on physics and money

Correct me if I'm wrong Sandy, but if I kill all the golfers, they're gonna lock me up and throw away the key.
-- Carl Spackler

For simplicity, but also quite accurately, you could define the Modern Era with Newton's Second Law: F=MxA. Though more accurately for this piece, we can use the derivative Acceleration = Force divided by Mass. Simply, this is one equation that defines the movement and shaping of physical things. At it's foundation, the Modern Era has been the human use of fossil fuel energy, coal, oil, and more recently natural gas, to shape and move physical things. Using these energy supplies, these forces, has allowed humanity in the past two-centuries, to reshape and move about this planet in ways unprecedented from the rest of human history. Now there's been plenty of good in this, but also, and much less debated, plenty bad. Whether good or bad, this reshaping and movement allowed the transformation of locality, the ability to transcend defining by the local, leading paradoxically to ever increasing homogeneity.

The Modern Era's latest and last phase is corporate globalization. While it has been forged by coal and to a lesser extent natural gas, it has been the movement provided by oil, and most importantly cheap oil, that allowed this brief, dead-end mutation we've seen the last few decades. Before the great global contraction of the last two years, the essential question of remaining global oil supplies was beginning to enter the popular mind, helped in America by plus $4 a gallon gasoline. Despite the contraction, the price of oil has remained stubbornly high and threatens to move much higher at every sign of renewed economic vigor. This is a problem for corporate globalization. The LA Times has a nice piece on how the increased price of oil is literally slowing the acceleration of corporate globalization, in this case, the great container ships plying the seven seas:

Eager to cut fuel costs, ocean shipping lines have ordered their sea captains to throttle back the engines for what is quaintly known in the industry as "slow steaming." In some cases, freighters are taking as many as 15 days to make a Pacific crossing that used to take 11 days.

There is no relief in sight, however. Ocean shippers lost an estimated $22 billion in 2009, analysts say, largely because of the global economic downturn. Saving on fuel is one way to cut losses.

This is a small but important development as it portends the end of an era, not simply the relatively recent corporate globalization era, but the Modern Era itself. Before they end, eras always gestate inside themselves the new. And as we watch the end of the Modern Era, the fossil fuel era, we see all about us the birth of the new. In place of Newton's law, we have Einstein's E=MC2, or even much more radical, the equations of the Quantum era. We see in our electronic media and more menacingly our atomic weapons, the power of these new forces, which have only begun shaping the planet, though at a rate even faster than fossil fuels and industrialization. Just as their predecessors radically changed institutions, culture, and life, so too will these forces, and maybe in the short-term, nothing more radically and necessarily than money itself.

An interesting thing occurred as energy transformed the Modern Era, money became further detached. In many ways, strangely enough, money has never been very reflective of the real economy. In its specie form, it always sat above, while in its current fiat form, money, at best, has some indeterminate relations to the real economy, any of which torn asunder over the last two decades. Reflecting this tearing has been the growing question in the financial press, "Are bonds in a bubble?" To which the answer is yes. Bonds are debt and debt is money, and we've watched the Fed, other central banks, and governments across the globe, in reaction to popping of the great private finance bubble of the past two decades, transfer the bubble into the currencies themselves.

Tom Petruno has a piece in the LA Times comparing the bond bubble to the dot.com bubble. He wants to conclude it's not as bad, but in fact it's much worse. Now Mr. Petruno concludes the bond market bubble ends in three relatively mild outcomes, but leaves out the dirty word of the bond world -- default. The greater the bubble grows, the more defaults there are going to be. Mr. Petruno alludes to, but doesn't quite bring out the even great problem with the bond bubble, it undermines the value of money itself. He states:

Others, like Ken Naehu of Bel Air Investment Advisors, are taking the opportunity to clear out lower-quality bonds in favor of higher-quality issues. "We're selling everything you won't be able to sell in the near future" should the bond market suddenly turn on investors, he said.

In other words, there will begin to be an ever increasing run, not simply to bonds, but "good" bonds, or to put it another way from bad money to good money. Begging the question, what is good money? Now, I've pointed out before, PIMCO has been ahead of the game on this topic, and well, you expect that from the world's biggest bondhouse. Several months ago, PIMCO's El-Erian came out saying we needed to start writing off some of the bad debt, destroying the bad money. I applauded this, but also pointed out that in so doing, PIMCO was trying to protect the money they held, trying to make sure it remained good by destroying other money. Mr. Petruno's article states,

The world's biggest bond fund, the $234-billion Pimco Total Return fund, by itself is taking in about $1 billion in fresh cash every week.

To which I can only plead, "Please don't give PIMCO anymore money." You're only making them more powerful and giving them an increasing ability to decide what's good and bad money, and if its based on Mr. Gross' cockamamie reasoning that future wealth depends on future population growth, and he's no way alone in his inanity, they really shouldn't be making decisions about the future on much of anything.

As we leave the Modern Era, we're going to redefine money. We might follow two simple rules of thumb, let those who know most about money today have the least to say about its future. And, if you want a good foundation for money, start with energy, and if you ever read any quantum physics, that's much much weirder than it sounds.