Page 1 of 2 Illusory dollars for a real crisis
By Julian Delasantellis
Historian Niall Ferguson argues in a new book that while money may be the root
of all evil, it is also the source of the human race's greatest progress. If
you disagree with Professor Ferguson, you may be one of those unrepentant,
doctrinaire Marxists who believe that money, and the entire framework of rules
by which it is earned and exchanged, is just a social construct that has been
eternally imposed by the world's rulers on the masses, keeping the masses
separated from their destiny of ultimately living in a blissful communitarian
paradise.
If that's what you believe, you'd have a hard time explaining the
worldwide success, indeed, the entire worldwide phenomenon, of the game of
Monopoly.
Created in 1904 by Quaker Elizabeth J Magie Phillips, Monopoly is a board game
centering on the principles of real-estate speculation, acquisition and
development. By the early 1930's, the Parker Brothers Company developed and
sold a version that would be recognizable to most of those who have played it
since. In it, players roll dice to determine their movements around a board
consisting mostly of properties and utilities to be bought and sold in and
around Atlantic City, New Jersey - or by now in the equivalent in whatever
country or region in which the game might be sold.
The game caught on; clearly, it was reaching something universal deep inside
those who played it. By the mid 1930's, in the depths of the Great Depression,
it was the most popular game in America, as players dreamed of acquiring the
great riches that were seemingly never to be had again. Starting in the 1960's
Parker Brothers was passed around and around like a rag doll from one corporate
parent to another, finally, the toy company Hasbro bought what remained of
Parker Brothers in 1991. Hasbro now says that over 750 million people, about
11% of the world's population, have played the game worldwide, far more than
play either chess or Go.
In the three quarters of a century since the game was introduced to the mass
market, many variations of the basic game based on local landmarks and tastes
have been brought to the market. From Argentina to Venezuela and over 50
countries in between, local versions of the game, with locally recognizable
properties and landmarks, have been sold to bring the game to those who would
find no meaning in the Atlantic City properties.
In Japanese Monopoly the most valuable property is not Boardwalk but the Ginza
district; in Hong Kong, it is The Peak, in London it is Mayfair. There are over
35 separate Monopoly editions designed around individual American cities;
should you desire to engage in an imaginary contest to decide who is the most
spectacular real estate mogul in Grand Rapids, Michigan, or Manitowac,
Wisconsin, there's a Monopoly board for you, too.
The game is also available for PC and Macintosh, and various pop culture based
editions have been produced as well, such as Monopoly Star Wars, and Potopoly,
a Monopoly-like game for parents who would rather have their children learn to
deal in marijuana rather than real estate. In 2003, Hasbro went to court to
stop distribution of Ghettopoly, claiming that that game's stereotypical
negative images of American urban life were hurting Monopoly's core brand.
Most recently, a very interesting variant of the game has been released, the
Monopoly Electronic Banking Edition. Besides updating the properties and prices
to reflect more modern times - the priciest property on the new board is Times
Square, which goes for US$4 million, up from traditional Monopoly's $400
Boardwalk - the game also enters the brave new world of modern finance in that
paper money has been abolished. Gone are those rolls of brightly colored paper
play money that were the medium of exchange in the old game.
In much the same way that 30 years ago cash-machine manufacturers realized that
the US high school students who were clerks in supermarkets and apothecaries
could no longer do enough math to make change, in that the register had to tell
them that a customer who proffers $2 for a $1.62 charge is entitled to $0.38
back, now Hasbro realizes that it's apparently too much to expect a
contemporary American youth to know that a person giving $100 in Monopoly play
money for a $50 charge deserves $50 back.
In paper money's place is a system of ATM-like cards, and a small,
calculator-like device that, when the cards are inserted into it, totals up
credits and debits for each player. Thus, when $1 million is exchanged between
players, one card is debited for that amount, the other credited. Thus, the
finely honed end of game tradition of all the players greedily counting up all
their money like merchants at the souk to determine a winner is unnecessary -
the ATM cards know all.
What would happen, I wondered, if the ATM calculator started acting very weird,
or if one player learned how to hack the machine? Let's say that a player
expecting to be credited $1 million in his account suddenly gets credited $30
million. Well, that's obvious - that player would be winning the game in pretty
short order - until the hacking secret got around. If everybody found a way to
gin up their play money by say, 30 times in short order, no player would have
any competitive advantage over any other, but the tremendous added resources
that could be directed to the real estate and other properties on the board
would result in huge increases in the prices that these were exchanged for.
And that's about the easiest way to understand what happened in the real estate
and asset markets up until August of 2007. The money creation machine just went
crazy .
What would happen if the process went into reverse? What if the player
expecting his card to read $100 million suddenly found that he was only worth
$75 million, $50 million, $25 million or less? What if that happened
simultaneously to all the players in the game? Obviously, the prices of the
assets on the board would start dropping, and would not stop dropping until
some degree of rationality and predictability was returned to the output
display of the game ATM.
And that's what's happened to the world capitalist system since August 2007.
The money-creation machine is broken, is acting very unpredictably, and no one
really knows when it is going to be fixed.
With the effective supply of money now such an unpredictable variable, the
capitalist system's central control lever, the price mechanism, has become
unreliable, somewhat opaque. In Joseph Stalin's Soviet Union the five-year plan
replaced the price mechanism; things aren't that bad in the US yet, but, if
you're an executive in one enterprise of the huge swath of the American
financial system now effectively nationalized by the government, subject to
almost daily backtalk and kibitzing from regulators, hayseed congressman and
ignorant scalp-hungry media stars, the distinction might not make that much of
a difference.
For students and aficionados of history, it is only natural to think that life
in this modern world is just so humdrum and mundane, not at all like the great
historical epochs of the past. Where today are the figures of such stature as
Marcus Aurelius, Cardinal Richelieu, Tokugawa Ieyasu, George Washington,
Churchill, de Gaulle?
A student of economic history need not fret or feel dejected, for it is no
comforting exaggeration to say that this year has been a truly momentous time
in world economic history. Whether the ongoing US, and much of the rest of the
world, recession turns out to be mild or monstrous, genteel or Gotterdammerung,
what happened in the financial markets this year should be remembered and
retold, indeed, it should provide a cautionary tale, for untold decades to
come.
The beast has a name, and that name is deleveraging - in one form or another,
I've discussed it in just about every article I've written for this site since
August 2007. The beast also has a face; it's the face of some banker, be it in
Paris or Peoria, turning down a borrower for a loan or a renewal of a line of
credit. We've learned this year that, in the current world financial
environment, what happens next can be almost unimaginable.
Let me make the example as simple as possible. I'm looking down at my wrist,
the timepiece around it says "Rolex". I bought it for $18 in Tijuana, Mexico,
so I'm more than willing to entertain questions as to its authenticity. Still,
it keeps good time, is kinda snazzy looking, and I've discovered that for
someone teaching economics to today's college students, a bit of bling does
help to establish credibility.
Over there in Geneva, Switzerland, the boys at Rolex headquarters are probably
pretty steamed to read this. It is their contention that the availability of
the, ahem, "replica" Rolex, at its very popular price, is the only thing
preventing me from shelling out maybe $4,000 or so on the real thing.
No, it's not. If the cheap one wasn't available, and in most places in the
United States it now isn't, I'd just buy a Timex or something at Wal-Mart. I'm
not going to spend $4,000, just about our yearly food budget, or enough for a
really kick-ass foreign vacation, on a wristwatch - the real ones just don't
provide enough marginal consumption utility over the replicas to justify the
added expense.
What could change my mind? What if, at some point in the future, that $4,000
would not buy a round-the-world trip, but it was barely enough for bus fare?
Conversely, if the $18 it cost for my Tijuana cutie (I hope my wife does not
misunderstand that and gets the wrong idea about what I did on my trip) did not
represent a pizza with extra topping but a whole month's mortgage payment, I
might not decide to buy it, even at its seemingly cheap price.
In other words, it's usually not the price of any one good that is significant,
but what that price is compared with what that amount can purchase in terms of
other merchandise that matters. Prices of just one particular good, in
isolation of the price of everything else , are meaningless.
So what determines the general price level, that is, the price of everything?
If there's enough money in circulation that enough people can buy one without
sentencing themselves to starvation or homelessness, Rolex will price their
product at $4,000 and prosper; if not, the price will have to come down.
Not too long ago, it was thought that it was the US government, through its
central bank, that provided the money to the US economy. Current Federal
Reserve chairman Ben Bernanke made his name with research contending that, if
the Federal Reserve of the 1930s had at that time more aggressively provided
liquidity, money, to the economy, the worst of the Great Depression could have
been averted. Before becoming Fed chairman in 2002, he was most famous for
stating that, if necessary, he would drop money out of a helicopter to get it
in people's hands so they could start spending.
This year, it was discovered that things are more complicated than that, in
that there's a very important middleman between the helicopter up there in the
sky and the people down below - the present day financial system. A new,
completely unregulated, and in many cases bigger, shadow banking system has
been allowed to come into existence, one that is completely impervious and
oblivious to the Federal Reserve's wishes. (For an account of the development
and operation of the shadow banking system, see
And the band played on, Asia Times Online, March 6, 2008).
If the financial system as a whole is working properly, if it has a mind to,
the money dropped out of the Fed's chopper can act like the seed corn for a
bountiful new crop of economic activity - the banks will take it and multiply
it many times over to meet the needs of a growing economy. But that hasn't
happened this year. Currently, a very large black hole has opened up beneath
the chopper, swallowing up everything that Ben, and for that matter US Treasury
Secretary Henry Paulson as well, drop into it. After that, it seems like the
money is never seen or heard from again.
For a more widespread illustration of this than just my wristwatch, just look
at the second-biggest economic story of the year. Back in July, crude oil was
commanding a pricey $147 a barrel, and the talk the world over was of
car-pooling, inflated tires, windmills, buses and Priuses. A lot of people were
somewhat perplexed at oil's meteoric rise, tripling in 18 months, but there was
always the China dodge. It was said that the price rise was all from extra
demand from newly industrializing China. These past few years, you could
frequently explain away just about anything economic by referencing China, and
people would buy it.
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