Michael Ashton - Whats Wrong with Money?: The Biggest Bubble of All

Copyright 2016 by Michael Ashton. All rights reserved.

Published by John Wiley & Sons, Inc., Hoboken, New Jersey.

Published simultaneously in Canada.

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Library of Congress Cataloging-in-Publication Data:

ISBN 9781119191018 (Hardcover)

ISBN 9781119191179 (ePDF)

ISBN 9781119191162 (ePub)

Cover Images: Soap bubble rusm/iStockphoto;

US one hundred dollar bill burakpekakcan/iStockphoto;

Pushpin rimglow/iStockphoto

Cover Design: Wiley

This book is dedicated to my wife, Diane,
and to our joint investments in the future:
Andy and Lila.

Every person in authority, whether at the Federal Reserve (Fed) or the European Central Bank (ECB), in the White House or at 10 Downing Street, on Capitol Hill or in Parliament, says that we should not worry. Sure, there are holdoutspeople who worry, like we dobut they are marginalized as cranks or backbenchers.

What are we worried about? In 2000, we had a bursting stock market bubble that produced a fairly brief but painful recession. Central banks and legislators sprang into action by drastically cutting interest rates and extending jobless benefits, among other things. Don't worry! It's Greenspan to the rescue! we were told. For a while, it seemed as if they were right. The economy recovered, although we now realize that the actions of the authorities set up another, bigger bubble.

In 2007, the second bubble within a single decade started to come undone; it popped in 2008. The ensuing recession was deeper, and longer, and the response from monetary and fiscal authorities was more dramatic. The scale of the response was an order of magnitude larger, with trillions of dollars of deficit spending and the implementation of quantitative easing (QE) on a massive scale. The breadth of the response was also impressive, with every major central bank not only dropping interest rates but also implementing its own version of QE. Dramatic? The response was desperate. Certain central banks pursued policies that drew criticism at the time, not because they were of limited effectiveness but because they were of questionable legality under the central bank's authorizing legislation. But it was a classic case of the ends being taken to justify the means: In the end, the world was saved from financial immolation and if you have to break a few eggs to make an omelet, who cares? After the fact, even some of the original critics begrudgingly recanted, saying that in the heat of the moment clearly something had to be done, and any alternative proposal would have to be tested against a policy that, ultimately, worked.

In the United States, the unemployment rate is below 6 percent again. Banks are lending. The hyperinflation predicted by the hyperventilated never, in fact, happened. Budget deficits are coming back down. Japan and the Eurozone have seemingly averted deflationary collapses as well, and although many bank depositors in Cyprus were bailed in (in other words, their money on deposit was confiscated), the European currency union has so far proven inviolate. Although, to be fair, we haven't heard the last of Greece.

Winning!

So why are we worried? The crisis is over! Disaster averted. And soonalthough we have to use our imagination about what soon isthe Federal Reserve will begin increasing interest rates to put monetary policy on a more normal footing. All of the worst predictions have failed to materialize. Game, set, and match to the financial interventionists. Right?

We are worried because this doesn't feel right. We see a perpetual motion machine, and although we can't write down the physics equations for why it shouldn't be working, we have intuition that tells us it shouldn't. If the seemingly insane scope and scale of the policy response was successful in doing what it is purported to have doneto have added millions of jobs, saved thousands of banks and put the stock market on the moonwith no evident side effects, then why the heck haven't central banks and legislatures been doing this forever? Eat all the chocolate you want, and don't gain weight! It sounds like a great deal.

But we know something is amiss. This book describes what that is. The unfortunate fact is that each subsequent crisis has only been repaired by weakening a more fundamental layer of our financial lives. The crumbling equity market edifice was repaired, at the cost of the housing and credit markets. The housing and credit markets have been repaired, but at what cost?

This book is about the most fundamental layer of all: the structure of money itself. Over the last century, our concept of what money is, at its very root, has gradually changed. What backs money today is simply this: trust. There is nothing else behind our dollars, our euros, our sterling, our yen, our francs but trust that someone else will accept it at a reasonably predictable level in exchange for stuff we need. And this is why it matters so much that policymaker responses to the last few crises have whittled away at that trust. This is why it is so disturbing that these policymakers say trust us while they monkey with money.

Never before has so much ridden on trust. And never before has that trust been so abused, and so stretched. What's wrong with money? Nothing, and everything.

What's Wrong with Money: The Biggest Bubble of All is structured thus:

In of the book I explain what money is, how it differs from related concepts of wealth and currency, and why we need money in the first place. How has money evolved from being backed by something to being backed by only trust? What is