“In the United States neither paper currency nor deposits have value as commodities. Intrinsically, a dollar bill is just a piece of paper, deposits merely book entries. Coins do have some intrinsic value as metal, but generally far less than their face value. What, then, makes these instruments – cheques, paper money, and coins – acceptable at face value in payment of all debts and for other monetary uses ? Mainly, it is the confidence people have that they will be able to exchange such money for other financial assets and for real goods and services whenever they choose to do so.”
- 1961 Federal Reserve Bank of Chicago paper, via Zero Hedge.
“US Economy Grinds To Halt As Nation Realizes Money Just A Symbolic, Mutually Shared Illusion”
- Headline from The Onion.
Historians are taught to discriminate between primary and secondary sources. At the risk of oversimplification, primary sources amount to original history and secondary sources are comment. Financial markets accommodate a similar distinction. Primary sources are objective market prices – a statement of fact (even if those same prices are distorted by central bank action, the price remains the price). Secondary sources are comment – a subjective statement of opinion (for example: editorial from a publication such as The Financial Times will report the price of gold and quickly add that it’s a bubble). Given the ‘drinking from a fire hose’ nature of our web-enabled world, and the stubbornly finite number of hours in a day, the chances are that most consumers of financial news receive their commentary as secondary sources, filtered via somebody else’s prejudices. Consumers of financial news are also surprised and prone to intellectual denial when they hear the suggestion from market participants that news typically follows the price, rather than the other way around.
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