Tuesday, November 9, 2010

The Bears and The Bulls

Remember when your mother or father sat you down and gave you the talk about "the birds and the bees?" It's probably less common now in the days of the Internet and health class in school; and I doubt if anyone has seriously used the phrase "the birds and the bees" since about 1962. But the cliche is well-established and the sentiment is well-recognized - it's an awkward coming-of-age talk about a subject that is both exciting and necessary for our society.

We have reached a point in our society where coming of age requires a talk about a different set of animals - ones that represent a subject just as necessary for survival, but not nearly as exciting or rewarding. I'm not talking about the Donkey and the Elephant; we've covered enough politics in the past month, even given that we just recently emerged from election season. No, like the birds and the bees, this pair of animals also begins with a B. And if you can't tell by now what they are, I'll give you a hint: they're the animals from the title of this post.

You've probably heard the terms "Bearish" and "Bullish" in reference to the economy. But to the non-financially minded, those two terms generally refer to trends in the stock market. Put simply, a bear market is one characterized by cautious investing and downward trending prices, whereas a bullish market includes high returns and upward trends. But I don't mean that parents should educate their kids on the intricacies of trading stocks. I'm using the bear and the bull as metaphorical tropes to represent the institution of money.

Money can be Exchanged for Goods and Services

Back in the old days - I mean the really old days, like the caveman days - if you wanted something, you went out and got it for yourself. (Or for yourself and your loved ones, depending on your opinion of the anthropological development of the family unit.) Later on, with the advent of society and specialization, each individual worked a profession providing a good or a service, which they would then barter directly with other members of the society. As humans became more industrious, the concept of paid labor came into vogue and a medium of exchange was set up between people and the items/services necessary for survival in a society. This medium of exchange is known as money.

At least that's how I imagine it happening in a hugely-oversimplified, pseudo-anthropological sort of way. The process seems rather intuitive at its core, but it's strange how little thought I've given to the development of the basic system around which so much of our lives revolve. Quite frankly, it's a little hard to imagine how easily I accepted the monetary system in the past without questioning its roots.

How Much is it Worth?

I'll give you X wrinkly green strips of paper/jingly metal coins, and in return you'll give me Y lbs. of food, gallons of gas, pieces of clothing, shares of stock, etc. Now it stands to reason that you'll only accept my offer of money if you're confident you can exchange that money for a comparable amount of goods/services in the future. That confidence is inspired by several institutions, such as the Federal Reserve - which prints money and attempts to keep inflation rates manageable - and the Free Market - where all sorts of shit is bought and sold with little or no intervention.

These institutions are rather reliable, despite the occasional meltdown, crash, or recession. But the underlying principle that makes these institutions work is a tacit agreement by each and every citizen in a society to accept money as a means to getting what you want from other people/entities. Or maybe it's less of an agreement as it is a mandate. "This note is legal tender for all debts, public and private." This is printed on all standard bills, meaning that any institution that ascribes to certain principles of our legal system has to accept money in their transactions.

Is the stock market a zero-sum game?

I know that the value of money is determined by a complex set of circumstances out of anyone's control, and the machine has been rolling for so long and with such force that it's probably impossible to undermine that value even if every citizen in every country in the world decided to stop accepting money for their private and public debts. The gold standard was abandoned many years ago, and in its place was established a set of rules whereby the worth of money is determined by many various things. Gold is still in play, as is oil and corn and various other commodities. The performance of thousands of major companies also comes into play, as does the worth of most every currency in the world. These are all the numbers that the weirdos at CNBC obsess over day in and day out.

If the system sounds reflexive in nature, it probably is. I have no clue how to even fathom how the market works. The only way it could possibly make sense is if everything that's represented in the market equals out to zero. Every bar of gold or barrel of oil or publicly traded company is worth a certain amount of dollars. Same with every person or country that aren't directly represented by the market but whose buying and selling power make the market run.

The only way this money game can possibly work is if every entity's debts, public and private, work out to exactly the same dollar amount as the worth of every conceivable tradeable good or service. And who could possibly have the resources to work out such a massive equation - an equation that encompasses all economics, past and present?

Even the threat of power has power.

In our world of credit cards and direct deposits and offshore bank accounts, money is rarely ever represented in terms of cash anymore. It's all in numbers flashing across a computer screen on Wall Street. Or on signed checks that are fed to banks almost as fast as they're distributed by other banks. Or embedded in magnetic strips on tiny pieces of plastic inside your wallet. What does it all mean anymore? What does it represent that's actually real?

I guess that's up to each and every one of us to decide.