Burning a Nation’s Cash
Arriving at an alternative monetary systeme
A Lebanese poultry shop most famous for its broiled chicken was caught in the flames less than a month ago. Rumors quickly surfaced that it had been a case of arson by competitors, as the shop had been able to tame its prices amidst a national currency devaluation.
Hawa Chicken has indeed been able to keep its prices nearly 30% lower than other prominent poultry brands. To avoid creating a black market for its products, it has also enforced a cap on the quantities each customer purchased.
Wherever the initial spark came from, the line of thought of the public, along with the inflation rates which have surpassed currency devaluation rates, give us a little more insight on our terms with money. Most prominently, the fact that exorbitant prices have been maintained in light of over 20% recovery by the Mediterranean nation’s currency is revealing.
It highlights a glitch in how the economic system is set up.
This piece is not meant to discuss fiscal policy of a government. It highlights a glitch in how the economic system is set up. Following how businesses are defined now, achieving their purpose, increasing profits is almost synonymous with “making money”. From a government perspective, “making money”, increasing the money in circulation, devalues it. In a sense, the stock market is not the only factor forcing businesses to think short-term.
Businesses are always in a race to accumulate revenue before they become irrelevant, or before what they’ve accumulated loses its value. They want to amass profits while keeping their margins, accounting for future devaluation. The currency “fluctuation” in Lebanon is a humble example amplified by “greedy merchants” as the locals would say. The case of hyperinflation in Zimbabwe is a more extreme example. However, examples need not be this extreme.
Inflation has been characteristic of modern economic systems since money has been introduced. People want more. Counterintuitively, we see that the US inflation rate over the past century have been in the negative in times of trouble. Apart from invisible hands, the US actually sets target inflation rates. It could be understood in good faith as an attempt at keeping things under control.
You cannot make the system both, controllable and predictable.
This highlights another aspect of the modern economic system. “Modern” is not a generic term indicating the recent past or current time. You cannot make the system both, controllable and predictable, for the two form a dichotomy which has been coined by von Neumann, as I have indicated in my article on describing the economy over a lattice.
This is why, as
Li Jiang shows with his models, you shouldn’t try to time the market. If you’ve read Mesoeconomics, you’d avoid the stock market altogether. When “predictable” is used above, it means the ability to describe non-trivial future behavior.
Could you guess for which — being controllable or predictable — the system has been built? The fact that we have fiscal policy and chronic budget “deficits” — which seemingly have been the new normal — and that insider trading is a legal offence, should be a telltale sign.
One could argue that the pricing of commodities is determined through the supply and demand dynamics of the market. Nevertheless, the market could possibly contain neither complete nor perfect information. For one, the technicalities of offerings spill beyond the financial domain. Moreover, the assumption of participants being rational is not valid.
Sometimes, we just want to make airplanes happen.
Sometimes, we just want to make airplanes happen. This is the story of one of Buffet’s most notorious “blunders”, as
Denning tells us. Money, carrying a transactional value, is a tool subject to our whims and decisions. With a stretch, it could be claimed that merchants wake up one day and decide that their merchandise is worth less, to avoid overhead cost perhaps— the negative oil prices are telling — or more so that their books are in black.
Within this framework, one could better understand the perfect market, fully determined by supply and demand although the two concepts — supply and demand — hide under the carpet the complexity of being human. Rich people don’t buy more toilet paper after all, as
Rybnik points out.
In reality, we are out of equilibrium.
The perfect market is a dynamic equilibrium, an unattainable equilibrium. In reality, we are out of equilibrium — until we die. One lesson we learn from the advances in nuclear fusion is that you ought to accept instabilities as an inherent phenomenon as you shape the system for the future you want to build. I encourage you to step out of your comfort zone, and read
Ventura’s interview with Robert Bussard, a prominent figure in the nuclear community, to better understand how to work with non-equilibrium.
Merchants seem to understand this. Acknowledging that the gold standard has been ditched, they find it acceptable to request more money for the same product — or even less of a product, effectively devaluing money.
They then go on to spend that cash, or, in case of the Lebanese market, get their hands on the greenback. They do so in a short period of time before the market feels the further devaluation, effectively beyond the local non-equilibrium their actions as independent agents have exacerbated, in the market which is yet to feel the waves of devaluation they’ve sent out.
Several reasons lie behind price hikes. “Greed” is not the only one. In many cases, especially with small and medium businesses, there is a need to transfer additional costs to the client to truly sustain operation. In other cases, they fund the future R&D expenditure to improve the product, better serve the client and fulfill the organization’s purpose.
Money needs to be minted.
Apart from the obvious, there is a practical consideration. Money needs to be minted. In 2015 alone, US Federal Reserve spent $717 million on printing new bills, with all what the process entails. As the population expands, and resources are uncovered, there would be a growing need for money in circulation.
Consider for a second that instead of increasing the supply to meet the demand for money, you can keep it fixed. You cap the supply, rather than minting money to meet predicted demand. As more resources are uncovered, and products are manufactured, the same amount of money covers market transactions.
Would you burn the cash for a new reality?
Business offerings are not suddenly worth “less”. It is money that gains greater transactional value. If, say, the currency is digital such that it does not need to be printed, and decentralized such that the cost of “minting” it is more directly distributed over the growing population and produce — cryptocurrencies anyone? — deflation and budget surplus could become the new reality.
Such an alternative reality requires a leap of faith, and another piece of writing to be better described. Would you burn the cash for a new reality? For after all, national currencies need not be a Ponzi scheme.
I am an engineer based in Beirut. I write on multiscale, and I write with metaphors.