Belmont Club

All the Money in the World

There’s an ongoing war raging in the world today and it is a war of information. Over the last few decades officials and bankers have been creating tokens of value, inflating central bank balance sheets by fiat or creating money in the shadow banking systems of for example  — China — and in so doing have imputed claims on the real goods and services in the world. Forbes writes:

Shadow banking conjures up images of money laundering and black market crime. In China, shadow banking is described a little differently.

“It’s a way for local governments to get funding or financing. These municipalities set up a company and invest in it. They’re essentially off balance sheet vehicles of the banking system,” said Andrew Milligan, head of global strategy at Standard Life Investments in Edinburgh.

The monies generated thereby can build ghost cities in Mongolia. Or they can fund the construction of the tallest building in the world in a empty Chinese pasture. Now that the party threatens to grind to a halt (no pun intended) the people in the money invention game are looking for more ways to gin up cash. Reuters reports that the efforts of local communist parties to persuade the central government to pour $6.3 trillion dollars into an “urbanization” program have run into snags. “China’s plan to spend $6.5 trillion on urbanisation to bolster the economy is running into snags, sources close to the government said, as top leaders fear another spending binge could push up local debt levels and inflate a property … China plans to spend some 40 trillion yuan ($6.5 trillion) to bring 400 million people to its cities over the next decade as leaders such as Li try to sustain economic growth that slowed to a 13-year low of 7.8 percent in 2012.”

They need $6.5 trillion in addition to the $5.5 trillion they’ve already minted over the years. That’s trillions with a “T”, a sum larger than anything except the GDP of the United States. In exchange you get ‘urbanization’.

A Chinese firm best known for building air conditioning units is constructing a vertical city. Broad Sustainable Construction (BSB) said this week that next month it will finally break ground on its the tower that will not only be the world’s tallest but could, according to BSB, become a model for how China deals with mass urbanization.

The 838-meter-tall (2,749 feet) tower more commonly known as “Sky City” will be about 10 meters taller than the world’s highest skyscraper at present, Dubai’s Burj Khalifa. Moreover, it will be stationed in the southern provincial capital of Changsha of about 7 million people—tiny compared to cities like Beijing or Shanghai.

A long way from anywhere

A long way from anywhere

While such developments may earn money for the construction companies, they might not return a profit to the investors. In fact they are almost certainly going to have to be written off. But who cares? It’s only money anyway, and there’s more where that came from. The production of money now has no inherent limit as long as you can find a way to do it. Which brings us to the question of Liberty Reserve. Liberty Reserve is a virtual currency company that was just seized by the Feds.

The U.S. Secret Service have arrested five individuals and seized multiple bank accounts related to a $6 billion money laundering scheme being described by authorities as “staggering” and the largest ever case of international money-laundering.

In a statement, Secret Service officials said authorities in Spain, Costa Rica and New York arrested five people on Friday and seized bank accounts and Internet domains associated with the company Liberty Reserve – a Costa Rica-based website that deals in digital currency and allows transnational online payments and money transfers …

Aditya Sood, a computer science doctoral candidate at Michigan State University who has studied the underground economy, described Liberty Reserve as a no-questions-asked alternative to the global banking system, with little more than a valid email needed to open an account and start moving money across borders.

Apart from the charge that Liberty Reserve acted as a front for criminal organizations it poses another threat. It allows some of the money — or whatever you want to call it — that is sloshing around out there, to make contact with the ordinary money we spend at Walmart or CVS pharmacy. The critical thing you have to remember about the Ponzi game in today’s world is that all that fiat money — the trillions created to doctor bank balance sheets or generated in schemes like Chinese urbanization or the subprime mortgage system — is simultaneously both good and bad.

It’s good because this funny money can be used to fund stimulus programs, pay for the super-aging Japanese pensions from self-bought debt or bail out Spain, Italy, Greece or Cyprus. But it’s bad because should this mountain of imaginary stuff come into real contact with our ordinary world then it will have the effect of matter touching anti-matter.

Without this funny money governments would go bust. Obama would be reduced to rattling pencils in the street. Greece could not be bailed out. Japan would go belly up.  And China would have to reckon with all them guys who bought Chinese communist party shadow bonds and can’t be paid back.

But if the funny money gets away from government and shows up in the street it will be like a ticker tape parade on Broadway.

The Washington Post writes that the charges against Liberty Reserve — absent the allegations of fronting for child porn or racketeering — “could just as easily describe Bitcoin. Anyone can create a new address for accepting bitcoins and then transmit funds to other Bitcoin addresses without furnishing identifying information. This feature has raised concerns that the currency has been used for activities such as drug dealing or illegal gambling.”

The U.S. government faults Liberty Reserve for requiring users to fund their accounts through intermediaries called “exchangers.” In the prosecutors’ view, these intermediaries helped the core Liberty Reserve network avoid collecting identifying information about their users. The Bitcoin economy has a similar structure. Users buy bitcoins with conventional currencies via online exchanges. Some of these intermediaries do collect information about their users, but once users have purchased their bitcoins they can conduct unregulated, and practically untraceable, transactions with other Bitcoin users.

But the Washington Post overlooks the real danger of schemes like Liberty Reserve. Such schemes undermine government control of financial information. They provide what amounts to a back door into money database. They let unauthorized people  move entries between restricted categories in the global balance sheet. Those uncontrolled transactions can confront the system with its own contradictions. And the current information system is like a Medusa. It is one big lie, unable, unable in principle to look at itself in the mirror, fearing what it will see.

Can you imagine what would happen if we actually believed that “all the money in the world” truly existed? We would either by rich, rich, rich. Or all our savings wouldn’t be worth the paper they’re printed on. All those trillions. Wow. Hell you could have a good time in Vegas with that.

The War for Information now consists partially in this: who defines the legitimacy of claims on the world’s goods and services when the aggregate volume of claims exceeds the assets required to satisfy them?  Who gets a haircut? And who can walk away with his State-given piece of the pie? That is the key dilemma of any bankruptcy. But if we live in a bankrupt world, then the power to change entries in the financial database is power indeed.


The Three Conjectures at Amazon Kindle for $1.99
Storming the Castle at Amazon Kindle for $3.99
No Way In at Amazon Kindle $8.95, print $9.99
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