The big shift

Last Sunday I made pancake batter -- as I do most Sundays -- but I made a full rather than a half recipe because Natalie was joining us (me and Graham). Yesterday I thawed the batter out and today I made pancakes with it. They were totally fine, even after I extended them with an egg, a little milk, and some flour (but no baking powder).

One of the key concepts that William Goetzmann develops in his book Money Changes Everything is that money is -- in his formulation -- a "financial technology" used for shifting value across time periods. Money saved, for example, allows us to shift the value of past labor into the future. Borrowings, on the other hand, represent value shifted from the future (not yet earned) to the present. Of course, one person's savings/investment (we'll conflate the two for now) -- be it in the form of a bank deposit or a stock or bond purchase -- facilitate's another's borrowing -- in the form of loan, bond, or equity promised. Banks and capital markets being just key ways of allocating capital across time and space.

And then there are taxes, a special way in which governmental (instead of corporate) entities raise money in the future to fund liabilities incurred in the present.

Right now we are in a place where a lot of private sector liabilities were shifted onto public balance sheets in the financial crisis. Which reflated private sector assets. Retiring boomers wanted fixed income, so corporations issued debt and retired equity through buybacks, continuing the reflation. Now those debts will move onto public balance sheets, partially reflating assets again.

But the hole will need to be filled, partially from future taxes, partially from financial repression (letting inflation depress the real value of debt servicing), and partially from the value stored in the pool of current assets, limited specifically by the hue and cry against buybacks, which have been net net the primary driver of equity market growth since the crisis. Meaning markets cannot climb back both quickly and sustainably.* The money will be needed elsewhere, and rightly so.

But to return to my point at the beginning and in general in this blog. Freezing pancake batter, etc. Taking care of things. Taking care of our bodies. In many ways these are analogous to the use of money and its various incarnations to preserve value (stored labor) over time. They have much in common.

The big difference is in scalability. I can only store so much pancake batter. I am limited by the size of my freezer and by the need for pancake batter specifically. We can and indeed wish to eat only so much of it. Moreover, if I spent too much time making and storing pancake batter, I wouldn't be able to do other things I want to do, like blog. Which takes us back to the principles of comparative advantage and the virtuous of highly granular value chains and specialization.

In any case, it is now time to gear up and go for a bike ride with Graham and my mom.




*nb. I am trying to wrap my head around the application of the Modigliani/Miller theorem to society as a whole. How important is the ratio of debt/equity financing, in the end?