Wednesday, September 12, 2007
In 1981 French philosopher Jean Baudrillard wrote a book attempting to theorize the post-modern, titled "Simulacra and Simulation." Why should you care? Because many of the themes Baudrillard discussed are related to the breakdown in "financial simulation" we are seeing in credit and currency markets.
First, what is "Modernity"?
"Modernity" is most often viewed as the child of the Renaissance and as heralding the development of social and scientific thought; the "modernization" and integration of large-scale societies that had been previously separated by technological, social and even religious boundaries.
In terms of finance, we can characterize "modernity" as a seemingly linear progression of the following:
- increased modes of production
- increased movement of goods and capital backed by some thing, a store of value
- the development of a structural framework in which the movement of goods and capital can interrelate and "grow"
- corresponding division of labor
The reason for bringing up Baudrillard's "Simulacra and Simulation" is to discuss what he called the "successive phases of the image" and the relation to our fiat-based monetary system.
In a fiat-based monetary regime, what is the "price" of a security but an image?
It is a "signifier" of some "thing."
But what? Is it objective? Is price "real"?
Baudrillard's successive phases of the image translate well with the progression of price discovery in markets as money transitions from reality (backed by something physical, a store of value) to image (backed by absolutely nothing).
Baudrillard's Successive Phases of the Image (with price relation in parentheses)
1) it is the reflection of a profound reality (price "means" something profound with respect to the security)
2) it masks and denatures a profound reality (price disguises a profound reality - the value investor's dream)
3) it masks the absence of a profound reality (say, 1999)
4) it has no relation to any reality whatsoever; it is its own pure simulacrum, a copy without a model (the decoupling of fiat money and the continuous supply of liquidity and credit to market participants with no underlying attachment other than the promise of a central bank).
From the standpoint of Baudrillard's final phase of the image (price), we now seem to be witnessing in credit markets objects that have no relation whatsoever to anything - many credit instruments are simply not capable of being valued.
They are now solely existant as a pure simulacrum from which higher and lower are relations to something without meaning; in other words a hyperreal market.
Baudrillard argued in Symbolic Exchange and Death that our society overall has undergone these successive phases of image, from an era of The Original, to The Counterfeit, to the Mechanical Copy, something "Produced" to the "third order of simulacra, where the copy replaces the original.
an excellent metaphysical view on the hubris of financial engineering. and if that wasn't enough....
According to the Wall Street Journal, home builders are putting up fewer supersize homes and offering smaller floor plans to lure buyers by keeping prices low.
The psychology of credit expansion feeds into everything.
Over the past three decades the average size of newly constructed single-family homes expanded by nearly 45%, according to the Journal, even as the size of the average family declined.
According to the Census Bureau, the median size of a newly completed single-family home reached 2,248 square feet, up from 1,560 square feet in 1974.
In the second quarter of this year, however, that expansion abruptly declined, from 2,302 square feet in the first quarter, to 2,241 square feet.
Jeffrey Mezger, chief executive of Los Angeles-based KB Home (KBH), told the Journal that the change has been "driven by data on what our home buyers want and what they can afford in a new home."
Toll Brothers (TOL) chief marketing officer, Kira McCarron, conceded that there "probably is more demand for 3,000- versus 6,000-square-foot," homes, the newspaper said.
Sarah Susanka, author of "The Not-So-Big House," said "I used to be asked all the time why would anybody want to downsize? People thought I was crazy. Now it's becoming much more mainstream."
As deflationary forces grow, the psychology spreads, infecting markets, consumer decisions and attitudes toward tangible goods and consumer goods.
We'll likely see this theme recurring again and again in the coming years.