The Time Value Of Money
Chris Laird
In recent times the exchange function of money has come to overwhelm the value function.
This disparity has been greatly enhanced by the historically significant proliferation and penetration of the IT industry. The result has been the the linking of information to money in the world economy. What this has done is to greatly increase the link of money to a time value component.
All money today (except metals) are associated with time components which encode the PARTICULAR TRANSACTIONS they are used for in that time period. This is the thesis of this paper.
The effect of this greatly increased time component of money and information encoding of money is a great deal of risk to the world economy. The world economy is greatly dependent on the TIMELY settlement of not only money transactions but of the associated information. This is particularly illustrated by the amazing penetration of just in time manufacturing world wide.
So then, if the exchange element of money is so greatly emphasized, what would be the effect of any given interruption of settlements, either just clearing checks, or on a larger scale, a bank liquidity crisis? The effect is a cascading destruction of wealth and production far greater and more sensitive to disruption, than say at a time when the time value of money was not so highly emphasized. In other words, we have the destruction of the INFORMATION encoded with the money that is dependent on a timely settlement. As we shall see this time encoding has created a world economy so interlinked that, when there are any significant defaults, they are not only losses for the direct parties, but are greatly magnified by the destruction of the encoded transactions and connected information which were also timed to follow in expectation of settlement. In the past, the effects of settlement failure (bounced checks to liquidity crises) were mitigated by the low penetration of time multipliers on money. The creation of the IT industry and its incredible penetration to all facets of the economy has greatly magnified the time multiplier component of a given dollar settlement.
This greatly increased time associated multiplier of money has created the ability to achieve incredible economies of scale for the manufacturing industry, by reducing the needed inventories for production, among other things. But this effect, while increasing efficiency and leading to global production centers for all economic commodities (produced or mined) has magnified the possible effects of a disruption of any center of production. This center of production model achieved by great economies of scale has in effect encoded into the time flow of money the realized gains in productivity. This realized gain in efficiency is directly correlated to the increased time value of money today.
Now, what if there is a failure of a transaction? If it fails then it causes others to fail if there is not a sufficient buffer to allow for mitigation. This lack of a mitigation buffer is a direct measure of the time value of money. If mitigation efforts fail then another transaction fails, and if mitigation efforts fail for that one, another, and so on till a cascade occurs. The creation of great efficiency in our money economy has led to great efficiency to our productive economy, and the creation of globally located production centers of all kinds, including labor centers. But these efficiencies have rendered the whole system vulnerable to cascading economic defaults. Any destruction of money is now greatly magnified by a lack of settlement buffers, and this whole phenomena is in effect a money system that can go poof! In my GE editorial Mexican stand-off I commented on my belief that the US dollar can lose most of its value in one hour. I literally mean that statement.
But when that money goes poof we don't just lose the money. We lose the associated encoded information as well, which is critical to all the transactions that would depend on the money settling. THIS IS THE REASON THE FED WILL FAIL IN ITS ATTEMPTS TO REPLACE THE DESTROYED MONEY. This is the reason why I stated in my GE editorials on derivatives that the FED will find it cannot replace the lost money of derivatives fast enough to stem a real derivatives crisis and or a real debt deflation. Any attempt would be like trying to put out a forest fire with a glass of water. The FED can recreate the money and send it out. BUT ALL THE TIME DEPENDENT INFORMATION is irretrievably lost to the system upon expiration of the time settlement window.
In the past, when money was not so disassociated from its store of value function, (money has two functions, store of value and transactional) the store of value function created real liquidity buffers of all kinds to the economic system, from national savings to metal value sinks to stabilize and make the money "real'. The way money is now, unless you are involved in speculation or finance, (all activities that profit from the time value function) you are making no real profit. This movement of all economic activity to time series and money velocity has so deemphasized the store of value function of money that money is at risk of going up in a conflagration. Indeed, it will go up in a conflagration. In this case, I cannot agree at all with the hypothesis that we will resolve this mess in a MUDDLE THROUGH ECONOMY. The disparity of store of value and the transaction value of money is so great that the system WILL collapse. There will be no muddle through resolution scenario leading to normalization. The high probability scenario is a LOSS OF CONTROL, and a destruction of money, destruction of velocity of money, destruction of the encoded economic information in that money, and destruction of production globally, which will be magnified by an huge debt overhang worldwide, debt deflation, and the cessation of most manufacturing and financial activity worldwide and in a synchronicity hitherto never thought possible.
The result will be a massive unwinding and deflationary depression lasting probably decades. Then war.
GLOBALIZATION AND THE TIME VALUE OF MONEY
In the 1950's to 1970's, the US was primarily a manufacturing center for the world. Most of what we bought was made here. That money was immediately fed back into the system (without having to be returned by foreign creditor nations at a interest rate discount) on a one to one basis, and the wheel turned nicely, and the standard of living rose in the US. We were a large net creditor to the world then, and even though the last links to a gold dollar were removed, for a time we had the wealth to carry on nicely.
At that time, manufacturing was functioning using inventory buffers both at the factory level and and the distributors, and there were real money buffers in the US economy as well. As the economy fluxed the economy had sufficient inventories to prevent system wide disruptions from any given supply center, and also these centers were distributed all over the country geographically. Production centers were atomized and in small local units which resulted in many transaction buffers not only for a factory but for the working populations, all working in a nice harmony, and able to adjust to market disruptions by belt tightening, and local planning.
Today we have the exact opposite situation. There are no local production centers interlinked to a local geography. In the aforementioned time, the US auto industry had many dependent satellite industries mostly located in a local geography, and one manufactured car would result in many jobs, not only at a US manufacturer, but jobs for many support companies. As I recall one car manufacturing job had 7 associated jobs in some support function.
Globalization was made possible by the advent of the IT industry and relatively cheap energy, and that made it possible to greatly magnify the time value of money and the dissociation of the store of value function of money from the transaction value. The transaction value became greatly emphasized, resulting in large efficiencies of a kind, and the creation of global production geographies. These global production geograhpies are dependent greatly on money velocity and the increase in encoded information into money, as well as cheap energy.
This process meant that local production geographies became dissociated and their efficiencies replaced by transportation physically and a DIRECT ANALOG effect on money.
Money now had encoded information associated with it, in the form of the linking the IT industry made possible between production centers and the consumer. Cheap energy also facilitated this process. Today the purchaser is usually greatly at a distance from the producer, as is the prouder greatly removed from his sources of materials and components.
All the links are met by a combination of IT transaction systems that are associated with money transactions that are time dependent. This dependence is so critical that any disruption of a key production node will stop the whole. This is the nature of time encoding of money combined with its direct linking with information and its analog on production centers and consumers.
In addition, this time encoding of information into money has led to a spin-off finance industry that handicaps and makes bets on the flow of this time and information money.
Indeed this process has become so prevalent that GM now makes more money on its financing operations than on its car production.(Is this a cause or effect?) This process is so out of whack that the derivatives industry has created its own arcane alchemy. The derivatives industry is relatively new since about 1990, and its growth has correlated nicely with the growth of the IT industry. The derivatives industry games the possibilities of the time value of money so horrendously that 200 trillion dollars of money is at the table every day, and somehow if that fails, the FED is supposed to replace it all. THAT WILL NOT HAPPEN. If the flow of money settlement is interrupted past the time window associated with it, that money DIES. YOU CANNOT REPLACE DEAD MONEY. Dead money is money that has been irretrievably separated from it associated time settlement component, and associated information component.
What will be eventual result? A return to an emphasis on the store of value component of money. But unfortunately this will necessarily correspond to a very great de emphasis of the transactional component, IE, severe economic strife.
There is a lot more to this story of the time value of money. I am considering writing a nice book about it. If a publisher or well heeled investor is interested in participating in the creation of the book, you are welcome to contact me.
November 1, 2004
Chris Laird
tec_10000@yahoo.com
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