Steve, Sounds like you want to do to commodities what the goldsmith's did to gold.

Look where that has taken us.



" Oh, what a tangled web we weave
When first we practice to deceive! "

CB's use "the money illusion" deception to drive the system, expecting any rational information supply and demand outcome from such manipulation is preposterous.

Gov't has confused "activity with accomplishment"

Steve,

I have been looking at this post for a few days now, and I can't resist sticking my nose in. I have long, involved, complicated things I might say, but I would try to reduce it all to ten quick points. Some of what I will say may seem unbearably obvious and stupid, some obtuse and impossible, but I am making a try.

1. I come at all of this with the thoughts a) that money is a kind, a form, a species of information, and b) that the salient property of informational things is non-conservation. By "non-conservation" I mean the opposite of what we were taught in high school physics and chemistry about physical things, that "mass-energy is conserved," that atoms are conserved, although re-arranged into different molecules, across chemical reactions. So... where does new money, never before seen money, "come from"? It gets created in the midst of a transaction. It kinda comes out of "nowhere" -- conventions and conventional behaviors among people and institutions, right -- but don't try to make it subject to the kinds of symmetries that characterize Physics. If prices are cut in half in a market, where does the money go...? It doesn't really go anywhere. Actually it just unbecomes; no longer exists.

2. Commodities are some of the most physically physical things transacted for in markets. Oil, coal, copper, etc. Btus are being bought and sold, pounds, tons. Conservation principles, you can't get something for nothing, there are no perpetual motion machines (except as filings to delight patent examiners), there's heat, and then there's waste heat... all that very physical, very engineering as science as organized around basic equations that are basic statements of conservation applies quite closely in almost all of what anybody is going to do with most commodities. (Even the financial "commodities" traded are governed by accounting - which is a set of conservation principles... debits equal credits, etc. Money itself is pure information and not conserved, but accounting imposes conservation upon practices using money.)

3. Without going into a long shpeel, I would summon your intuition to suggest that commodity market are one of the places in the economy in which the differences in the basic nature of the subject matter of the transaction, the oil, coal, gold, etc. and the informational tokens and representations used in transactions, money and money-like things, stand ready to create anomalous conditions and results. True, so long as the actions in the market are just basic contracts and cash settlements, accountancy will constrain and organize the money to a conservational form that will match well enough the "in gross" physical properties (here-it-goes/ there-it-goes) properties of the stuff transacted for in the markets. Coupled to or become part of a market structure in which money is created and extinguished, made complex in form, one rife with "informational amplifications" (we'll get to that) it makes a certain sense that apparently anomalous behavior will occur. (As in the real estate and mortgage market -- houses and acres are physical things... the real "creativity" goes into playing with the money.)

4. You say: "Financial markets are fundamentally information processing devices." I completely agree. That is absolutely right. I would add that they are not entirely unlike other information processing devices employed by society, bureaucracies, computers, etc. And markets are used for similar kinds of things: modeling, systematizing, resource allocation, policy implementation and propagation, feedback control structures...etc.

5. You immediately go on to say: "Their [markets] purpose is to help investors place capital (or risk) where it can do the most good (or least harm)." Hmmm. I'm struggling. It's kind of Aristotelian (virtue of a knife is its sharpness... Aristotle was not trying to turn the screw to open the battery compartment of his kid's Christmas toy....)

6. I would rather sneak up on the question instead of making any big decaration of "purpose" and just talk about comparatively functional and dysfunctional market behavior, to ask "How are we doing at.... allocating some particular resource...or how are we doing at... representing and charging for some set of costs ...."? Yes markets give investors opportunities -- and that's just fine, but markets do a lot of things, keep some people and interests out, hold others in, act as sinks and sources for subject matter bulk in cycles (act like eocnomic capacitors - store charge), and so on and so on. (These are informational behaviors rather than physical -- but somethines physical analogies help to conceptualize.) It is a matter of taste, but one might rather look at the market as a system having "properties" than propose to enshrine a "purpose."

7. Like other "information processing devices" then, markets do interestingly well and badly. Digital computers are able to model the complex hydrodymanics of rotating surfaces well enough to come up with amazingly quiet submarine propellers and to simulate fusion bomb construction well enough to avoid much testing. But the same digital computers do not understand even the most mildly amusing dumb joke. Or pun. Or observation about a stopped clock. Long theory about why this should be so, properties of informational structures and systems, theory of "informational amplificaton" theory of informational "depth" / context, managment of context. Etc.

Limits to arbitrage, absolutely. Failure of aribtrage to rationalize market conditions, definitely. Every "informaiton processing device," and the components of it considered, has its strengths and weaknessses, abilities and failures.

8. The argument is that it is that kind of thing that is happening from time to time to certain markets, in particular to features of the commodity markets that you write about. The facts that Michael Masters assembles are basically right, large influx of money into the commodities markets in the last few years, regular use of positions in the markets for new and different purposes, etc. He could have added other facts, even those having to do with the central bank equity position in the currency, or at least the failure of the dollar as a reserve currency. (The argument indeed being that people are tyring, willy nilly, to create a kind of substitute "reserve currency" / store /index of value; are using what is to hand, and don't completely know how to do it -- certainly not elegantly). The commodity markets as an information processing system are now being put to a notably different "purpose" (I'll call it that - sure) than they were a decade ago. I don't think anybody really cares, per se, that a commodity future isn't organizedly merging to the spot price as delivery date approaches (somebody isn't cleaning some chips from the table ... but so what) but it is hard not to see a reason to care that such failures instigate a larger failure in basic resource allocation and pricing functions of the markets.

9. To which you say, if I understand correctly, let's create a new form of money, and add that for use specifically to make the market functional in some of the small ways that it now isn't -- hoping that it will solve some of the bigger problems concommitantly. I'm not trying to be flip in calling it "money"; the thing being talked about is representational in nature and negotiable for value. That pretty much meets the requirments for money, whether money as hogsheads of tobacco or bit strings in a transmission "wiring" bank funds.


10. I note that you then announce some pretty meaty rules regarding this money. You talk about making sure it is claims against *actual* inventory [my emphasis]; you describe it as negative carry (could arguably be a problematic thing to enforce ... a secondary marcket can always re-price and re-price-structure an asset.) To summarize, I hear you yelling (yelling is called for -- no worries) "And goddamit, this is going to be money with which some of these people behave well..." or some such. I'm exaggerating for effect, but my point is that, wihtout talking about the issue as such, I get the sense you are tryng to get system structure from the subject matter in which it deals. That is not impossible. Language gives structure to thought, etc. BUT it is not something that money readily does in a good way. Money is information, pure informaiton, nothing but information. But in itself it is very simple, low quality information. It doesn't explain much, doesn't of itself organize much; it is merely scalar. Compared to strand of DNA, money is inarticulate. If one needs principles, or rules to be followed, or systems to guide systems, best go straight to making them. The creation of the money can be an aid, no one should be against it. But not more than an aid. All of the arcitecture is in the rules.

Steve,

Thank you very much for your thoughtful and long note in answer to mine.
Clearly the two of us would be capable of putting forth an worthwhile, if extended, symposium.

I find myself agreeing with eighty-five percent of what you say, (I'm not sure that all of it lies in direct contradiction to what I thought I was saying originally.) Maybe it is the "Blah" part at the end that we would contend over.

Let me try to be as short and sweet as I can in a quick review, and then one or two questions that I think might be helpful.

Your #1 I take to be a statement that the representational (I'm going to call them properties -- because I don't have another word) the representational properties of information matter. I couldn't agree more. That is what information, including especially money information is all about. The failure of the money to represent what it needs to .... essentially negotiable value -- is a big deal. We would agree.

I think we also agree that there is "better" and "worse" in this, your #2 and the matter of "tastes" notwithstanding.

You say "I don't think there's any "good" money." I agree that there is not in any *absolute* sense, but I am quite persuaded that there is good, and better and worse, money in every practical sense. I am further persuaded that Gresham's "Law" (more or less "bad money drives out good") is a very significant principle. As a concrete example, we recently saw (Bloomberg piece I can't quite put my finger on as I write - I'm at the wrong computer - but about 3 wks ago) even that the US Fed, having accepted crummy collateral in the bank "asset" swaps was being force fed another slug of it.

I agree that markets are a form of collective design - your #3, and I hugely agree that all forms of "not knowing what we're doing" are entirely more risky than forms which evidence what is going on. Public framework for distinguishing among market virtues and vices. I'm totally there. But those are what I would be calling "properties" of the market ( again, just because I don't have a better word handy).

I'm not arguing that markets are "facts of nature." Quite the contrary. I'm arguing that markets are "constructed," made, created, built like houses are built, written like books are written, they are structures and systems that are invented and installed. I'm probably somewhere toward the extreme in this view, thinking, as I do, that classical economics as a sort of "physics" is silliness. Notions that supply or demand, or their pre-ordained intersection, exist in the abstract aren't right. For various social reasons we try to make it seem as if that is so from time to time -- but there is nothing fundamental to it. And, for me, a lot of this comes from realizing the truth of non-conservation.... informational things can come into being by being made into place; they don't get "taken away" from some other bundle of mass-energy.

I do somewhat disagree with your #4. I definitely do not want to get "bogged down." Biiig Blah. BUT I think a lot of our troubles, including our recent troubles, come from not understanding (collectively) what finance is and is not, from supposing it is "magic" in ways that it isn't, from various kinds of false categorizations (there's the price of eggs, and that is all that inflation is about, and there's the price of houses, and that is a totally separate thing we'll call asset value increase, and that has nothing to do with the stability of the currency because that depends upon inflation, and I've just checked the price of eggs and...) Somehow, people whose eyes glaze over when phrases like "futures arbitrage" are spoken need to be able to see enough of a picture...

"Meaty" rules was just a phrase I came up with -- maybe not a particularly helpful one. I'll withdraw it, but I might note that in the middle of your #5 it is "...because here come the auditors" Let's let it go at that and head for a question or two.

Question number A would be whether you suspect that, somewhere toward the center here, let's just call them "relationships," outside the market are having a somewhat de-marketizing effect on the market? No corruption, collusion, monopolization... nothing criminal. Essentially another form of "derivative."

The second question would be whether you wold guess that there can be a kind of "disclosure tipping point" at which enough information about who is doing what and to whom is readily available that a market, even one that was for a time a "semi-public" market again becomes a sufficiently public market?

Third would have to do with the technique for organizing the "disclosure" (description, information flow); and whether transactions in an entity-vehicle are best suited, qualified?

Thanks again so much for your long response. Sorry to have gone on long again.