Exter’s Pyramid
The Paper Empire: I find John Exter’s upside down debt period to be an extremely useful
model for developing a visual understanding of the monetary system and
economic cycles.In order to make use of it though, we must first make the distinction between real wealth and claims on wealth. Real wealth is represented by actual items that people want or need. This can be food, land, natural resources, buildings, factories etc. Financial assets, shown as layers in the pyramid, represent claims on real wealth. In a fully developed financial system, in good perceived standing, there is a high ratio of claims on wealth to actual underlying real wealth. In this environment the average buying power of the financial assets is lower. This can best be observed by looking at the purchasing power at the bottom of the pyramid. Gold is at a minimum here. It is competing with all of the other claims on wealth for a relatively constant amount of underlying real assets.
According to Exters theory of money, when economies get into trouble through the accumulation of too much debt, the levels of the pyramid disappear in order from highest to lowest. As the pyramid contracts downward, the remaining layers represent a proportionally higher claim on the real underlying wealth. In other words their value increases. Using gold as our reference point, it’s relative purchasing power increases as the pyramid contracts. Gold finds itself in a secular bull market.
In the extreme hypothetical case where all other assest classes are destroyed, including the currency itself, only gold remains.
In this case the holders of gold compete with no other financial assets for claims on the underlying wealth. This scenario represents the ultimate clearing of the economy. All currency denominated debts have been wiped clean.
If a market economy remains in place then the pyramid begins to expand and grow again. The wealth claims represented in gold will be deployed as investments and a new currency will emerge that garners the faith of those who use it. As this new economy grows and expands, the previous instruments of credit and financing will appear again. Layer upon layer are added back to the pyramid. From the perspective of gold, its relative purchasing power decreases as it competes with these new financial assets for claims on the underlying real wealth. Gold is in a secular bear market as the newest levels of the pyramid are in their growth phase.
This model provides a useful intuitive understanding of the alternating secular bull and bear markets of commodities vs. equities. Bear in mind that normal cycles of expansion and contraction of the system involve only the outermost levels of the pyramid. Only in extreme historical examples does the contraction reach the lowest levels in which the currency itself is destroyed.
Of course a visualization this simplistic is only intended to give a very broad understanding of some of the root fundamentals that drive economic cycles. On top of this are many complications that arise from not only the extraordinary complexity of the global financial system but also of the massive non market interventions of government and central banking.
Bailouts and the propping up of assets represent distortions in the anticipated successive evaporation of layers from the pyramid. Layers may temporarily appear and disappear out of order as non market forces hold temporary reign.
Additional complexities arise when the currency itself is at risk as it usually serves are the numeraire or reference point by which the purchasing power of other asset classes is measured. During rapid currency debasement an asset may appear to be rising in nominal terms but actually decreasing as a claim on the underlying wealth. A good example of this is the difference in the DOW since 2000 when priced in Dollars vs. ounces of gold.
A note on equities
I don’t believe the original version of Exter’s pyramid included stocks. It was simply layers of debt instruments and money. The more recent addition of stocks (and real estate) as part of the model does complicate the behavior in my mind. Stocks exhibit more of a hybrid behavior as both a financial asset and as well as a hard asset. At their core they do represent ownership of an actual company but since the trading of that ownership involves no production, storage, delivery or rolling over of contracts, they behave under normal circumstance more as financial instruments. During a severe contraction of the pyramid, in which the currency is severely damaged, stocks revert to their fundamental nature as a hard asset. So unlike a debt layer which disappears completely, the equities layer will at some point stabilize even as underlying layers start to disappear. A good example of this was the Zimbabwe stock exchange during their hyperinflation. Instead of stocks going to zero they became something of a hedge against inflation as the market experienced large percentage increases.
The Paper Empire: Human beings are born with different
physical brains. Many of the physical attributes of the brain greatly
influence our personalities, emotions, abilities and interests. Within
the realm of human society and human governance, the population is divided into
three general brain types: Sociopaths (The Bad), Sheep (The Ugly), and Truth Seekers (The Good).
Sociopaths Within the human
population there exist a small subset of individuals whose brains are
essentially defective in one important regard: They do not experience emotion
as the rest of the population does. They are driven only by the temporary
happiness (or exhilaration) obtained through the gain of power or money.
Once this temporary rush wears off, they exist only to seek their next
fix. Although they do not experience normal emotions, they understand
well how to emulate them and how to manipulate them to their advantage.
Sociopaths tend to feel little remorse and do not have a conscience in the
normal sense. They do not seek to simply live their lives, and as a result,
have tremendous amounts of time to devote to their solitary purpose of
obtaining more power and more money. They are naturally suited for climbing
social power structures. The highest levels of banking, finance and
politics contain far larger concentrations of sociopaths than the population at
large.
Sheep The great bulk of the
population exists neither to control others or to discover truth. They simply
want to live their lives. They attempt to do this through the path of
least resistance. The process of seeking truth involves tremendous
amounts of mental work that gets in the way of living their lives. They prefer
not to do the heavy lifting required to arrive at a set of beliefs, but rather,
to adopt a predefined set. They find great comfort in seeking the
approval of others as it reassures them the belief systems that they have
adopted (or have been taught) are correct. Once reassured, they are relieved of
the arduous mental work required to discover the truth. The Sheep tend to
follow the voices of the sociopaths, who in turn seek to herd them; to
shear them; and in some cases – to slaughter them.
Truth Seekers At this this end of the
distribution lay the diametrical opposite of the sociopaths. These are
the individuals whose desire for truth and the ability to live free, is so
strong that they will accept a more difficult life in order to accomplish those
goals. Unlike the sociopaths, they have no desire to wield power over others.
In fact, they view the control of others as a great burden – a tremendous
drain on precious time – time that should be spent discovering the true nature
of the world around them. These people are strong individualists and tend
to be scientists, artists, and thinkers. Because of their inherent
nature, they tend to avoid any involvement in politics, the bureaucracy, and
institutions of management. It is only in times of great political
strain, and threat to their own freedom, that they are forced to become part of
the politic. They rise up during times of revolution, as necessary, only
to fade away once the overthrow of the sociopaths has been accomplished. Power
is then gradually yielded back to the sociopaths as the lessons of the past are
slowly forgotten by subsequent generations of Sheep.
Related: Time To Bradley-Manning The Banksters!
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