tied, tethered to public money….the key with Diem is that since it has a base of 2.5Billion Facebook users and about 1Billion active users (because Facebook is no longer cool), Diem could circumvent fiat money.
  • M-Pesa is another example of ‘financial inclusion’; 
  • Note that the ledger does not necessarily have to be decentralized, ie. It could be a closed pool of miners that are protecting the ledgers integrity…. 
  • Carney points out that Stablecoins should heed the warnings from the Bank of Amsterdam where “Debasement happens.” Binding rules matter. 

The problem with stablecoins is that it still falls prey to cash on steroids (money laundering! terrorism financing! Other illicit financing!) Those things are bad for society. 

Central Bank Digital Currencies:

Central Bank Digital Currencies (CBDC) are an electronic form of central bank money. CBDC bridges the divide between legal digital currencies and crypto-currencies that in time, Carney argues will be subject to being made illegal (at the exchange level principally and the anonymity is pseudo according to Carney). Currently, if we transact via accounts then we are using private bank ledgers that are fueled by the central bank. The only ‘risk-free asset’ of a central bank is the banknotes/cash in hand. CBDC is the best of both worlds: a) 24/7 payments, b) provide a stablecoin model that is backed by a publicly accountable/liquid/operationally sound solution of which work is slowly being developed.

Carney recommends a two-tiered system where consumers have an ‘indirect claim’ to the CBDC through a private bank or digital wallet (Apple Pay or Facebook’s Calibra). Central banks would supervise these wallets with integrations into smart contracts, and if the customer agrees, to better data pooling for improved digital services. Carney figures this is the efficiency gain such that paper money can be phased out (seigniorage: the value of that currency versus the cost to produce that currency). Carney believes there is true value here, consumers would be able to access the risk-free asset digitally…. 

The questions for CBDC are: 

  • if consumers can’t convert their holdings would the government back them? Oh yes! Like current deposit insurance.
  • Would there be a risk of a CBDC Sterling being worth more or less than actual banknotes?
  • Would you try to create a token currency or an accounts based currency? Central banks would want an accounts based solution. 
  • Why not allow every citizen to have an account with the central bank? Because then there would be massive shifts of capital from commercial banks into the central bank during a crisis. It would also undermine the commercial banks as intermediaries.
  • If interest is paid to the CBDCs then it would be attractive to be paid in CBDC however, it would weaken the dealers in the banking system…a bit of a problem there…But it would also allow the central bank to neatly charge “negative interest rates” which is currently mitigated because cash yields zero or slightly negative interest when taking storage costs into account. So is CBDC solving the right problem here? 
  • Famously negative interest rates would make holdings in accounts less attractive and make putting money under a mattress a better move for consumers…
  • There is also the Know Your Customer implications of CBDC, prevents money laundering, terrorism could be tracked etc…
  • Under what circumstances could customer data be accessed? 
  • Would it be to the benefit of better targeting customer services for consent? 
  • The big elephant in the room with CBDC is that the central bank would be crowding out investment dollars from private investment projects…

Carney then shifts his attention to musing about the social credit system in China. Just mentioning it really. Instagram and YouTube stars who are creating value that is underpinned by advertising revenue/marketing. 

Trust is Key:

Money must be “resilient, responsible, transparent, dynamic and trusted” (122, Value(s)). Trust in independent institutions is paramount. The default situation is much like democracy, the public will cede control in exchange for the economic and financial stability that central banks facilitate. For Carney, the key is to spot the difference between good innovation and mediocre snake oil. The 2008 crisis triggered a revolution in crypto-currencies but the real value of money is in the public trust with central banks. 

Introduction: Humanity Distilled Chapter 1 Objective Value
 Chapter 2 Subjective Value Chapter 3 Money & Gold
 Chapter 4 Magna Carta  Chapter 5 Future of Money
 Chapter 6 Market Society Chapter 7 Financial Crisis
 Chapter 8 Safer FinanceChapter 9 Covid Crisis
 Chapter 10 Covid Recovery Chapter 11 Climate Crisis
 Chapter 12 Climate Horizon Chapter 13 Your Values
 Chapter 14 Values in Companies Chapter 15 ESG
  

Analysis of Part 1 and Chapter 5

  • Carney suggests that cryptocurrency could be made illegal. What would that legal mandate look like? What would be the justification? As long as there are some decentralized bit-torrents working away then its had to close that down. 
  • If something doesn’t make sense, then it doesn’t….the alignment of greed with altruism (replacing central banks who ‘arbitrarily dispense currency’)
  • Mark Carney misses an opportunity in this chapter to illustrate the concept of objective value in the digital age because blockchain ensure, through computational “proof of work”, that a transactions on the ledger is the true transaction, making blockchain highly trust-independent / decentralized. This act of mining ie. proof of work is an example of objective value as it is autonomous labour that is engaged in the proof of work! Adam Smith would be proud for a micro-second but then realize the value is ledger itself. Review this industry standard explanation of cryptocurrency here for more details.
  • The playroom to fiat is not to have computers decide the supply of money but rather independent data points that cannot be games that are connected to real economic demand. 
  • To look under the hood of Bitcoin and other crypto-currency might highlight that the market is subject to massive manipulation by Elon Musk for example as well as investors who got in early who then reinvest with their massive winnings are much the higher prices in order to further churn-up the currencies value.
  • It appears correct that monetary institutions aren’t just powerful arbitrarily, they are powerful because they facilitate the financial system, stupid! The evolution in money is a product of a back and forth between private innovation and political and economic responses to those innovations. 
  • The criticism of the Professional Managerial Class who may or may not be “rich” off the back of their central banker or commercial banker role is an important concept in BitCoin. Those who are not in the PMC, didn’t complete the Charter Financial Analyst exam or didn’t get a PhD in economics and instead mined BitCoin frequently point out that the PMC-types are the croaks and that the miner of BitCoin who are trying to replace FIAT currencies are the ones who driving the Ferrari (too bad there are some suckers buying at the wrong time building castles in the sky….). 
  • Carney seems to overlook the fact that there’s a venn diagram between the actions of central bankers and the commercial bankers whose butts needed to be saved during the financial crisis. The lender of last resorts is imbedded into an infrastructure that does not directly assist individual citizens but rather realizes on intermediaries (commercial banks) which have their own self-interest at heart as well as their customers to varying degrees. The ire of the general public was that these experts had screwed up and walked away while the public had to pay in various formats: a) declining economy, b) houses underwater, c) quantitative easing that served to debase salary  in real terms etc. Who made Carney the master of the universe turned public sector enabler? Are his motives subject to unconscious bias about who deserves to be bailed out? In times of crisis, central banks typically operate with a friend and social network of adjacent private sector allies looking to keep the arteries of the financial flowing with liquidity with means to distributing financial relief to small business owners, employees etc…There is no helicopter of money or universal basic income but rather the academic central banks biases at hand. With Bitcoin, ostensibly the trust is in the ledger itself. It’s flaw being it is complete untethered to economic activity. 
  • RTGS and the APIs to the PSPs (alternative payment providers) have started to take off via Carney’s leadership as the Governor of the Bank of England. I would say he is open to such progress, and able to mitigate the detractors within the monopoly to effect incremental change. 
  • The emergence of crypto-currencies which currently operates as assets (despite having no net present value of future cashflows) or tulips rather than actual currencies is due to an alignment with greed and altruism. Greed in the sense that the value of the currency enables a tulip bulb increase in valuation that can be sold to the next fool in a highly liquid market. Altruism in the sense that the currency proposes an alternative to public money which is not trusted. Of course, the flaws in a bit-torrent type decentralized ‘central bank’ are myriad: slow transaction speeds, security risk at the doorway between the blockchain and the transaction interfaces, environmental costs to mine these coins but I know a few people have really gotten rich just be doing something that seems ‘stupid’ and not fit for the purpose it was intended for. Ultimately, crypto-currencies most ardent defenders have the value to prove it worked for them, unless they lost on those transactions…
  • One gets the impression of castles in the sky, but there are a lot of people who made great wealth by selling castles in the sky and got out before it collapsed. 
  • Mark Carney’s interest in protecting public money seems self-interested but it is also system-interested. If you consider the last 4 chapters, this one is well placed to be an “oh, yeah” moment. Money is about reflecting scarcity of measurable goods and services whether via the classists (objective value) or neoclassicist (subjective value. Competing cryptocurrencies are less obviously about values but the narrative that central banks are evil is a nice marketing strategy here.
  • At first, I wonder why would Carney bother with a crypto-currency at all if all you are doing is further enriching and empowering the existing interests. He has identified the real problems in finance, intermediary costs, lack of global transactions without onerous fees. Some of this is about avoiding government tax however, Carney wants to take the fun out of this crypto-revolution and keep the practical benefits. Makes sense from his standpoint.
  • If the private sector drives innovation and then public/government sector nationalizes that private sector innovation then is there a risk that the private sector will be dis-incentivized to create in the first instance? Probably not, because risk reward is not that simple and also there are select nationalizations that occur where either the profit margins are too small to deliver the service such as rural telecoms or there is the risk of not nationalizing being greater than the risk of allowing private interests to exploit the innovation to the determinant of society. With crypto-currency, such nationalization is hard to implement however so Carney is more an advocate of steal the good ideas and let these crypto-currencies die on the vine. 

Citations Worth Noting for Part 1: Chapter 5:

Value(s) by Mark Carney: Chapter 4 From Magna Carta to Modern Money: Key Takeaways / Analysis / Citations

Chapter 4 From Magna Carta to Modern Money

Key Takeaways

Constitutional Principles Underpin Money: Sound money is a societal convention that is backed by institutions that reflect some abstract form of that society’s values in Carney’s view. He then turns to another societal convention, democracy to illustrate the value of rules that are independent of the will of strong actors, whether it be bankers or politicians. Carney makes the case here that Britain’s innovation in banking stems from its innovating in constitutional order.

Magna Carta 1215: was on display at the British Museum in 2015. It is a bunch of rags really. But Carney sees the 800 year anniversary as a reminder of its amazing story. It was a product of its time. There were a series of Magna Carta documents, each increased as a pragmatic negotiation between King and powerful interest groups. 

Factors in the Run-Up to the Signing of Magna Carta: 

  1. There was a dysfunctional English (actually French) monarchy;
  2. The war with France over European conquests was expensive;
  3. The relationship between local barons and central authorities (monarchy) was poor;
  4. Kings of England typically lived in Anjou or Normandy until 1205 when King John moved to England and started to more closely track the silver stockpiles of barons. Barons directly collected fixed farm income from their villeins (ie. peasants) and then paid the king a smaller fixed farm fee.
  5. King John and the barons did not cooperate with each other because of King John’s tax hikes and the heavy public debt finances which were used to pay for a) an extravagant lifestyle, b) monarchical infighting, c) wars (military funding), d) the crusades. 
  6. King John used the judicial system to extra additional fees from barons in an extortionist fashion.
  7. Security for the Norman castles was a huge structural deficit as he attempted to continually re-conquer northern France; 
  8. There as a financial crisis due to a public sector bail-out when Richard I was held for ransom at £66K which was two times the Crown income and ¼ the equivalent of the UK bank bailouts from 2007 – 2010 (RBS, Northern Rock, etc)
  9. Then there was the cost to pay for the crusades and reclaim Jerusalem that the barons were forced to cover;
  10. Inflation (ie. prices increased) in the 13th century. Crown income from ‘farms” were fixed in nominal terms while the governments expenses were subject to inflation in prices. The farms were not permitted to renegotiate the Crown incomes and so “The King’s finances were unhedged.” pg 80, Value(s). The solution was to kick the farmers off the land in what is called desmne control so that the real output of the land could be collected by the owner. The barons were doing just that. The largest barons had the most scale and became very wealthy elites. Efforts to increase the king’s cut of the fixed farm fee were met with derision and so the King had to find other ways to raise money.
  11. The King (ie. public sector) could not pull this demesne strategy himself because of the power of the sheriffs’ and other royals needed to maintain power…
  12. The cost of wheat, oxen and work horses were also all rising rapidly in price in the early 1200s.
  13. The wages were also rising such that King John was paying three times what his father paid to his knights. Foot soliders’ daily rate doubled. Pay growth was approaching 20% growth year on year, wages were fizzing. 
  14. Global monetary conditions were a major factor in the 13th century. It is believed that there was a massive increase in the number of silver coins in England and an increase in Europe due to the Harz silver mine in West Germany. 
  15. In addition, there were massive wool trading flows in exchange for silver coin with Flanders. 
  16. Even with outflows of silver for Norman defenses and the crusades, the balance of payments was in surplus for many years and the silver coin supply increased. 
  17. There was also financial innovating in that under common law, land would become an increasingly liquid asset which meant it was an alternative store of wealth that was used in lieu of silver which the king would confiscate a portion of as income. 
  18. Recoinage started in 1204 in which coins were smelted down and reminted. They had to exchange clipped coins (which reflected inflation) for their actual worth on a metallic basis which did not reflect inflation. This recoinage meant everyone wanted to get out of silver coins. 

Magna Carta was issued under fiscal, monetary and political duress in June 1215 with the help of the Church. Within 3 months, King John re-neged on the deal, thus triggering the First Baron’s war. The Magna Carta was the most detailed effort to win favour with the nobles. It was signed 16 years into King John’s reign. A council is the embryonic parliament and parliament is the embryonic future form of democracy currently being developed in the 21st century. And Magna Carta’s text has been used around the world. The exercise of the authority must be approved by such agreements.

The key ideas from Magna Carta that were novel at the time were:

  1. Freedom of religion (freedom of the Church or freedom of other beliefs)
  2. Habeas corpus (no wrongful imprisonment, must be legally justified)
  3. No bribery.
  4. Establish a council for developing laws.

Just as Magna Carta was a product of the refusal to be ruled arbitrarily. Carney argues that the gold standard was undermined when society rejected that arbitrary measure of value. 

Constitutions That Govern Money:

The Bank of England charter in 1694 was also novel. The authority of independent bodies enables this innovation. It was the only joint-stock bank in London by the 19th century. It was criticized for acting against the public interest since external international obligations superseded domestic interests. It became the lender of last resort and adopted the Bagehot principle that it would lien against good collateral at hefty rates in financial crises. By the 19th century, it was the monetary policy hub for the world and operated the gold standard. BoE was nationalized in 1946. The BoE was not intervened with by the government. 

In the 1950s and 60s there were devaluations and then inflation in the 1970s and 1980s. There were banking crises and a housing market boom and bust. There was Black Wednesday in 1992 in which the UK was ejected from their tether to the Germany Mark (Exchange Rate Mechanism) of the EU. 

Modern money is backed by trust, independence of partisans, broad-based public support and is not backed by gold, land or some other asset. Modern money is confident that:

  1. Banknotes are real not counterfeit;
  2. Money’s value will not be eroded away through run-away inflation;
  3. The debt burden will not fly to the moon due to price and wage deflation;
  4. Money is secure, won’t disappear in a financial crisis or otherwise.

There is monetary and financial stability: 

Monetary Stability: money’s value can be counted from the mint. 2% inflation target.

Financial Stability: ability to provide loans, ensure orderly response during shocks, and support transactions. Every transaction gets settled in the Bank of England in the United Kingdom.

The Breton Wood system collapsed in 1971, there was in a series of botched experiments in the United Kingdom. There were price increases of 700% in the 80s. Unemployments was very high in the UK. The electoral cycles and firms and households were anticipating the preferred rate of inflation, and then let the monetary authority follow through. Rather than the other way around. There was criticisms that the Bank of England would protect its own interest as it pertains to protecting its gold reserves over that of the general public, during times of uncertainty. But that faded as it became the lender of last resort (intervening to protect interests). 

The Monetary Constitution:

Removing political interference and a commitment to low inflation targeting helped to provide transparency about what it is a central bank is doing. For Mark Carney, low inflation targeting was a major innovation in central banking. It basically made the work autonomous, data-led, non-ideological and empirical….just like Adam Smith would have liked. 

The 1998 New UK Framework:

The Bank of England Act of 1998 was the spirit of Magna Carta realized in monetary policy. Power flows from the people via Representative Democracy. The big highlights of the new framework was:

  1. A new Monetary Policy Committee, 
  2. A constrained discretion was applied to the Bank of England,
  3. The MPC sets an inflation target for the medium term and delegates how that is achieved.  

Bank of England has to explain its goal. The financial crisis happens roughly every decade, according to Mark Carney. The 2008 crisis caused a decline in trust. There are no macro-economic interventions. The counterfactual of a policy is very hard to prove. So us mortals are left with our deductive reasoning…..

Central banks should address financial risks. It needs continual trust. Changing the bank notes to Jane Austen and Turing is the more symbolic work that Mark Carney’s leadership at the Bank of England delivered. Technocratic decisions have the slur of gold even though it was done away with years ago…Carney believes in illustrating a better understanding of Bank of England decisions. They publish the objectives of the bank to try to meet people where they are. Bitcoin doesn’t work according to Mark Carney. The next chapter will blow Bitcoin up.

Introduction: Humanity Distilled Chapter 1 Objective Value
 Chapter 2 Subjective Value Chapter 3 Money & Gold
 Chapter 4 Magna Carta  Chapter 5 Future of Money
 Chapter 6 Market Society Chapter 7 Financial Crisis
 Chapter 8 Safer FinanceChapter 9 Covid Crisis
 Chapter 10 Covid Recovery Chapter 11 Climate Crisis
 Chapter 12 Climate Horizon Chapter 13 Your Values
 Chapter 14 Values in Companies Chapter 15 ESG
  

Analysis of Part 1 and Chapter 4

  • The whole point of money is to reflect the scarcity of goods in reality. The point of money, as accurately as possible, is to be the accounting of the economy in quantifiable terms. Disappointing and often wildly inefficient but is money supply gets too far disintermediated with the economy it is supposed to reflect then you have crises like deflation / inflation / hyperinflation: Weimer Republic or Zimbabwe or Lebanon or Brazil or Argentina.  So people who say just print print print don’t understand inflation is. There are consequences to the value of currency as it is tethered to the scarcity of goods and services in the real economy. The rate of ‘printing’ which is more complicated then the expression suggests should reflect the rate of inflation. It’s hard to track but not impossible especially with more data sources. 
  • Central Banks operate the Real-Time Gross Settlement (RTGS) for holding accounts for commercial banks and other institutions. This service delivers the risk-free settlement which is critical for liquidity within the system.
  • The elephant in the room is that the political state has a monopoly on a country’s currency. On the banknotes it says ‘pay the bearer’ which carries the unconditional backing of the state. As such, the monopolistic behaviours of those employed at the Bank of England should be expected, however this is not addressed by Carney. Trust is tacit.  
  • Carney seems to downplay the subjectivity of central bankers, particularly when they decide which banks are allowed to fail and which banks are saved. In the 19th century, there is uneven policy implementation in this regard as discussed by Dornbusch and Frenkel’s “Crisis in 1847.”
  • Carney gets caught up in having to have a thesis and presenting arguments for that thesis and then addressing the counter-arguments which is the core of academic adversarial discourse. For example, Carney makes the claim that from 1998 to 2008, the Bank of England with its public ownership did really well. And that from 1950s to 60s and then 70s and 80s, the Bank of England which was subject to political interference did badly as a steward for the British economy…this is a classic sales pitch. Carney focuses in on the variable he would like to have you believe has caused a complex economy to thrive: in this case, independence of a central bank (independent variable), with a positive outcome (dependent variable). Unfortunately, there are 1000s and millions of identifiable variables acting in a complex system that contribute to the performance of the British economy from the 1950s to 2008….However, I think he is likely correct. Just cannot be honest in saying it is a certainty.
  • Carney seems to downplay the power of networks as well. The Bank of England’s employees do not live in a vacuum. If they did, then they would not have been employed at the Bank of England. As any human organization requires, the Bank of England hires those who are like the existing employees, not necessarily based on gender and ethnicity but based on mindset. There is the tragedy of self-selecting and sorting within all human organizations that leads to a lack of diversity of ideas. This, in theory, would be particularly in the case of organizations that underperform. But not necessarily, I guess professional wrestler have to be good actors and central bankers have to be economists….However, the further complication is that organization performance is frequently obscured by externalities and the complex set of variables acting on reality that make an evaluation of an organizations performance impossible without a parallel or split test of that same organization during the same period of time being evaluated. Something to work on for sure.
  • This is where I realized, he just wants to sell books and not be Prime Minister of Canada. Or at least, he doesn’t tie this back to Canada. He is far removed and speaking to a British audience quite a lot in this book.
  • The gains of independence have been more stable inflation but then Carney says things turned south with the 2008 financial crisis. 
  • Monday morning quarterbacking about the financial crisis is odd to read here. You get the sense that Carney is a historian, not necessarily a data scientist. 
  • The idea that inflation was a major component of the signing of Magna Carta is lost on the department that focuses in on Magna Carta….political science and history departments. Carney is exposing herein that academia is too siloed/departmentalized, often in order to provide a misleading view of the world. I do believe that Carney is sufficiently de-departmentalized however, just barely though. He is big on being cool.
  • ESG critiques abound!

Citations Worth Noting for Part 1: Chapter 4:

  • N. Vincent, Magna Carta: A Very Short Introduction (Oxford: Oxford University Press, 2012).
  • P.D.A. Harvey, ‘The English Inflation of 1180-1220’, Past and Present 61.
  • R. C. Palmer, ‘The Economic and Cultural Impact of the Origins of Property: 1180-1220’, Law and History Review 3(2) (Autumn 1985).
  • Eddie George, ‘Central bank independence’, speech given at the SEANCE Governors’ Symposium, 26 August 2000.
  • Inflation Targeting, Mark Carney at LSE, 2017. The Lambda stump speech: https://www.youtube.com/watch?v=PlQ1ajRqhgk 
  • Lender of Last Resort Explained by Rudiger Dornbusch and Jacob Frenkel (1984) ‘The Gold Standard and the Bank of England in the Crisis of 1847’ National Bureau of Economics Research. A Retrospective on the Classical Gold Standard. 1821-1931.

Value(s) by Mark Carney: Chapter 3 Money, Gold and the Age of Consent: Key Takeaways / Analysis / Citations

Chapter 3 Money, Gold and the Age of Consent

Key Takeaways

The Bank of England holds $180 billion worth of gold bullion which has been pulled out of the earth from the Canadian arctic or South Africa brought to London and put in a vault…back…into the earth. At one point, as will be illustrated, gold was money and then we had gold backed money and the central banks engaged in the selling of gold to each other and now under FIAT, it no longer has the value that it once did. The gold is held at the Bank of England because it was the promissory basis of banknotes such that a person would walk into the Bank of England with a banknote and receive a clip of gold in exchange.

Money is subjective value. We can all agree that money is better than bartering. But money is a social convention, it is an IOU. But what is money for Carney:

  • One, banknotes now only account for ¼ of all transactions. In the 1950s, people were mostly paid in cash so it was more like ⅘ of all transactions. 
  • Two, electronic reserves and to settle transaction, every transaction is finished with the central bank as the commercial banks settle daily. At the central bank they complete the settlements with commercial banks at the end of each business day and we have come to trust it. 
  • Three, fractional reserve banking and Medici style technique of money management have been crucial to making money so versatile. Sweden’s Riksbank was the first central bank. They only keep a fraction of the currency. A run on the bank is what created institutions of private money, and safety nets and depositors insurance. 

Public Institutions Underwrite Money: 

Central banks have unlimited currency resources. Being well run is hard but necessary for a central bank. The private financial sector has high expectations. The commercial banks make money making a loan and new money enters circulation. Credit = trust. 

The Debasement of Money, A Classic Paranoia:

The debasement of money in the Roman Empire etc was a major problem in currency devaluation as the banknotes are typically very cheap to make and the temptation to print more than the economy requires is always strong. And ultimately, the temptation to over print or over create is followed by the reminder that such a decision causes inflation and debasement. 

Private money collapses happen gradually and then very suddenly…in a pattern of promise, trust and then disillusionment, according to Carney. 

The Bank of Amsterdam:

The Bank of Amsterdam started a revolution in banking created a bank of money, confidence was maintained. Its ability to be the central bank, the lenders of last resort was secure. Then the Bank of Amsterdam became heavily invested in the Dutch East India company (VOC) and there was a run (where depositors all demand their money at the same time) and the bank collapsed. Transparency was critical. You need purpose, transparency and accountability to get people to believe in your bank and there is always a risk you will destroy that trust.

Free Banking Era in the US (1837 – 1863):

Free banks were rogue US banks before the central reserve banks were established in 1915. These free banks would reduce the gold held to back their commercial bank money that they issued, thus debasing their own rogue currencies that were issuing notes. And their value varied in the market like an unstable asset. Guarding against debasement was too difficult. The solution was to develop FIAT currencies and a central bank that would act as a lender of last resort should liquidity dry up. The central bank concept pioneered by the Bank of Amsterdam would be implemented in England (1694 to present) and backed by institutions led by institutional independence with the ability to set out monetary policy.

What Backs Money?

Metal-backed money was problematic since there was an unsteady supply of precious metals. Silver and gold coins were the medium of exchange in the Roman empire and the shortage explains why the Roman coinage outlived the Roman empire. Roman coins were used into the Charlemagne era (768 – 814). The Spanish learned the hard way that getting gold money did not make you rich: if the supply increases at a greater rate then the consumer price index then purchasing power decreases ie. inflation.

England’s Financial Revolution:

The Glorious Revolution 1688 in England and the success of the Dutch as a global power triggered a financial revolution. 

  1. First, the founding of the Bank of England in 1694 as a joint-stock company plus its focus on monetary management and the creation of banknotes enabled it to flourish. 
  2. Second, gold became the standard by accident. Britain moved completely off the silver and gold standard to just the gold standard in 1717. The silver and gold were paired together at ratios based on their relative availability which needed to be rebalanced. Sir Isaac Newton accidently priced gold too low driving silver into private hands. So the guy who developed calculus created the gold standard by accident in 1717. The gold standard was officially adopted in the British empire, Europe and the United States by the mid-19th century.
  3. Third, the Bank of England got rid of the convertibility of banknotes into gold. In 1797, there was a financial crisis and Prime Minister William Pitt the Younger suspended the traditional right of banknotes to be converted into gold by an Order in Council. Many economists, later referred to as Bullionists (David Ricardo for example), were aghast arguing that “if the banks were not required to convert into gold, they would issue too many notes, causing inflation and the debasement of money.” pg 68, Value(s) The Real Bill Doctrine argues that you can have banknotes that are credible as long as the assets that backed them could be deemed creditworthy. As long as there isn’t excessive notes issuance and any excesses were realized quickly and cleaned up, such a FIAT system could work. And in fact, it was much better since gold supplies could not keep up with the demand for new currency…BUT then the Bullionists prevailed in 1821, the gold standard of convertibility of banknotes into gold was reinstated up into the First World War. Since gold was limited, the only way to support commercial expansion at the required rate was the allowance of new (joint-stock taking banks) that permitted and provided loans for investment.
  4. Then in 1844 the Bank of England was granted a monopoly on note issuance and became the bank of last resort for commercial banks that failed. There were conflicts however as there were balance of payments forces which required higher interest rates while domestic banking problems required lower interest rates. 
  5. The de-politicization of the Bank of England occurred in the modern era in 1998. Setting a target of 2% inflation and then handing the operational controls to technocrats that are independent of political short-term interests. That has been a significant change for BoE which Carney himself led.

International Gold Standard:

The Franco Prussian war of 1870 was a turning point for the gold standard. The France, Russia and Austro Hungary all halted convertibility of banknotes into gold. Thus, Britain became the superpower that continued to support the gold standard. Path dependence leads to the most powerful nation imposing its standard on the rest of the world within 150 years. A standard that was accidental. Today, the US and China are deciding the future of currency globally in this same way. 

20.67 = 1 oz. 1 oz. = £ oz. = £4.25. 50 mill. 4.86 = £1. £8 mill. 538,823 ounces. The flow of gold from England to U.S. won’t persist over time. M•V=P•Q.  gold =  MS.  MS =  P. deflation.  gold =  MS.  MS =  P. inflation. U.S. exports fall and British exports rise until trade flows balance.

Workings of the Gold Standard:

David Hume (1711 – 1776) described the gold standard in international trade:  

1) The goods are exported, 

2) the exporter of those goods receives payment in gold and then,

3) that gold was minted into a coin locally,

4) The importer buys that good and pays with gold….. 

In the trade deficit (importers) country, gold flows out in net. That sets in train a mechanism of self correcting prices downward because less gold was chasing the same amount of goods. 

In the foreign country, more gold was chasing the same amount of goods so prices rose. With imports more expensive, people would consume less of them and more of the now cheaper domestic produce. The trade deficit would shrink and the balance would be restored. 

The problem is: in a complex financial society, gold was not how this above process was done but rather in currency. So: 

  1. the money supply contracts in the deficit trade as more currency flows out then 
  2. interest rates would rise,
  3. Dometic prices/wages falls,
  4. then export competitiveness would reach a new equilibrium since prices would be attractive again to foreign investors. 

The gold exchange standard works because the Bank of England, Bank of France and Bank of Reichstag all were credible. Trust was essential. This trust wasn’t a product of the system’s design. There is no magic to keeping money valuable, the pressures to print wildly are always present. Trust in the gold standard was the means of managing the printing of paper banknotes for convertibility. And such a system was contingent on stability.  

There are three factors in re-enforcing the Gold Standard System: 

  1. The UK economy created large re-enforcing synergies that recycled gold into the economy for productive investment through the selling of machinery technology and manufacturing in exchange for raw resources from the empire like Canada and Argentina. 
  2. There weren’t any serious internal or external risks to the system.
  3. The system was backed by the politicians. They would try to keep the system stable at any cost which includes raising interest rates to increase gold inflows that would also apply downward pressure on prices/wages and thus restore competitiveness.

By the end of the 19th century, the flaw in the gold standard become more evident: the amount of gold mined was not keeping pace with economic demands leading to deflation ie. prices and wages fell. Since the economic power was not singularly in London anymore, the gold standard was harder to manage. As more countries joined the gold standard in 1870s, the amount of gold available was not able to chase the same amount of economic activity, this was causing deflation in general prices. When they found new gold deposits in Alaska, South Africa and Australia the downward pressure subsided but the increased again as the new supply faded. The system turned to unbacked foreign reserves thus weakening the creditworthiness within banking. 

Central banks were conflicted with being lenders of last resorts (internal balance) versus convertibility (external balance). There were more frequent bank runs and more provisions for liquidity. There were self-fulling behaviours in which the Bank of England was being called the coordinator of international cooperation. The Bank of England tried to manage the 1890 bearings crisis in Argentina. The Bank of England loaned from France and Russia to help Argentina. The political movements became more working class parties, it was harder to manage the system because the gold standard model was built before fractional reserve banking and paper banknotes. It seemed fraudulent to laymen voters. Governments prior to democracy could manage their currency above all else. But now citizens were asking about the gold standard, just as many crypto-currency enthusiasts are asking about FIAT in the early 21st century. 

Carney’s Diagnosis of the End of the Gold Standard:

The gold standard was not aligned with ‘solidarity’ of domestic requirements. It was a product of international exchange in a multi-polar central banking world. The First World War triggered the end of the gold standard. The centre of economic power shifted to the US but the US wasn’t willing to follow the gold standard. The rise of trade unions prevented wages from adjusting in response to deflationary equilibrium…. 

For Carney, the gold standard’s values were not consistent with values. It was about international cooperation between central banks rather than the internal cooperation of citizens in a domestic polity.

The gold standard was not immediately resurrected after World War I in part because Britain wasn’t the central power that it once was prior to World War I. For example the United States was twice the economy of the United Kingdom and Britain was under performing relative to France and Russia. So the gold standard no longer makes sense. The US was also emergent in its influence and the protocols of the gold standard wouldn’t have worked for the US.

There was a 1920 Mansion House bankers dinner where Montagu Norman assumed the gold standard was coming back. He arrogantly pushed his case. But as Carney points out, the people who are often least aware of changes in the financial world are the bankers themselves who have vested interest in retaining its existing structure. This was the era of “never elaborate and never explain” according to Carney. The UK reinstated the gold standard in 1926 with disastrous results. And then had to  abandon the gold standard again in 1931. UK had screwed-up their economy as a result. 

The Montagu Norman Painting:

Carney recounts his first day as the Governor of the Bank of England and his decision to remove a painting of Montagu Norman. George Osborne (the Chancellor of the Exchequer/ Minister of Finance / Secretary of the Treasury) called and said he wanted the painting to remind him not to listen to the Governor of the Bank of England. Montagu Norman had convinced (finance minister in the UK) at the time was Winston Churchill to back the gold standard at pre-WWI levels. The painting would remind Osborne to never listen to the Governor of the Bank of England. 

Lessons from Gold Standard for the Values:

  1. Trust is critical, you need to have convertibility, and self equilibrium, but trust can’t be maintained without transparency. You need consent and a fair sharing of the burdens of adjustments. The world becomes multi-polar.
  2. Domestic financial systems are complex. This brings financial prudence. Labour power would increase such that the equilibrium required for a gold standard adjustment no longer worked.
  3. The values of the “value of money” is about trust, integrity solidarity and accountability.
  4. Most countries use fiat money, but those institutional foundations are just as fragile if they aren’t tied to the right values.
Introduction: Humanity Distilled Chapter 1 Objective Value
 Chapter 2 Subjective Value Chapter 3 Money & Gold
 Chapter 4 Magna Carta  Chapter 5 Future of Money
 Chapter 6 Market Society Chapter 7 Financial Crisis
 Chapter 8 Safer FinanceChapter 9 Covid Crisis
 Chapter 10 Covid Recovery Chapter 11 Climate Crisis
 Chapter 12 Climate Horizon Chapter 13 Your Values
 Chapter 14 Values in Companies Chapter 15 ESG
  

Analysis Part 1 Chapter 3

  • Free Banking in the US seems to be precursor to the Social Credit movement in Alberta, Canada. I wonder if there is a connection to this alternative to a central bank movement to explore further?
  • The fact that central banks are better now then in the past does not re-assure the crypto-currency enthusiasts who say central bankers are crooks.
  • Which society are we talking about? The focus is squarely on countries in which Carney has resided….there is more to England than London and there is more to Earth then England.
  • Gold is no longer the gold standard but rather the promise to manage the supply of new bills, new bond issuance and the levers of monetary policy. The Bank of England conducts monetary policy to ensure that the amount of cash circulation supports low and stable inflation. The point is that Bitcoin and Zeitgeist folks simply don’t trust the civil servants operating such machinery AND the processes of central banking as sufficiently complex such that their functioning can be misconstrued. There is a vested interest in not trusting central banks.
  • Super-ironic that Mark Carney makes fun of the elitism of a Bankers Dinner in 1920 where the Governor of the Bank of England, Montagu Norman gave a speech in which he was certain the gold standard “would return of normal” after after the conclusion of the 1919 Paris peace conference….meanwhile people aren’t going to be reading Value(s) closely and Carney is also advocating for things that are disconnected from the values of the ‘majority’….
  • Montagu Norman’s arrogance mirrors Mark Carney’s own arrogance in thinking that people will follow him just because he has the right credentials. Value(s) is a good effort but the parallels are interesting.
  • The Bank of England is look at the top of the greasy pole of monetary and accounting prudence and thinking….naw, its nice let’s keep climbing, there is always someone smarter, better. 
  • Carney mentions the donut shaped Yap’s of Micronesian island of Yap. The Rai stone is viewed as not actually being a money system at all according to some economists…..
  • Mobile phone payments in Kenya involve selling airtime minutes but also there are direct money transfers as well, Carney makes it sound like M-Pesa is merely about selling airtime minutes.

Citations Worth Noting for Part 1: Chapter 3:

  • Michael McLeay, Amar Radia and Ryland, ‘Money Creation in the Modern Economy’, Bank of England Quarterly Bulletin (2014) Q1. 
  • Niall Ferguson, The Ascent of Money: A Financial History of the World (London: Allen Lane, 2008).
  • P.G.M Dickson, The Financial Revolution in England: A Study in the Development of Public Credit, 1688 – 1756 (London: Macmillan; New York: St Martin’s Press, 1967).
  • David Omrod, The Rise of Commercial Empires: England and the Netherlands in the Age of Mercantilism, 1650 – 1770 (Cambridge: Cambridge University Press, 2003).
  • John David Angle, ‘Glorious Revolution as Financial Revolution’, History Faculty Publications 6 (2013), https://scholar.snu.edu/hum_sci_history_research/6
  • B.R. Mtchel, International Historical Statistics, Europe 1750 – 1988 (New York: Stockton press, 1992)
  • Angus Maddison, Contour of the World Economy, 1 – 2030 AD: Essays in Macro-economic History (Oxford: Oxford University Press, 2007). 

Value(s) by Mark Carney: Chapter 2 Perspectives of Value – Subjective Value: Key Takeaways / Analysis / Citations

Chapter 2 Perspectives of Value – Subjective Value

Key Takeaways

The last chapter was about objective value and this chapter is about subjective value which Carney shows is how the world operates today.

The central question in this chapter is: if beauty is in the eye of the beholder, is the same true for value? Subjectivity is the demand and supply way of deriving a price which is a biased perspective of any individual actor as it pertains to any commodity.

Damian Hirst created an art piece that showed that the act of valuing is art itself. The value of money and the value of art collides. Morris, the director of the Tate Modern, made a plea against blockbuster art installations and instead emphasized the British art that Tate holds in ‘trust for the nation.’ Morris’ view was that you can’t really value art but you still have to pay for it. Tate Modern is a social space not a marketplace…..

The emergence of the Neoclassicists is critical to our understanding of value. In short, the value of a good is in the demand and supply of that good itself and not in the labour as the classists (Smith, Ricardo, Marx) argued. 

The utility of goods; they are good for something equals their value. Carney discusses a group of early neoclassical thinkers:

John Law (1671 -1729)

  • Demand and supply defines the price of a good or service was the concept developed by Law.
  • Set the standard for a price being the measure of the goods utility. 
  • John Law has a pretty fascinating rise and fall.
  • He famously developed the concept that water and diamonds show that price is based also on the subjective utility of the item. Water versus diamonds in a desert for example. 
  • Utility is reflected in the buyer’s willingness to bid at a given price. 

John Stuart Mill (1806 – 1873)

  • JS Mill demonstrated that the value of a commodity is the price just sufficient to carry off the existing supply. 

Marginalism was the major breakthrough that ushered in the neoclassical view for Carney. Marginalism asks: What’s the particular availability of the good in a given time and place? That’s what matters! It’s the marginal value, stupid. Not total supply but available supply. For example, you are willing to pay for a pair of shoes at $100 instead of the $60 retail prices because it’s convenient. And so you are then also willing to pay another $80 for a second pair for the weekend. The consumer surplus is $180 – $120 which is the retail price x 2 pairs = $60 is considered the consumer surplus. A third pair of shoes would be valued at $60 which totals $240 – $180 which is the retail price x 3 pairs = $60 consumer surplus. The value of each subsequent pair of shoes changes in a judgement. The more ice cream you have the less each additional scoop is valued and in computer coding, the best coding is not developed by more and more developers in the Mythical-Man-Month i.e. the law of diminishing returns.

Carl Menger (1840 – 1921), William Jevon (1835 – 1882) and Leon Walras (1834 – 1910) capture this view best. They argue that value does not exist outside the consciousness of human beings and thus is subjective. If this is so then, an environmentalists value of a tree and a lumber jacks value of that same tree can be wildly different. And that reflects the reality we live in. Human beings live in the moment and do not price based at the system level. So Walras tried to include a system level view but no one really cared. 

Carney however goes on to explain equilibrium of markets of exchange where all marginal benefits and costs are equalized. Utilitarianism is developed to maximize the greatest good for the greatest number of people, popularized by Jeremy Bentham (1747 – 1832). John Stuart Mills saw that life is more than happiness but the pursuit of meaning and the ability to get things done. 

Carl Sunstein

He believes that cost-benefit analysis is more complex, especially for goods and services that aren’t generally priced. Totally obvious and true. Except that “animal welfare” and “access to public buildings” are examples of subjective values that Sunstein is biased towards and as a member of the Obama administration would be advocating for without capturing actual preferences beyond representative democratic processes which are highly flawed. Carney shows that there is a knowledge problem with knowing what people value beyond simple price discovery and transaction price. Much of the most valuable things in life aren’t measured in capital terms. “Money is a proxy for value.” – Professor Nerdster. There are efforts to measure what people value: randomized control trials, retrospective analysis and other strategies to measure what money can’t buy but it is rather wanting with current data science technology and the lack of control groups….in real world settings. 

The value of life is not easily measured either. It’s priceless, obviously. We can’t really measure the value of the person. So Carney shows that we aren’t really going solve this problem of how to value things….

So Carney pivots here. He explained objective value and subjective value. Now he will explain how the fact that today, there is no underlying, fundamental or intrinsic value that isn’t already reflected in the price of a commodity, and that markets define value and demand and supply expresses that value but that this is very flawed. Carney will argue we are mispricing at a societal level the things that are most valuable. 

https://en.wikipedia.org/wiki/Mariana_Mazzucato

Mariana Mazzucato (1968 – present)

Describes the dangers of performativity “how we talk effects behaviour” she would like you to believe what she believes. She wonders are shareholders as the biggest risk takers or is it actually the employees? Anyone can call themselves a value creator and so this is limited term for value creation.

There are four consequences of the victory of the subjective values system:

  1. Market Failures;
  2. Human Frailties;
  3. Welfare of Nations;
  4. The Theory of Market Sentiments. 

On Market Failures

Economist are bad are creating generalizable theories because humans will defy expectations, reality is more complex, hence Keynes’ famous claim that there are madmen in authority who are typically trying to distill academic writings into practical decision-making. Reality of unpredictable human behaviour will screw up academic theory in the following ways:

  • Oligopolies or Monopolies: which are operated by self-interested people and this distort reality, surprise economists since monopolists are like most people, semi-rational. Monopolists are rent seekers in a world where the free market is not realized according to Adam Smith…
  • Externalities: failure is socialized and profits are individualized / privatized. Environmental externalities aren’t calculated. Externalities show the limits of property rights. Trust (of the system of valuation) is critical for market functioning. Social capital needs to be nurtured for human capital to grow.
  • Incomplete Markets: when financial firms are hedging risk, they assume they have access to the complete market. That error can lead to major financial crises and have impacts that are not directly connected to the financial system. 

On Human Frailty

Humans are only rational when they are dispassionate about the outcome. We tend to support past decisions believing them to still be good. Subjective values are more important. We value the present much more than the future. We tend to value distant issues at a lower rate. We didn’t invest in pandemic preparedness or care homes. Banks didn’t build up enough buffer to avoid the financial crisis; moral hazard. Carney refers to these human frailties as the tragedy of the horizon. The environmental catastrophe that Carney believes is coming could and should be avoided through actions now.

  • The value of a human being during Covid was ‘priced’ higher level then generally accepted by actuaries. Seniors with x years left to live were priced much higher then a subjective value approach would suggest.

The Welfare of Nations

  • As has been described in chapter 1, Carney is trying to hit home that subjective value does not distinguish between productive and unproductive value creation and rent-seeking or value capture. Everything priced is in the GDP calculation but there is a lot missing there. And what has value today is not valuable in the future necessarily. Diane Coyle saw that finance was revalued as important in the economy due to statistical changes in how GDP is calculated which has now included finance in economic production. Standard GDP of the government was just the salary of government employees for the longest time.
  • It is painfully obvious that healthcare workers are paid a salary which can be measured but Carney recommends measuring the workers ability to save lives. 
  • Well-being or happiness is not being priced and therefore not being valued. If markets were perfectly efficient and people were rational and there were no transaction costs then the sum would not maximize welfare because again “capital is a proxy for total value.” 
  • Distribution matters for welfare, when there are large benefits that aren’t captured by monetary figures. Even if losers lose and gainers gain in welfare terms. An extra 1000 matters not for Zuckerberg. Small gains or losses for the wealthy but for the least well off, it is material. 

The Theory of Market Sentiments

In a society that rewards value capture, our social psychology will adjust accordingly, as per Adam Smith’s view of the desire to be well-regarded and well-liked. The problem is much more about what is not measured. Carney asks:

  1. If it is not priced is it not valued? 
  2. Or is it possible that market value will increasingly become the measure of all things? 
  3. By changing how we value, can we change our own values? 
  4. Or will subjectivism destroy intrinsic or objective value? It does that now!
Introduction: Humanity Distilled Chapter 1 Objective Value
 Chapter 2 Subjective Value Chapter 3 Money & Gold
 Chapter 4 Magna Carta  Chapter 5 Future of Money
 Chapter 6 Market Society Chapter 7 Financial Crisis
 Chapter 8 Safer FinanceChapter 9 Covid Crisis
 Chapter 10 Covid Recovery Chapter 11 Climate Crisis
 Chapter 12 Climate Horizon Chapter 13 Your Values
 Chapter 14 Values in Companies Chapter 15 ESG
  

Analysis Part 1 and Chapter 2

  • Theory (7/10) and Reality (8/10). Basically, utility or labour that defines the value of things doesn’t really matter. Both objective and subjective value are a factor in my view and varies per person. But subjective value is central in the financial sphere that Carney has succeeded in.
  • Carney considers social media a monopoly…which is highly suspect. Facebook is not really a monopoly…I can pick up the phone and talk to friends…we should all try that more often.
  • Carney’s view that healthcare workers should be paid by how many lives they save shows a lack of understanding of healthcare and clinicians. How do you show the causal connection between clinician inputs and better outcomes is very complex. Sometimes a clinician’s action results in a patient’s death and other times a patient is really going to die even with herculean efforts. To try to explicitly connect cause effect and provide a reward to clinicians on the basis of lives saved is not well thought through…
  • Carney is preaching to a very small group of possible readers, there is the Liberal Party hopefuls that would like to see him as finance minister and then Prime Minister just based on his competence and then there are finance specialists or Bank of Canada, England types who will enjoy his approach. But Carney’s Value(s) is challenged by the fact that his bullhorn is a lot smaller than he seems to realize, he’s not going to be changing the way society values things without stepping into leadership in the Liberal Party….or making a documentary like Niall Ferguson. Politics is fraught with difficulties, sacrifice and mixed results.
  • Mark Carney references British sterling and not Canadian dollars, I think if you read between he lines, his examples are very British, perhaps he is not serious about the Liberal Party of Canada.
  • Carney doesn’t have a serious view on healthcare workers instead he’s making an abstract point over and over again, that what we value more and what we price are disjointed: ie “money is a poor proxy for value.” But put Carney in the role of a hospital administrator managing a budget and suddenly…nurses are paid reasonably.
  • Carney mentions Carl Sunstein, whose work in the Obama White House included an effort to measure whether a law makes people’s lives better…um, cost-benefit analysis is important, I wonder if Sunstein is Carney’s friend here? Again, we could summarize this entire section as money is a poor proxy for value.   
  • If the neo-classists are correct, then the value of the inland areas above 20 feet should be more valuable if the climate crisis leads to water level increases suddenly. 
  • Another example of Mark Carney insider thinking.
  • Did Carney know “that money is but a proxy for value” all along and did he play in ignorance until recently? Was he talking about this while at the Bank of Canada…is this a death bed confession or a political pivot? And perhaps like Bill Gates philanthropic second-career, as Carney climbed the greasy pole to the top of the organizations he operated, only then does he look down to say “hey, now that I have the market values working well for me, I should mention that perhaps market values aren’t aligned with what matters more!” Obvious but Carney is just coming around because now that he’s been at the peak of the mountain (Goldman Sachs, Bank of Canada, Bank of England) he can see it’s somewhat an illusion. How he created value was working a system that valued things in a way that needs to change…but in fairness, I’d rather have someone who knows how markets work then someone who doesn’t at all….
  • Did Harvard and Oxford indoctrinate him to not realize the money is a proxy for value and a poor proxy at that? In other words, is Carney a faux capitalist or did he have latent realizations that money is a proxy for value just recently? This point is really just an echo of the above. Again, to be honest, it’s great that Carney has written this book but it also shows he has deep knowledge that can be channeled for good.

Citations Worth Noting for Part 1: Chapter 2:

  • William Stanley Jevons, Theory of Political Economy (London Macmillan, 1871), p.2 
  • John Stuart Mill, The Principles of Political Economy (Batoche Books, 1848/2000), p.517. 
  • Diane Coyle, GDP: A Brief but Affectionate History, revised and expanded edn (Princeton: Princeton University Press, 2015), p. 108.