Gustible - under the rubric of [$_SELF]

A phrase in an article published in the Financial Times, on 19 September 2008 caught my attention. The phrase was this:

…recent events have left investors and financial institutions so utterly disorientated, that there is widespread confusion about what anything might now be worth.

The article was entitled Gridlock and panic follows loss of compass, and it discussed the issues of disorientation evident amongst financiers following the financial calamities during 2008, and the collapse of many investment banks during September 2008.

Let us consider. The author states that financial institutions do not know how to value financial assets anymore. From this I can infer the following:

• Financial assets have only a relative value, no absolute value
• The valuation of financial assets depend on the mutually agreed upon valuation of all parties who trade in these assets

If these assets had an intrinsic value, it would not be possible to become confused as to the value at which they should be traded. Nevertheless the trade in these “things” have made a number of organisations and individuals exceedingly wealthy, and the perceived or agreed upon value of these things have been translated into a great many physical assets, such as buildings, cars, aeroplanes, boats, jewellery etc., which do have some form of intrinsic or absolute value, if only by virtue of their physical scarcity and aesthetic appeal.

Here is the question – how can this be possible ? How can something that a small group of people agree has value be translated into something that has actual, absolute value ? How is it possible to use the gains from trading in financial instruments to buy bread ?

The answer I have formulated is this: money is a means by which to distribute value. This means that rather than breaking gold nuggets into tiny bits, we use a token to stand for the value which that piece of gold (or bread, or unit of labour) would have represented. It is common knowledge that central (government) banks do not necessarily have the actual physical assets to back the amount of currency in circulation – but the currency is nevertheless backed by the expected labour and material output of the economy that produces the currency. The valuation of this currency is produced by the market by considering factors that can influence the ability of the economic unit (country) to produce value – factors such as the degree of governmental stability, militancy of the labour force, adherence to acceptable financial practises, etc. So far so good. Money is real.

We have already concluded that if it is true that financiers do not know how to value financial assets anymore, then these assets cannot have real value. So how can these assets be used to produce money, which are, according to this definition, a means of distributing value ?

I believe the answer is simple: the perceived (and taught) complexity of financial markets have blinded most people to the apparent fact that financial trading is utter bullshit -  there is no feasible rationale for its existence, and it consists of nothing more than a swindle that has been dignified by the magnitude of success it has had (I mean – how can the guy in the Ferrari NOT have superior knowledge ??). This is not the first swindle on such a large scale: democracy, religion, patriotism are just the top three that occurs to me.

We are suckers for displays of power – be it based in monetary wealth or coercive force – and all too often we do not see the forest for the trees.

Value is always evident. Value is the basic unit of trade. Be very careful not to try and find value in a belief system that depends on the shared faith of others for its continued existence. If one person stops believing, it can all come tumbling down. The apple has been eaten.