The pre-revolutionary Iranian rial. Image Source: Unslash

In my writing, I often refer to my mother’s philosophy. My mother was a philosopher who tended to believe the great systemic philosophers had it all backwards. She was driven by the tragedies of the 20^th century, particularly that of the Holocaust (which her family escaped).

My father is a little different. He is an economist who denies the beliefs of the great systemic economists. My father’s Ph.D. was the first refutation of the Random Walk Hypotheses. He proceeded to make a great deal of money as an investor before deciding to “actually make something.”

That was a harder road to travel.                                     

Growing up, my father’s principles were drilled into all of us kids. I still remember them:

• Synergy is a four-letter word. We were free to say the F-word all we wanted, but “synergy” had consequences. Synergy was an excuse for empire-building, not a method of creating value.
• Owing money can protect you, up to a point. Whenever we came to the Ten Commandments in our annual cycle of Biblical readings, we were reminded that Alexander Hamilton could recite them from memory in Hebrew, by the age of three. Obviously, we were flawed. Hamilton’s real genius wasn’t reciting Bible verses, though. His real genius was understanding that if you owed people money, they would want you to survive. Debt is a form of protection.
• No macro-economic model works: people can’t be predicted.
• And… the greatest lesson of all: never invest in currency. My great-grandfather, the second son of a wealthy aristocratic English family, had moved to Kansas with an allowance. He owned a farm; because that was what you did. However, he didn’t work the farm, because that was beneath him. Instead, he received checks from back home and he invested his money. After World War I, as the Germany Mark began to slide, he saw an opportunity. He invested in the Mark. As he saw it, it had to recover eventually. In 1921, 90 Marks bought a dollar. By 1923, it took over 4 trillion marks to buy a dollar. The impacts of that mistake remain with my family almost a hundred years later.

Like many monetary theorists, my father sees currency as essentially valueless. As with baseball cards, only the perception of value gives currency actual value. As Adam Smith wrote: "Wealth does not consist in money, or in gold and silver, but in what money purchases and is valuable only for purchasing."

It is that principle that brings us to today’s catastrophe.

In response to the Wuhan Respiratory Syndrome, governments have begun borrowing (or printing) money at a massive rate. Peru is spending 12% of GDP on stimulus. The US is at 10%, so far. They are issuing money to companies and to individuals at an unprecedented rate. Expert economists will reflect on the potential economic distortions this cash will produce. They may fret about the effects on debt markets and the potential inflationary side-effects of Fed buying.

My concerns lay at the other end of the spectrum. I care less about how much money is inserted into the economy and more about what that money is good for. After all, money is not food or housing. Money does not produce goods or services. Money is only used to exchange them.

In a coronavirus world, it is not the printing of money but the lack of goods and services that threatens the value of currency.

There are numerous examples already around us. In many countries, toilet paper was hard to find. In terms of toilet paper, money became less valuable. Of course, there are easy if unpleasant workarounds to toilet paper. Laptops and office headsets had long backlogs. Money wasn’t enough to purchase these suddenly high-demand goods. Those price rises are in reaction to a rise in demand. But there are also drops in supply. No matter how much money you have, you will soon face a drought of new TV shows and movies. Labs working on innovations that have nothing to do with the Wuhan Respiratory Syndrome are facing slow-downs and stoppages – so new technologies from health care to IT will be unavailable. Money may not even buy you a decent haircut because the barber isn’t in.

All of these are “first-world problems.” In East Africa, pesticides and spraying systems were hard to source. Money that would normally be sufficient to buy the goods and services necessary to spray locusts was no longer sufficient. Supplies could not be sourced in a timely manner. As a result, a massive locust swarm threatens over a hundred million lives. While food reserves are substantial now, there are already drops in supply that can threaten the value of money in terms of food.

As the virus lingers, there is a risk that what you can buy with money will gradually become more and more limited. In principle, even in a deflationary world, money could shift towards being a tool used only to service debt (either directly or through rent), pay for food, and cover what medical services are available.

We can reinforce this concept by flipping it on its head. If someone develops a new cure for cancer that requires significant resources to deliver, the existence of that cure would increase the value of money. There’d be more reason to want access to resources.

As Smith put it, “Wealth does not consist in money… but in what money purchases.”

Today, we face a kind of economic squeeze. If people have government-defined ‘essential’ needs met by the government (think food, housing, and medicine) and fewer other valued goods are available, then the net benefit of productive work diminishes. There will be fewer producers, even of ‘essential’ goods. There will be less value in the economy.

A destructive cycle can be established, leading to a long-term economic decline.

In 2008, the attempts to lessen the financial impacts of the collapse led to a decline in the incentives to produce. This was reflected in a labor participation rate that dropped from 3.7% from 2008 to 2015 and had only regained 1% prior to the Wuhan Respiratory Syndrome.

There was less value in the economy, and thus less to work for.

Today’s decline, especially if encouraged by well-meaning government policies, will be far greater than 2008s. That was only a financial collapse, not a collapse in supply. Wall Street hurt Main Street.

This time it is Main Street that is leading the way down.

Not all hope is lost though. One of my father’s maxims is: ignore macro-economic models.

People don’t react in predictable ways: we have the power to change our reality.

Many will react to the current crises by cutting to the bone; by ceasing to create and innovate. They will seek only to protect what they have. But others will do exactly the opposite. They will seek opportunities to create value even under the constraints of a disincentivized labor force (full disclosure, I think I work for a company that is doing exactly this (WheelTug)). This applies to people, companies, and even governments.

Those who create value can give people something worth working for. As they return to the workforce, they will need to create value in order to purchase what they want. And a virtuous economic circle can be reestablished.

Investors, the users of this site, can use their power not just to deliver digits in a bank account, but to make those digits worth something. No matter what happens in the next few months, those who create value can “make money great again”.

As the coming months and years unfold, I expect to return to my father’s principles again and again: Don’t invest in synergy, debt can be protection (up to a point), macroeconomic models are useless and never ever invest in money.