Quotable (#21)

From a conceptually-rich John Law (2006) post on the game-theoretic fragility of the world monetary order:

The first rule of investing is that it’s never a good idea to buy anything just because everyone else is buying it. When the price of an asset is the result of herd behavior, not fundamental value, it’s called a “bubble,” and bubbles always pop.

This rule is absolutely right — except in one case.

In English, a bubble that doesn’t pop is called “money.” Money is always fundamentally overvalued. Its purchasing power is independent of its direct physical usefulness to anyone.


The most important fact about money was described by economist Carl Menger in 1892: money is a consequence of its own history. Not every asset can serve as money, but not every asset that can serve as money will be used as money. As economists put it, money is “path-dependent” — it is a stable result of events that may be completely accidental.

We can call the transition from fundamental to monetary value “monetization.” Menger and other early economists analyzed monetization in a primitive barter economy. They showed that money is a market phenomenon — that it can develop spontaneously without any official seal of approval.

It’s not widely appreciated that the same monetization process Menger described can also occur in a modern financial market.


There’s much more, and it’s all gold. The emergence of blockchain cryptocurrencies in the years immediately following this post no doubt deflect its argument (systematically), but rather than undermining its momentum, if anything they reinforce it.

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