Safe Debt Is The New Money

This Cardiff Garcia post that I snatched the chart from is difficult to summarize, but worth your time if you’re interested in the details of what’s happening in the “shadow banking system.” The best way I think I can put it quickly is that nowadays a lot of instruments that are technically debt — highly rated securities for which deep and liquid markets exist — operate as a kind of money, since they’re used by the shadow banking system to facilitate transactions.

This in turn goes back to the issues raised in Gary Gorton’s excellent book Slapped by the Invisible Hand: The Panic of 2007. Most people who purport to be writing accounts of the financial crisis are actually writing accounts of something else, books about the financialization of the American economy over a 25-year timespan or books about the long and deep recession that followed the financial crisis. But Gorton’s book is about what, specifically, the crisis consisted of. Garcia is giving us a somewhat different way of looking at the same basic issue, a rapid collapse in the availability of this kind of privately-created pseudo-money. It’s been replaced, to an extent, by bigger government budget deficits in the United States (and to an extent the UK and Germany) but this may come to an end as fiscal austerity takes hold.