October 25, 2006: The Ultimate Fiction of Value

One way to reflect on the implications of postmodernism and its foundations in fictions is to consider some of the articles Gabor Steingart has been writing for SPIEGEL ONLINE (available in English). The one with the greatest impact was filed today with the full title: "Playing With Fire: America and the Dollar Illusion." This is an excellent follow-up to yesterday's article, "A Superpower in Decline: America's Middle Class Has Become Globalization's Loser." Given how hard it is to count on any American news source these days (even the so-called "public" sources) and the accusations of bias now being levelled at the BBC, it is probably quite valuable that Der Spiegel has chosen to support an English-language on-line edition. Even more important is that both these articles are excerpted from a book: Weltkrieg um Wohlstand: Wie Macht un Reichtum neu verteilt werden (which translates as "War for Wealth: The Global Grab for Power and Prosperity"). It is rare enough to find excerpts from a "serious" book in a magazine. In this case Der Spiegel has provided us with English-language content before any translated edition has been published. So, to get a feel for the economic implications of postmodern thinking, here are a few paragraphs from the "dollar illusion" article:

For capital market investors, reality isn't reality until the majority of investors are convinced it is reality and have begun reacting accordingly. Right now, everyone is watching everyone else closely. Everyone knows the dream of the stable economic superpower has ended, but everyone is keeping his eyes shut just a little longer.

Government bonds and shares don't have any objective value -- nothing you can see, weigh, taste or even eat. Their value is measured by investors' faith that the purchasing power of $1 million will still be $1 million 10 years from now, rather than having been reduced by half. This faith is measured on the markets almost every second -- and the measure used is nothing but the faith of other investors. As long as the faithful outnumber the skeptics, everything works out fine for the dollar (and the world economy). The trouble starts the day the scale begins to tip.

The process is complicated by the fact that investors aren't driven by blind faith alone. In part, it seems, hard facts also push them to extend their credit of trust a little longer. US economic growth -- an impressive figure on paper -- is an important benchmark. When it is high, investors feel reassured in their faith in the power of the US domestic economy to perform well. True, the trade balance deficit has skyrocketed since it first appeared in the mid-1970s. But the economy is growing steadily anyway, as the dreamers note with growing self-confidence. It may not be growing as rapidly as the Chinese economy, but it is growing twice as fast as the European economy.

And yet this benchmark is not as reliable as it seems. The faith investors have in the figure has actually helped create it. After all, the purchasing price of a government bond feeds almost directly into state consumption, just as the purchasing price of a share makes companies more inclined to consume. It also extends the credit basis of millions of private households -- which in turn boosts consumption. In this way, the expectations of investors -- including the expectation that the United States will continue to grow -- transform into certainties almost all by themselves.

In other words, the capital of trust creates the very growth rates it needs in order to justify itself. US economic growth, in fact, is fueled by ever-increasing consumer spending -- puzzling given that American wages are dropping as is industrial output. Still, everyone knows the answer to this riddle. The rise in consumption isn't based on an expansion of production, a rise in wages or even an increase in exports. To a large extent, it's based on the growing debt. But why do banks keep issuing credit? Because they accept the ever-increasing prices of stocks and real estate as a kind of collateral. A closed circuit of miraculous money minting has been created.

So, in the language of yesterday's post, are these fictions "intended to deceive?" I would answer in the affirmative. This system can only sustain itself if you have a critical mass of agents willing to believe in it, regardless of how sound that belief is. In the postmodern fashion of warping words, trust is being melded into faith until the two can no longer be distinguished. Thus, we are no longer dealing with the ways in which shareholders speculate over their investments; we are now in the domain of those individuals who, in one way or another, agree on questions concerned with the value of currency. Steingart has a useful characterization of those players:

Everyone knows how dangerous the game is, but continuing to play it strikes them as less dangerous than quitting.

Also, as was revealed in Lulu (play and opera), the best players are rarely seriously hurt by their decisions; the pain "trickles down" to those who lack the strength to endure such hits (without whom, however, markets would not be as strong as they are).

Meanwhile, lest we think that this game is only played with the relatively virtual concept of money, the online edition of the London Times ran a story today about the latest generation of "players" in the European Union "subsidy game." Olive oil producers in Spain, Greece, and Italy have been able to net €2 billion in subsidies based on inflated crop figures; and livestock farmers in Slovenia are now playing the same game with their cows, sheep, and goats! In other words the "concrete objects" that are out there in the fields are less important than the reports that are filed about those objects; and those reports have just as much fiction to them as the economic reports used to establish currency values.

Welcome to the postmodern world!