Toward Shores Not Yet Visible
Walter Bagehot, Daniel Peris, Perry Mehrling, Carlo Rovelli, and more on Political Economy, Finance & Time
We must examine the system on which these great masses of money are manipulated, and assure ourselves that it is safe and right.
- Walter Bagehot
The subtext, and occasionally the denotation, of discussions about finance is a shared idea of properly functioning markets. Our beliefs about “the way things are supposed to work” are part of the tapestry of confidence and understanding that facilitate trade. These choices, beliefs, and structures, broadly our political economy, have for over 30 years been taken for granted. Daniel Peris writes, “Our financial institutions rely on our political structures, and our political framework works because of certain underlying economic relationships. Separating the two realms is impossible.”
Despite this plain truth many who occupy roles in finance, either through ignorance or conscious effort, refrain from critique or examination of these core assumptions.
Finance professionals and politicians tend to “stay in their lane” and thus poorly understand how the highway system works. Moreover, most individuals within a political economy mode naturally assume it will continue in perpetuity. While modes can last for many years, decades or even centuries, they can and do change. We’re in the process of one of those changes1.
Fukuyama, Graeber, Hochuli, and others have well documented the “End of History” in the sociopolitical sense, but our conceptions about the role of finance and by extension our relationship with time itself are also undergoing seismic shifts.
Yale economist Robert Shiller describes finance as a collection of mechanisms for “moving money through time.” Savers need today’s dollars in the future, borrowers need future dollars today, and the institution of credit links the two. A generation prior another Yale economist, Irving Fisher, said “Interest is, as it were, human impatience crystallized into a market rate.” In very real ways our present is funded by castles in the sky, by the world we will be delivered into in the future. Perry Merhling writes in The New Lombard Street,
The web of interlocking debt commitments, each one a more or less rash promise about an uncertain future, is like a bridge that we collectively spin out into the unknown future toward shores not yet visible.
Time and Money
Keynes famously coined “Animal Spirits,” our unquantifiable urge to action. It is an expression of our individual attitudes about the future, and capitalism is our collective action to shape it.
Two timelines emerge from this desire to shape the future: Economic and financial time. Economic time deals with the present reality of acquiring resources and creating assets, while financial time ticks along discounting value that will be delivered in an unknowable future. In the height of COVID-19 lockdowns, Larry Summers said "Economic time has been stopped but financial time has not been stopped.” Money and finance accompany our economic lives to help us cope with the “experience of being caught between an unchangeable past and a wide-open future.2”
In the preceding three decades, this future seemed to have a gravitational pull. Technological progress accelerated and created ever-cheaper consumer products that improved our lives but also dulled the more acute symptoms of inequality. Growth and (somewhat) shared prosperity were a runaway train. Bruno Maçães writing in Foreign Policy, again amidst COVID lockdowns,
Modern Western societies like to think of themselves as being part of the accelerating movement of history—progress broadly understood. Too often, however, the feeling in these societies is that we have lost control over all the movement or agitation taking place around us: The economy has its own logic and should be left to its own processes. Society has a predetermined direction, one we can applaud but not shape. The winning values have been determined, and our task is merely to realize them. Being on the path of progress felt like being driven by forces beyond our control. Stopping or pausing was something no one would dare to imagine, even as it comprised the indispensable first step of a society deciding its own future. That the historical clock could stop—in whatever form—seemed an impossibility.
Since the turn of the century, the veil of coherence on our prevailing political economy has slipped too many times. The GFC threatened a fatal blow, but the dramatic coda of COVID finally woke us from the belief that the shores of the future were manifest and that the logic of the economy was beyond our grasp. We learned through visceral experience that when it comes to time, the meantime is all there really is. Carlo Rovelli, an Italian physicist, in his fantastic book The Order of Time writes,
Because everything that begins must end. What causes us to suffer is not in the past or the future: it is here, now, in our memory, in our expectations. We long for timelessness, we endure the passing of time: we suffer time.
This is a problem for economics. Economic and financial time is an “and never the twain shall meet” situation. Keynes was dismissive of the long run, “we are all dead in the long run,” and derided what he called “the fetish of liquidity.” But this does not reflect our reality. Political economist Martijn Konings,
The structure of the capitalist economy is a temporal one — not just in the trivial sense that things take place in time and are therefore subject to change, but in the more profound sense that time is an active force and that it, therefore, makes no sense to analyze processes of change as if they are driving toward a neutral state where things are organized according to their true value or purpose…[Hyman] Minsky did not have much use for the idea of such an independently given long run: in the economic game of capitalism, some survive and others die, some thrive and others languish. In that sense, there really only is the meantime — all time was -borrowed.
The degradation of financial time expresses itself in fatalism among market participants. Positioning one's self for the next speculative bubble or maintaining just enough liquidity until the inevitable bailout supersedes discounting future outcomes. Financial and economic time collapse into a single timeline disrupting the institution of credit. Perhaps most disorienting, policymakers lack the tools to intervene because they don’t regard the current environment as a possible system state.
Money and Political Economy
The degradation of financial time is challenging to identify and its impact on our political economy impossible to predict. As others have noted, much of our zealous partisanship is nothing more than a release valve for the frustration of lacking agency in shaping the future. Michael Cuenco and Blake Smith write,
In this senescent neoliberal moment, the powerlessness of the state trickles down into an analogous sense of powerlessness among individuals. Politics invites them to convert their frustrations into fuel for the culture war—the intensity of which is matched only by its inefficacy as a means for catalyzing material change. As if the empty moralism that motivates the toppling of statues or the cheap thrill of “owning the libs” is meant to compensate for the collapse of the middle class or the cratering of economic opportunity for anyone under forty.
The role of money and finance is no less a battleground. Conspiratorial thinking surrounds the machinations of central banking and Potemkin revolutions like cryptocurrency stunt the development of new models grounded in realism. An inability to grapple with our economic preponderance generates little in the way of substantive policy solutions. We may have wrested control of the runaway train, but we are nonetheless terrified of a derailment. The question for finance is the role and inherent instability of credit. Institutions attempt to tune the market towards stability, but our inability to predict the future means that the distinction between speculative and productive credit can only be known ex-post. Merhling, again in The New Lombard Street,
In any concrete case, the question therefore arises, Are we looking at a Hawtreyan speculative bubble that we want to rein in, or at Schumpeterian dynamic growth that we want to let run? One reason this question is hard to answer is that a credit-fuelled boom typically involves a bit of both.
There are no monetary solutions to the problem of a future too deeply discounted. Central bank policy transmission is faltering as fatalism tightens its grip on markets. “The seductive allure of present credit, and the crushing burden of future debt, are two faces of the same creature.3” As we lose fidelity on the future, our appetite for present credit proves too tempting, even rational. The time machine of finance ceases to function.
Only a true political paradigm shift will break us free from this malaise. A new political economy must reinvigorate the malleability of the future so that financial and economic time can again diverge. Neither a technocratically administered utopia nor the further liberation of market forces achieves this aim. Our institutions and markets must support our will and capacity to dictate our own fate in ways they currently do not. “Animal spirits” do not rely on an innate desire for self-reliance so much as a belief that our actions help shape the future in ways that will persist beyond our own time. Returning finally to Carlo Rovelli’s Order of Time,
“We understand the world in its becoming, not in its being.”
From the Daniel Peris blog linked above
From the Martijn Koning piece “The Time of Finance” linked in article
From Perry Mehrling’s “The New Lombard Street” referenced earlier
This post is in rare form, thanks for writing. Reminds me of how an investor can be tactically right but strategically wrong.
Overall, I’ve wrestled with the idea if it is more noble to invest in what you hope the world could be, or in what the highest probable outcome will be in the future per expected unit of risk...
Excellent work