FETISHISM OF MONEY. ARTH AND UNCLE SAM.
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Saturday, September 27, 2008
Fetishism of money. Arth and Uncle Sam.
-- Money as a commodity and defusing the world financial
mess: re-define money as a unit of account, the old-
fashioned economic way.
One definition says that money is anything accepted as
payment for goods and services and repayment of debts.
[Frederic S., (2007). The Economics of Money, Banking, and
Financial Markets (Alternate Edition). Boston: Addison
Wesley, 8.]
The synonym is 'currency' which is a standard, a unit of
account, a store of value and a medium of exchange.
Modern financial transactions have indulged in fetishism of
money, treating money as a commodity.
The commodity called money has undergone may processes not
unlike an agricultural product, say, tomato, which by
processing through agro-processing industry gets packaged
as ketchup. All such processed 'money' products are bought
and sold in financial markets such as stock exchanges,
central banks, IMF.
One such process of transformation of money is called
'derivative.
'Derivative' is actually a technical term in differential
calculus, a branch of mathematics. Derivative in calculus --
is the reverse of integration and, -- is a measurement of
change in a function as the value of inputs change. A crude
example is how a graph which is curved is made into a
linear approximation; so, a horizontal S-shaped curve -- ~
-- can be shown as a downward-sloping line drawn as a
tanget to that function.
A financial derivative is an instrument which changes in
response to changes in the underlying variables. Examples
of derivatives in financial markets are: participatory
notes, mutual funds, futures, forwards, puts, options,
swaps. Financial derivatives have taken many shapes and
forms and are based on a variety of assets not excluding
inflation derivatives: commodities, equities, stock market
indexes, consumer price index, bonds, interest rates,
exchange rates.
The financial derivatives are the root cause for a 60
trillion economy resulting in a 6,000 trillion dollar
financial marketplace. The players in the marketplace
(including the recently collapsed or rescued entities such
as Lehmann Brothers, Merrill Lynch, Washington Mutual,
American International Group) transact in these
derivatives.
Instead of reducing risk for the players, these market
players have placed themselves at risk of bankruptcy or
simply going out of business when faced with the prospect
of defaulting on promised payment schedules.
Now what Uncle Sam is attempting is a quick-fix to rescue
these market players who have placed themselves at risk by
their own market follies, dealing with fetishism of money,
that is, money as a commodity which has changed beyond its
original form and function -- simply as a unit of exchange
to facilitate barter transactions.
The basic problem which Uncle Sam is NOT addressing is the
fact that 60 trillion dollar economy has been transformed
into a ballooned 6000 trillion dollar financial derivatives
marketplace.
This is the structural reform needed: money has to be put
back to its original function, as a unit of account to
facilitate barter transactions. If I have cotton to sell
and want to buy a Nano, I should simply use money to settle
the deal and not be put through the fancy financial
instruments set up as mortgage loans or as personal debts
to be repaid using complex interest rate computations and
equated monthly repayment schedules.
The justification for designing a processed money product
called a 'financial derivative' is to manage risk, to
reduce the risk for one party.
In Hindu tradition, the word Arth has two meanings:
'wealth' and 'meaning'. This is a profound semantic
equivalence. Arth is meaningful only when it is related to
the creation of wealth. Today's financial derivatives do
NOT create wealth but indulge only in playing games with
money and its allotropic modifications called financial
derivatives.
An old-fashioned 18th century book of Economics, is called
Adam Smith's 'An Inquiry into the Nature and Causes of the
Wealth of Nations.' Smith was talking of money as a measure
of creating wealth. An example cited is that a butcher, a
baker, and a brewer provide goods and services to each
other out of self-interest; these economic activities
result -- because of an 'invisible hand' -- in a surprise:
creation of wealth for all three. Simply put, Arth is the
result of peoples' actions, work as it is called in old-
fashioned economics.
There is no substitute for work to produce employment and
to create wealth. The financial marketplace players are
creating an illusion of wealth thinking that they have
transformed the world into a 6000 trillion dollar
marketplace. It is actually worth only 60 trillion dollars,
that is, on the basis of the value of the underlying goods
and services available.
The G20 nations (including India) may be called upon to set
up a new brand of IMF, something like a super-SEBI to
regulate the world's financial marketplace. But they are
doomed to failure so long as they fail to understand that
the butcher, baker and brewer are the real producers of
wealth, not the Goldman Sachs, not the Mauritius-based
participatory note issuers.
I agree with Prof. Vaidyanathan.
http://www.dnaindia.com/report.asp?newsid=1192432
India has to teach Arth to Uncle Sam and the other G19 of
the G20.
S. Kalyanaraman
http://dharma1.blogspot.com/2008/09/fetishism-of-money-and-defusing-world.html
End of forwarded message from S. Kalyanaraman
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