Danny's Weblog

The catastrophic collapse of the dollar?

In the 1980s you started to see a lot of movies about video games and computer games. Most of them had the theme of the player somehow, through some sort of magical version of virtual reality, falling into the world of the game. The obvious example is "Tron". I soon began to feel that this idea missed the point. The really interesting thing about games is that we are able to feel immersed in the game even when we are perfectly well aware that we are actually standing in the video game parlor. The interface of Pac-Man is ludicrously abstract relative to reality, but it works just as well as the latest FPS game. Indeed, a simple book, which does not even have a timeline – whenever we like we can flick back a couple of pages, or glance over a boring bit, or indeed go to the bathroom – is in some ways even more involving. For instance, one might imagine that a book needs to describe its characters carefully to produce an involving mental picture, but Heinlein famously never described any of his viewpoint characters. In other words, we don't somehow "render" fictional entertainment into some sort of internal movie before we perceive it: we perceive it directly.

All of which is a sort of apology for the fact that I was astounded when the dollar did not plummet against other currencies when the credit crisis (or whatever we should start calling it now, when it keeps mutating into new problems) showed that the financial "industry", one of the few "profitable" areas of the US economy, was actually drowning in debt. So the US would be forced to borrow even more money to keep going, so its currency would fall... I thought.

With benefit of hindsight, I suppose what has been happening is that most of these insecure securities, which people now want to get rid of, were denominated in dollars. So financial institutions all over the planet have had to provide dollars to the sellers, so there has been a huge demand for dollars (I find it hard to believe, but apparently the face value of these credit default swaps and so forth was 20 times current world GNP) which has pushed up the price of the dollar against other currencies.

Now, even if I *had* considered this effect, I don't think I would have forecast that it would be sufficient to keep the dollar more or less steady. It seems to me that its natural result would have actually been to force the dollar up *hugely*. I think somehow the Feds must be pouring just the right amount of money into the system to keep it roughly in balance. Perhaps that's the real reason for the trillions of dollars that the Federal Reserve keeps issuing every week.

Anyway, my basic point is that I was confusing something relatively real, ie the competitiveness of the US economy, with something completely arbitrary. It reminds me of the days when the USA and Britain still maintained almost-constant exchange rates, and Englishmen laughed at flibbertigibbet currencies like the franc and the lira. We were confusing an abstract number with our national pride.

Many years ago, when I was still living in the USA, I became suspicious of those wacky resolutions you read about in state and federal capitols. You know the kind of thing: naming June 13th as "Corporal Eugene Porcodio Day". Now I could see that it doesn't cost very much to do this kind of thing, but still it involves quite a bit of time and trouble, and politicians don't seem to me to be the kind of people who do anything for fun. And it occurred to me: these resolutions *are* useful. If you want to bribe a politician, you know (unless you are quite naive) that you shouldn't deal with the politician directly. You need to deal with a middleman who has to be careful to avoid any appearance of political connections. But in that case, how can you possibly *trust* him? Easy: you just ask him to pass an arbitrary bill that is *obviously worthless*. When he can get the legislature to name the Purple Spiderwort as the state's Bridal Flower, you can confidently pay him real money for real corruption. I was very pleased to see that something apparently stupid was actually perfectly sensible.

More recently, I was thinking about those astounding prices that are paid at art auctions. You've thought the same, right: who could possibly want to pay such prices for such rubbish? Then I realized: you can use art auctions to launder money. If rich guy A wants to be paid by rich guy B, he can put up for sale – with a high reserve price – some ridiculous piece of junk like a pickled shark. And when rich guy B buys it, there's no paper trail between them.

The really interesting thing is that they *take the trouble* to do this using items of zero artistic merit. It would actually be far more plausible to do it with something of arguable intrinsic worth, so they are actually taking a small risk. But why?

You could argue that it removes the risk of some third party – some utter sap – actually stepping in and buying the item ahead of rich guy B. But my picture of rich guys is that their reaction would be to roll around on the floor laughing.

I think the answer is that someone involved in the process, probably the auction house, wants to avoid as far as possible distorting the market for real art. In other words, there are two separate and parallel art worlds: one where people have as much concern for the artworks as one has for cancelled checks, and another where people actually recognize artistic value. Maybe I'm naive, but I find the idea rather reassuring.

Anyway, my main point is that value is hard to judge, and most of the time what we are perceiving is several steps away from reality. Or at least, that's what I usually tell the magistrate.

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