The importance of economic facts may not be obvious to Americans. "What does the fish know about the water in which it swims?" asked Albert Einstein. But it's easy to grasp from the perspective of the developing and former communist countries where I live and work. In these countries, most of our assets and relationships are in the informal sector, outside the legal economy. Because they're not recorded in public memory systems, they cannot be written up as facts and are, in effect, invisible. All we have are shadow markets.A bit of a worry. But you want to see something really scary?
Without standardization, the values of assets and relationships are so variable that they can't be used to guarantee credit, to generate mortgages and bundle them into securities, to represent them in shares to raise capital. Nor do they fit the standard slots required to enter global markets. That's why credit crunches and massive unemployment are chronic conditions for most people forced to operate in the informal economy. These are the ones you see protesting in the streets of Arab countries or living in tents surrounding Port-au-Prince. We know only too well that facts don't speak for themselves: They have to be constructed through legal processes and kept transparent. They have to be defended, too.
When then-Treasury Secretary Henry Paulson initiated his Troubled Asset Relief Program (TARP) in September 2008, I assumed the objective was to restore trust in the market by identifying and weeding out the "troubled assets" held by the world's financial institutions. Three weeks later, when I asked American friends why Paulson had switched strategies and was injecting hundreds of billions of dollars into struggling financial institutions, I was told that there were so many idiosyncratic types of paper scattered around the world that no one had any clear idea of how many there were, where they were, how to value them, or who was holding the risk. These securities had slipped outside the recorded memory systems and were no longer easy to connect to the assets from which they had originally been derived.
Oh, and their notional value was somewhere between $600 trillion and $700 trillion dollars, 10 times the annual production of the entire world.As they say, read the whole thing. It might be an idea buying some silver too - not notes which affirm that you own some in a vault somewhere, but the physical article. No need to get much, but it might make you sleep better at night.