Flying Money – Where It All Began

China circa 1100…

This was a time when commerce was booming, life was grand and the Chinese economy was expanding rapidly.

I don’t know the figures but by all historical accounts real GDP was going through the roof.

Alternating crops on the land, irrigating and fertilising with manure – in other words, innovation – had led to farmers squeezing out 3 crops annually, where not long before they harvested only 1 per year. Add to this an expanding network of roads and dramatic improvements in water transport, and all of a sudden farmers could get their excess production to markets far beyond the immediate locale.

Chinese shipwrights, copying their counterparts in Persia, Arabia and Southeast Asia, built large, ocean-going junks with watertight compartments good for storing and transporting grains at sea. As a result, shipping costs plummeted and large-scale trade took off.

Shipping brokers and middlemen sprouted up to service this new industry. They warehoused cargoes, loaned money to facilitate trade and turned ships around faster.

These were interesting happenings in their own right, but what I find fascinating is what began taking place with the monetary system.

The Chinese government of the time minted bronze coins. The rapid increase in trade meant that the velocity of money increased, and the demand for more money than what was created intensified. The economy was expanding rapidly, but the money supply was not keeping up.

9th Century Bronze Coin

Historical records show that due to massive efforts to find new copper resources, as well as efforts to debase the currency by mixing it with lead, the money supply grew from 300 million coins to 1.83 billion between 983 and 1007 – 24 years.

Even while the money supply was expanding dramatically, demand was outstripping supply. Despite the massive amount of new currency in circulation, the economy was STILL growing faster than the money supply.

Emergence Of The Flying Money

Enter the tea trading days

In the 9th century the tea trade started booming. Tea traders set up offices in Chang’an where traders could exchange bronze coins received from selling their tea for “flying money.” These were paper bills of credit.

When traders returned to Sichuan they could convert their bills back into coins (real money) at the trader’s head offices.  The advantages were obvious, and soon merchants were using bills as cash in their own right. Money deriving it’s value from trust rather than intrinsic value had been created. Tea traders were the 9th century equivalent of modern day central bankers.

Meanwhile, the technological changes which were allowing for greater divisions of labour and greater productivity allowed numerous new inventions and products to be designed and brought to market. Coal, with it’s vastly superior energy content, assisted in the ascent.

Interestingly, China had a true industrial revolution in the production of textiles and steel a full 400 years before the West.

Iron output went up 6 times between 800 and 1078. to about 125,000 tons. This was almost as much as Europe would produce in 1700.

Reading through this history it is notable that the increase in the money supply did not detract from the real growth and increasing prosperity. The reason for this is obvious. The money supply growth came as a result of the real GDP growth and not the other way around.

The Problem Today: GDP Growth Vs. Money Supply

Contrast this with the situation we find ourselves in today.

Real GDP growth worldwide has been increasing roughly 4% annually for the last decade. Since today money is credit-based, let’s contrast this figure with the credit growth over the same time frame – 12% annually. The 8% variance is compounded each year! Just put it on our tab folks…

This has left us with a situation where global credit market debt (sovereign debt, consumer debt and corporate debt) has run from US$80 trillion to over US$200 trillion today, leaving us with a debt to GDP globally of somewhere around 350%.

As we’ve been trumpeting ad nauseum, the biggest perpetrator of this is Japan, with a Crescendo of Debt – ¥1,086,000,000,000,000.

This ridiculous growth in debt is a result of global central bankers expanding the money supply through credit issuance in an attempt to create real GDP growth. We humbly suggest that this is arse backward folks!

It’s a horrible idea, and we’re of the opinion that rather than creating real GDP growth we are going to see more sovereign defaults. GDP growth will remain well below the rate of growth in money supply (inflation), and at some point in the future a reset of the global monetary system will be inevitable.

This is but one reason why we are focused on countries that are experiencing real GDP growth with low debt levels, and companies and management teams focused on running their businesses conservatively and responsibly. We can’t protect against every eventuality, but we can hedge a little by staying clear of obvious impending train wrecks.

– Chris

“Unsustainable trends tend not to be sustained.” – Herbert Stein (economist and presidential advisor)


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