An Evost view: economy & finance

di Maximilien Girardin

Homo Sapiens Sapiens, as a distinct species, at best educated guess, roams the planet for about 250.000-300.000 years. All indicates that they lived as, more or less nomadic, hunter-gatherers and fishermen, for about 240.000 years. There are indications tough that they quite soon had an economy going, mainly based on barter, flint stones, salt, shells and ochre as pigment among others.

This state of affairs fundamentally changes quite late in our history, somewhere 12.000-10.000 years ago, when some populations discovered and started developing agriculture. This had several fundamental consequences, but the main ones are: sedentary life style, and inventing currency instead of barter for the economic front. 

·     Sedentary lifestyle: Land had to be worked upon to make it fit for cultivation, and cultivation asked a lot of maintenance – watering – weeding, making a shelter or housing in the vicinity and protection against the raiding wildlife in order to be able to harvest something. This is very probably why the dog was the first of our working pets that got domesticated (see the domestication graphic below). All of this fixed people on a piece of ground for a few years at least hence sedentarity (That is probably why for a long time the dogs where clearly three to four big groups: watch or guard dogs, protective or fighting dogs (Mollosses), hunting dogs, shepherd dogs and finally the cute fluffily cuddling family pet dogs in the end..

O M G, it is a cloud with legs

Currency instead of barter: when hunters (domesticated and breed hunting dogs out of the wolf) and much later shepherds with livestock (domesticated and breed sheperds by mixing wolf and dogs selected on behaviour) wanted to trade with a farmer, they had a huge problem: if it was not around or during the harvest or just after, season, the only thing a farmer – cultivator could give was the promise of a share of the harvest in…weeks or months… where a lot could still go wrong.

So there was a need for the basics of any economic system: defining a market value of something, pricing that value in a currency.

So the key was the currency, and then let the market dynamics play. Homo Sapiens tried many forms of currencies, as we’ll see further on; and that is not over yet, just look at bitcoins, chainblocks, paper money or other fiat currencies, as well as the oldies like gold, silver, copper, platinum, gems etc….

Overview approximate of animal domestication

Eurasia: reindeer 7.500 B. C

Siberia: sheep 7.000 B. C

Near East: goat 7.000 B. C

Near East: pig 6.000 B. C.

Near East: beef 6.000 B. C.

Near East: zebu 6.000 B. C.

Middle East: pigeon 4.500 B. C.

South America: lama 4.000 – 3.500 B. C.

South America: alpaca 4.000 – 3.500 B. C.

South America: Guinea pig 4.000 – 1.000 B. C.

Ukraine: horse 3.800 B. C.

Egypt: donkey 3.500 B. C.

Arabic Peninsula, Near East: dromedary 3.500 B. C.

Iran, Turkmenistan: camel 3.500 B. C.

India: Water buffalo 3.000 B. C.

India: chicken 2.500 B. C.

India: cat 2.500 B. C.

Egypt: goose 2.500 B. C.

India: peacock 2.500 B. C.

Tibet: yak 2.000 – 1.000 B. C.

China , Japan: Knob goose 1.000 B. C.

Near East: duck 1.000 B. C.

Mediterranean sea area: guinea fowl 500 B. C.

Iberian Peninsula: ferret 250 B. C.

China: Silk caterpillar 500 – 600 A. C.

As animals and later crops or other currencies are used comes the problem of estimating value

Value is the term used for the importance of something; it gives an idea how strongly someone wants something or cherishes it. This ‘it’ can be material, information, a good, service or a right.

Value is per definition of subjective nature. What is valuable to one, may be worthless to another. For example: a three legged dog may be a valuable and cherished house pet, while for a professional dog breeder it may be unsellable and thus worthless, or worse a space taking cost factor. A beautiful freshly caught fish might be priceless on the Sushi market while if you don’t like fish, you could not care less.

Price is the expression of value in any economy even in an economy that functions with natural exchange trade without money, like barter systems it remains a problem.

Is this flint stone worth a wild boar or three fishes?

In any so-called free economy form (not communism or extreme socialism) the market gets the role of valuation of any object, information, good, service or right; in a capitalist or so called ‘free’ economy, value is deducted by the tension field between two polarities: offer or availability and demand. This situation that can change continuously is called market value.

On the other hand, it is observable that the market value of any object, information, good, service or right, will influence the valuation people or costumers give to it. For example certain products are so expensive that practically nobody can afford them, and by that fact they become status symbols, which increases in a “distorted” way their market value. For example: An extremely low fast sports car in my countryside, or in Africa is madness, you’ll just scrape off the bottom and or parts as soon as you leave the nice city asphalted road, they are worth NOTHING practically, despite that they are extremely popular as status symbol with people who need to be seen in them, even if they can just drive around the block or church in the centre of the village.

Because value in itself is ungraspable, people as soon as they had stock-storage (too much of something) or wanted something now but could not give anything in exchange for it: all went thinking and reasoning on how to measure value.

For examples:

Similar to the one above, hunters liked bread too, as well as early farmers liked meat, but the hunter has to get rid of his meat quickly or put a lot of work in the salting and or smoking in order to conserve it longer, if that technique already was known; while the farmer can share some of the grain or flower if he has stock, otherwise he must stay in debt for the meat until the next harvest. But the problem remains how much meat is a bread worth and the reverse? One of the reasons why most of us have an almost innate repugnance towards rodents because they were dangers for our conserved food or grains.

Human inventively developed more tools and techniques and experience and as such through reasoning, different environments and types of populations: soon developed different cultures (facing the same problem and question) and thus tried different solutions for currency and later money, like in Africa: the Katanga copper crosses or Handa, cowry shells, etc

Cowry shells

Feather money from the Solomon islands (Santa Cruz archipelago) this money was used as marriage gift (buy a woman)

Whatever strange currency or money each culture invented, there is a transparency – constant, throughout this search in history; being the algorithm of qualities, a perfect currency should have to serve as money.

This algorithm goes like this a currency or money has to be:

Anything of value that is recognizable by all, and is accepted by all and serves as a medium for:

-A standard of value

-A unit of accounting or measure

-A legal tender for repayment of debt

-A financial exchange

-A store for wealth or purchasing power (savings)

In order to achieve these goals it must be intrinsically:

– rare and or very difficult (expensive) in generating new or more

– divisible in smaller parts

– a store of wealth: hold its rareness over long periods of time

After a walk through many strange currencies finally gold, silver and copper became the choice metals for currency (+-5000 BC with Croesus); gold for big transactions and silver for smaller transactions, and copper for every day use. (See the history of money, or “The ascent of money” by Niall Ferguson) 

This continued for about 7000 years, it ended with the decoupling of the American dollar of the gold standard in 1971 (see later), since then paper money or fiat currency was free for the central banks…it could be created practically at will….(See inflation: not an increase in price of real goods but the money loosing its value because too much has been printed)

Gold Koban or Ryo (ancient Japanese currency gold)

The concept of the quantity theory of money (QTM) began in the 16th century.

As gold and silver inflows from the Americas into Europe (Spain and Portugal) were being minted into coins, there was a resulting rise in inflation.

This led economist Henry Thornton in 1802 to assume that more money equals more inflation and that an increase in money supply does not necessarily mean an increase in economic output.

The quantity theory of money (QTM) states that there is a direct relationship between the quantity of money in an economy and the level of prices of goods and services sold. According to QTM, if the amount of money in an economy doubles, price levels also double, causing inflation (the percentage rate at which the level of prices is rising in an economy). The consumer therefore pays twice as much for the same amount of the good or service.

“Inflation is always and everywhere a monetary phenomenon. To control inflation, you need to control the money supply.“ Milton Friedman, Nobel Laureate in Economics.

Governments never have enough money.  Even the Roman Emperor Nero needed more money to expand the Roman Empire. How did he do it? He started cutting the coins. 

“Cutting” was a practice of adding cheap metals and decreasing the amount of gold and silver in coins. The Roman Government had an insatiable appetite for more money. The increase in the money supply nearly ruined the economy. This went on until near the end of the empire when the Roman coins ended up with only 2 percent precious metal! Rome also ran a huge trade deficit with the nations on the periphery of its empire as Rome consumed its life away. 

Sounds familiar?

It is a well known fact of history that the gold bullion the Spanish brought to Spain ended up ruining their economy by expanding the money supply and leading to runaway inflation – an empire based on consumption rather than production. 

Sounds familiar? 

It may surprise many of you but by 1885, America was the world’s leading manufacturer, ahead of Britain and Germany and it maintained that lead for over a century. After WWI, the U.S. balance of trade with Europe was way out of balance and put a strain on the gold standard. 

From 1914 to 1924, gold flowed in waves into the U.S. causing the boom of the roaring twenties. This allowed the US to lend money to Germany and a boom that ended in hyperinflation, the complete ruin of the German mark, Weimar Republic, and the rise of Adolf Hitler. 

This is what happened in 1929. The boom in America caused by this surplus allowed for a period of dizzying growth, the financing of speculative ventures that could not be repaid, the money supply collapsed and banks failed. The beginning of the ignominious ‘GREAT DEPRESSION’, with all its misery, Wall Street suicides etc. 

After the Depression, policy makers and economists became convinced that rising interest rates and a decreasing money supply exacerbated the situation and led to the prolonging of the Depression and that in the future, the Federal Reserve Bank ( a private banker institution despite the name!) should take steps to prevent this from happening by printing money and lowering interest rates. 

Historically, asset bubbles are caused by inflation of the money supply, which ultimately leads to a bust. 

By the end of WWII, America had again accumulated most of the world’s gold reserves. It was the great producer nation. In 1944, the Bretton Woods Conference established a system of fixed exchange rates designed to balance the uneven gold reserves in the world, which was fixed at $35 an ounce. 

 After the War there wasn’t enough money to support the economic recovery of Europe and Japan so there was a quasi-gold standard based on gold and the U.S. dollar. 

Originally, unlimited deficits were not to be allowed. The British economist, John Maynard Keynes, proposed that both deficit and surplus countries be fined until both countries took measures to balance their payments. His plan was rejected by the Americans.              

The Growth in Money Supply

After World War II, we see the beginnings of globalization. America (the US) encouraged other countries to manufacture goods that they would buy from them. Rather than just give money away through the Marshall Plan, America opened her markets to the world. By the late 60’s and early 70’s the US gold reserves began to dwindle as they bought more and more goods from abroad. Economist’s felt that world growth was hindered by the gold standard. 

In 1971, President Nixon suspended dollar convertibility to gold in order to protect the U.S. gold reserves. The Bretton Woods system ended and a system of floating exchange rates emerged based on the U.S. dollar. (just paper and an illusion)

From that time forth, the dollar became the standard reserve currency for the entire world. 

Since there was no mechanism to adjust for trade imbalances, America began to think that maybe there is such a thing as a “free lunch” after all, as dollars began to pour back into the country. As we shall see, trade imbalances are responsible for the tremendous disequilibrium we see in the world today. The Chart above shows the growth in the U.S. money supply and the chart below shows the growth of the trade deficit. 

Global money supply, fuelled by American dollars, does not begin to go off the chart until after 1971. 

The dollar standard stimulated growth world wide because the money supply can be increased without any constraints. (The US federal bank is despite as the name suggests a private banking institution) The dollar standard has resulted in increased liquidity for growth but results in a huge disequilibrium between nations. 

It has also caused disruptions around the world: depressions, recessions, inflation and deflation. Notice in the chart above the correlation between the growth of money supply and the US current account (trade) deficit. In other words, they printed dollars or created Treasury bonds – they inflated the supply in order to pay the US debts.

Now let us take the pulse of the patient called economy:

Every complex adaptive system’s metabolism (economy) is dependent on the amount of raw materials delivered by the circulation (bulk shipping)

This is measured in the economy by what is called the Baltic Dry Index

Wikipedia: The Baltic Dry Index (BDI) is an economic indicator issued daily by the London-based Baltic Exchange. Not restricted to Baltic Sea countries, the index provides “an assessment of the price of moving the major raw materials by sea. Taking in 23 shipping routes measured on a time-charter basis, the index covers Handysize, Supramax, Panamax, and Capesize dry bulk carriers carrying a range of commodities including coal, iron ore and grain.”

Ship Classification

Dead Weight Tons

% of World Fleet

% of Dry Bulk Traffic[5]

Capesize

100,000+

10%

62%

Panamax

60,000-80,000

19%

20%

Supramax

45,000-59,000

37%

18%[6]

Handysize

15,000-35,000

34%

Most directly, the index measures the demand for shipping capacity versus the supply of dry bulk carriers. The demand for shipping varies with the amount of cargo that is being traded or moved in various markets (supply and demand).

The supply of cargo ships is generally both tight and inelastic—it takes two years to build a new ship, and the cost of laying up a ship is too high to take out of trade for short intervals

Because dry bulk primarily consists of materials that function as raw material inputs to the production of intermediate or finished goods, such as concrete, electricity, steel, and food; the index is also seen as an efficient economic indicator of future economic growth and production. The BDI is termed a leading economic indicator because it predicts future economic activity.

the crisis of 2008 is the big sink

today = 647 (2019)

Another index, the HARPEX,[10] focuses on containers freight. It provides an insight on the transport of a much wider base of commercial goods than commodities alone. HARPEX is regarded as a Current-Activity Indicator, because it measures and charts the changes in freight rates for ‘container ships.’ Container ships typically carry a wide variety of finished goods from a multitude of sellers. These are factory output goods headed for retail markets, at the other end of the supply chain.

This one is with 2016

Steps to take to increase your resilience for turbulence or worse:

 1.  Read what Baltic Dry index and Harpex index mean, and then see the living picture of economy and production as cell or tissue or organ physiology (circulation and metabolism)

2.  Take a look at the Baltic dry index and harpex course of today

3.   Put this into perspective of the mechanism in a CAS: the BDI is the blood circulation of the system = the environment, directly important for the oxygen and food distribution of the system ( auto, para and endocrine communication)

4.   When you see this take a look again at the Baltic dry index and look at it over a period of 10 years

5.   You will see that even with all the central bank interventions never healed the system. They maintained “the illusion of being alive, but it barely survived, look at the numbers…..”

6.   I think that the next financial breakdown is coming and it will be worse than 2008, youdon’t want money in the bank when it happens, you want real goods like land, houses (real estate), forest, silver or gold, not paper but real stuff which won’t be affected so dramatically when the paper system gets its infarction…..

7.   And like any complex adaptive system it is unpredictable…a bit like death, you know every living system or CAS is temporary, it will die, certain, the how and when that is unpredictable … Augment your awareness, and do something about your resilience as a system…Cheers and good luck to all of us, because the smell is really becoming pungent…