This is the script for my Demographic Doom podcast episode #52 recorded in Key West on 18 January 2021 and released on 19 January 2021. It may differ slightly from the final broadcast. This episode is available on major podcast platforms like iTunes and Google Podcasts. The audio master for this episode is found at Podbean and a video version is on YouTube (below). See the description on the YouTube version for extensive annotations, links and corrections. You can also comment on this episode there. The main website for this project is DemographicDoom.com
I'm Glenn Campbell. I call myself a demographic philosopher. I'm looking at life and trying to predict the future through the lens of demography or the study of human populations. I'm trying to view humanity from a distance like aliens would see us from space.
In this episode, I want to take another stab at explaining the messed up macroeconomics of the world in the simplest possible terms. I've tried to do it before on other episodes, but it's so important that I'm going to try it again from a different angle.
This time around, I want you to imagine a world without any money. That's my rhetorical device of the day. If we lived in a world without hard currency, like dollars or yen, would the economy be as screwed up as it is today, and the answer is, Yes, it could be, because there are other things that stand in for money, and they can become just as distorted as money can.
Imagining a world without money shouldn't be too hard, because humanity has lived most of its existence without it. In a medieval village, for exampl, most people might not have had access to currency, so what did they do? They bartered, of course. Barter is the only truly honest monetary system. If one farmer has an excess of chickens and another an excess of beets, they can trade with each other and both parties win, at least gaining a more balanced diet.
You can barter anything for anything, like goods for services. For example, you can work in the fields for a farmer, and he might pay you one chicken for each day of your labor. If you don't happen to need a chicken right now, you can trade it to some other villager for something you do need. If you're a blacksmith, you take raw metal and add value to it by turning it into a useful tool, which you can then sell for chickens or beets. Whether you grow a vegetable, raise an animal or form a raw material into a tool, you are creating value that that can be traded for other things.
I call this an honest monetary system because you always know the value of things, and the objects you are bartering are right in front of you and can't easily be faked. The only problem, of course, is that trading chickens and beets and tools can get really awkward, given all the merchandise you got to carry around with you. It would be much easier if you could trade your chickens and beets for something more compact, like little disks of various kinds of metal. Then you wouldn't have to carry around all those chickens.
And that's how money was born. Initially, it still would have been an honest system, because the disks of metal would have had value in themselves. In the days before mass production, copper and iron would have been mined and smelted by hand and would have been quite valuable even as a small disk. Those disks of metal in your pocket could be melted down to make nails or hinges. Even when being used for trade, the metal itself was worth what it was being traded for. It was just more convenient than the chickens or beets.
This isn't really "money" yet, at least not as we now know it, because those disks being traded were intrinsically worth something. There is a long history of how metal disks inherently worth their face value turned into paper bills and computer entries worth nothing at all, but we're going to skip that history in this episode. We are assuming, for the sake of argument, that money was never invented.
So if you have a civilized society and no money, how do you trade with others—that is, without carrying around a lot of chickens. A chicken has intrinsic value, in that you can eat it, but it's hard to to use as a medium of exchange, at least in its physical form. You can't stick chickens in your pocket, and they're a pain to maintain. So how do you remedy this problem? How do you make a chicken more portable.
Well, it's pretty easy. Let's say you know you're going to need to a chicken in the future, say for a chicken soup party you're having a month from now, but you don't want to house and feed the chicken for a month. You just want to assure a future supply of chicken, so you pay a bushel of beets to the chicken farmer, and the farmer gives you a piece of paper promising to give the bearer of that paper a chicken one month from now,
So what can you do with that piece of paper? Well, you could cash it in a month from now for a physical chicken, or you can trade it to someone else for something else you might need right now, like a sword. The sword maker can then turn the paper for a chicken.
So you don't really need a government issuing a currency, which is the standard definition of "money". Any merchant or product manufacturer can issue a promise, a sort of de-facto currency that can be traded just like it was money. Merchants used to do this all the time in the 20th Century: issuing various coupons or gift certificates that consumers could trade among themselves and eventually redeem for stuff. For example, McDonald's only had gift certificates that could be redeemed for hamburgers, which kids can trade with other kids to get other things they wanted.
Even there is no money in the world, in the traditional sense, you can still have a vibrant economy just dealing in these paper promises of things. Here's a piece of paper; it can be redeemed for one chicken. Once you have this coupon in your hands, you can trade it like a dollar bill for the things you really want. I call this a "representative economy", which is when you trade symbolic tokens that represent other things. You don't need government money because the token is the money, with no government involved.
An this is essentially how most of our present economy works. What financial markets do is not trade things, per se; they trade the promises of things. That's what a stock is. It's a piece of paper that says you own a certain share of the future profits of a company. It used to be that you'd physically own a piece of paper, a stock certificate, that you kept in a safe and that proved your ownership. Nowadays, we've dispensed with the paper itself, but the same ownership system still holds. If you own a company's stock, you're holding a promise of future profits—or future chicken—that's eventually going to come your way.
Money is just an intermediate medium to facilitate these transactions. Most investors don't hold onto their money for very long. Instead they turn it into promises for things. They can buy a stock, which is a promise of future profits, or they can buy commercial real estate, which also promises future profit. A bond or other debt instrument is a promise that someone will pay you its face value at a certain future date. Even if you deposit your money in a bank, you are exchanging cash for the promise that the bank will eventually pay you back.
All this representative trade in the promises of things doesn't need a currency. A currency is certainly convenient but not essential. I can trade chicken futures for beet futures without any intermediate currency involved. If currency didn't exist, we could just hand pieces of paper to each other. And this is what would probably happen if the US dollar or other major currencies broke down. Someone would set up an online clearinghouse where promised of chickens could be traded for promised of beets or anything else you wanted. Anyone could create a promise of something, like future chickens, and trade it for a promise of something else. Merchants would be expected to actually deliver on their promises, or they'd be booted off the platform. In fact, this could very well be where things are headed if currencies collapse.
But before we get to that stage, we need to think about how this system could possibly go bad. What could be wrong with trading the promises of things. The problem is actually quite simple. It had happens again and again throughout human history, wherever a market has sprung up for promises. The inherent risk of any promise-based system is that people promise more than they can deliver.
Think of the chicken farmer, issuing promises of future chicken. If he finds himself in a financial bind and needs resources right away, it is going to be very tempting to him to issue more promises than he has chickens. At the least, he may use the most optimistic estimate when predicting his future chicken production, which assumes that everything goes right in the chicken business. At worst, he can just make up imaginary chickens that he know he can't deliver, maybe because he hopes to flee the country or come up with another plan before the promises come due.
Wherever a system of promises exists, overpromising is bound to creep in, because the temptations are huge. This is especially true when there are big financial pressures in the present and the promises don't have to be fulfilled for years. And that's exactly the problem with the economy today. There are far more paper promises in the world than can possibly be fulfilled.
In other words, in a variety of realms, there are far more chicken futures in the world than there are chickens, and sooner or later, the people holding those futures will realize the chickens can't be delivered, and the market for these futures is going to crash. And this is going to happen all over the economy, because everywhere you look, there are too many promises.
This overpromising is obvious in the stock market which, at the time of this episode, is flying higher than ever before in spite of the pandemic. Those stocks are a promise of future profit that, in most cases, will never justify the current price. It is not necessarily true that anyone has lied. Companies are required by law to be honest about their profits. It's just that naïve investors have bid up the prices too high.
There are all manner of other debts and assets in the world that can't possibly fulfill their promise, but the one example I keep coming back to is government debt. To talk about government debt, I should probably throw in some currency, because everything ultimately gets valued in terms of dollars or euros or yen. To avoid complicating things, let's just assume there's no inflation. A dollar will always be worth a dollar and will always buy you, I don't know, a hamburger or something.
Any debt, be it a consumer loan or a government bond, is a promise to pay dollars in the future. And these paper promises are a sort of currency that can be traded between investors as though they were cash. Technically, only the Federal Reserve can issue currency, but in practice, the US Government does it whenever it issues a bond. The bond is traded among investors as though it were cash. When an investor buys a 10-year bond at something around 1%, they are buying into the belief that 10 years from now, the government will pay off on that debt and that inflation won't erode its value—both of which are huge assumptions.
The fact is, there's no way the U.S. government can pay off its debts—ever. Even if there's no inflation ever again and interest rates remain close to zero, no paydown is ever possible, because there's no way the government can ever again balance its budget. Things are too far gone. Like the chicken farmer promising more chickens than he has, the government has promised more future value to bond holders than it can possibly generate.
The government's chicken is called "taxes" and in 2020 and probably 2021, the government is spending roughly twice as much as the taxes it is taking in. Think of it as taking in 3 trillion chickens a year but spending 6 or 7 trillion chickens. This isn't just a result of the pandemic. In 2019, in nominally the best of times, the government was borrowing one of every 4 dollars it spent—or one in every four chickens, to use our analogy. So even if we get back to 2019 normalcy, the debt is still impossible to service. The government just can't pull a trillion chickens out of a hat. The best it can do is promise people a trillion chickens they can never deliver
All around the world are people and institutions who hold this debt, who think they have a $10,000 bond that they can redeem for $10,000, but they really hold nothing but paper promises, promises of chicken that can never be delivered. So far, the government has been able to make good on its debt. Every maturing bond has been paid off—so far—but that's only because the Ponzi scheme hasn't collapsed yet. And that's what this is, a Ponzi scheme: earlier investors being paid off by later ones. Like any other Ponzi scheme, there's not viable business plan in the works. There's no plan just to break even, let alone make a profit that can start paying down this debt.
Investors say, "The government can never default because it owns the printing presses and can print as much money as it wants." Well, yeah, but what are we talking about here: chickens or the promises of chickens. The government can always print more promises. What it can't do is print more chickens. The chicken inflow—meaning the actual value coming into the government—is limited to the actual number of chickens collected in taxes, which is limited to the number of chickens the economy actually produces.
I don't know how to count chickens here, but it is basically the core output of the economy that can be taxed, and that remains fairly constant over time. The government has income of about $3 trillion a year no matter how much it promises.
Printing more chicken promises than that $3 trillion encourages just a different kind of default, called inflation. The risk here is, you buy your $10,000 bond now, turn it in and get your $10,000 back, but that $10,000 buys only what $2,000 buys now. Maybe $10,000 only buys you a hamburger.
I take no comfort from the fact that, at the moment, $10,000 still buys 10,000 hamburgers. It will not always be so. The fact that there's little consumer inflation right now doesn't comfort me. You can't just keep printing money forever. Someday, the dam will break and all the inflation will come spewing out.
A representative economy, an economy of paper promises, is a relatively recent thing. It's been supercharged by the computer revolution which has made the trading of promises incredibly fast and easy. Humanity just hasn't had the time to develop the wisdom to manage it. You can't keep the farmers from selling more chicken than they've got, and in the case of government bonds, you've got the government regulating itself with no hope of restraint.
It's just so easy to sell paper promises. That's what every politician in the world is doing right now. Many of them won't even be around with the bills come due, so there's no incentive to balance the books. No one's addressing the debt right now. They're trying to save lives during the pandemic, which is admirable. It's just that those saved lives will be living in a very bleak world.
So what does it mean, in a practical sense, when there are too many promises in the world. It means that the perceived wealth of the world is much greater than the actual wealth.
Think about how someone measures their own wealth. To figure out how wealthy they are, they're going to inventory all their assets—all their stocks, bonds, real estate, gold, etc.—and then they are going to look on the internet to see what the current market value of each of those things are worth. You see that the value of a stock is currently "X" dollars a share, and you look at Zillow, and you see that a house in your neighborhood similar to yours recently sold for "Y" dollars. And you add it all up, and you get a net worth of eleventy-seven million dollars.
That's what you think you're worth, but it's an illusion, because it's only what you'd get if you sold everything today and the value of a dollar remains fixed. What can happen almost overnight is that the bottom falls out of an asset market, so maybe you can get only half of what you expected to get, and you're really only half as wealthy as you thought you were. That's an evaporation of wealth, and it can happen almost in an instant, as soon as people realize, "This promise isn't worth what I thought it was."
And with every oversold promise, they day of reckoning always comes, sooner or later. You don't know when, but it will come. Every Ponzi scheme collapses, and the world is an interlocking system of them right now, starting with the government Ponzi scheme of selling far more bonds than it can ever repay.
In a world without any money, you know the system has collapsed when you take your chicken coupon to the farmer, and he can't redeem it because he's run of chickens. In a modern economy, it might happen in a variety of different ways. A formerly high-flying stock can collapse to zero. Inflation can eat away at the value of an asset, even if the nominal prices doesn't change. Certain unique assets like real estate might not be sellable at all.
The only thing certain when promises collapse is that the holders of those promises—the owners of the stocks, bonds and real estate—will find they've lost all or part of their wealth.
There were just too many chicken promises and not enough chickens to pay them off.
Written, recorded and edited by Glenn Campbell. For annotations, links and corrections, see the description on the video version of this podcast. You can also leave comments there. See here for all my podcast scripts on this blog.