Dollar hits fresh lows. The "poor pound" thesis - that the US stock index is going to stay roughly flat in constant currency terms, seems to be holding. This is because most of the support for the US stock market is M3 growth and Bank of Japan carry trade, and that is going to get whacked out of the dollar. Tight money for consumers, loose money for speculators.

When does it end?

Well when things are about to get good.

The thing about investment money is it is about control, not returns. Who cares what the nominal rate of interest of a return is, when the reality is that own 49% and you are "a minority stake holder", own 50% plus one share, and you are the Chairman of the Board of Directors. This is why deals are often cut that return pennies on the dollar - plus control of the asset in question. This can go on for a very long time, with entities rolling over debt, that is finance speak for issuing new debt to pay off the old debt, and generally to the same people who owe the old debt - and post hoc renegotiating interest rates and other terms, waving balloon payments - all in return for incremental control over the real assets.

However, every so often a disruptive influence comes in - a new mineral strike, a new technology. Suddenly this fictional money - which only went to pay the people who managed it, and their numbers did not increase dramatically with the amount of investment money to be managed - has to be spent on real people. Researchers, factories, private roads or railroad spurs, freight charges to move materials, the raw materials themselves. Everyone has to do this, because the disruptive technology has to rise in price until it is as expensive as the assets everyone has been fighting over for years. To turn a cliche around - it's OK to be big in buggy whips, until there are working automobiles, road systems and gas stations on the horizon.

This, in short, is the moment where the nice club of keeping all the gold, as Will Rodgers put it, floating at the top, becomes a mad rush to engage in investment. The Austrian School of economics blames low interest rates for over investment, and the working off of over investment as the source of down turns, but the reality is one step farther removed. Interest rates were low, and could be kept low, until there was something worth over investing in. This is why some of the most spectacular economic collapses come on the door step of what seems like technological salvation. Often economies do their biggest development of industrial infrastructure, in times when real GDP is contracting in comparative terms, while GDP in absolute terms rises. This paradox can be seen from the "Great Depression" of the late 19th century. In macroëconomic terms, there was deflation, falling employment, bank collapses, and falling output in money terms. At the same time there was dramatic expansion of the industrial base, paving the way for the urban eruption of the 20th century. Both sets of numbers are correct - in relative terms the existing holdings of assets were falling in value, precisely because new assets were coming into being.

When this happens, micro-inflation appears first, as the resources needed to go into the disruptive area - technology, geographic area, what have you - are bid up in price. England was striped bare of tall pines for masts very quickly in the age of discovery, and held New England precisely because of the tall straight pine forests. The best trees had the "king's mark" put on them.

Then macro-inflation appears, that is prices going up generally, as those who are employed to exploit this brave new world start spending like, to note the cliche which has real meaning drunken sailors. A term from a time when sailors from a rich trade and raid expedition would get their shares of pay.

This is whent the central bank must step in, or feels it must step in. Of course, the people in the club of money will blame the central bank first for keeping interest rates too low, and then for making them too tight, despite the fact that the first period is generally held to be "sound for business" and the second period "necessary for business confidence." The same batch of economists who blame the Federal Reserve for the Great Depression, are eager to praise "the Maestro" for flooding the investment world with cheap liquidity.

The same story played out in the 1990's. The stock market never really experienced the sharp bear market that it should have - the joke on Wall Street is that the Crash of 1987 represented an August to October bear market, the shortest in history - given the economic fundamentals. The disruptive opening of the former Soviet Union created inflation - over there - but disinflation and even deflation in the West. Hence no need to shift investment money here to consumption money.

This assymetrical relationship between inflation in the investment sector and inflation in the commodities sector is the result of an arrow of time phenomenon. In commodity infation - inflation for goods - the past taxes the present. That is those who have currency lose purchasing power to those who have assets, and often the debts used to buy those assets. In asset inflation, the present taxes the future, as people who do not have money - or are not even born - have to consume less in the future to buy assets that are bought up today. Thus there is a bias in favor of asset inflation - "Dow Hits Record High!" - and a bias against commodity inflation - "Gas Hits Three Dollars a Gallon!"

I am reading many predictions of a full fledged recession, about two years ago I believed that there was going to be a declared recession, because the indicators pointed to it. At this point I do not, precisely because there is not the mad frenzy to convert investment money which is really rent trading - into investment money that is really consumption spent on capital goods. This is something that Malthus - a classical political economist - looked into when working on the question of "The General Glut" - a condition where the society is so over-productive relative to its base of money, that prices spiral downwards, downwards, downwards without any end in sight.

What I am describing here is a situation where the reason there is a general glut is not because of over-production per se - there has never really been a time when any large number of people really had "too much of everything" - though a few more sagging bellies on college age students here in the US may convince me we are getting close - but instead a brief period of hyper-production, which then collapses.

This is a reverse malthusian thesis because Malthus argued that landlords would consume when prices fell, thus bolstering the economy. This argument says that collapses are when landlords move from swapping assets in search of small advantages in a static strategic structure, to having to spend wildly to capture assets which have not yet been created. When the monetary authority tries to put the screws in to restore equilibrium - that is enforce winners and losers on the new asset classes - there is a recession or business slump.

It is, after all, what happened in the 1990's - once the dot com boom started employing a lot of people, it started producing macro-inflationary pressures, and then, and only then, did Greenspan tighten.

What this adds up to is that the "blame the bank" rhetoric from a large swath of economists is incorrect - what is instead the case is that policy allowed a society to become top heavy, with more higher asset prices than the then current stream of revenues could support, and this is precipitated out like an avalanche, when the pressure to jump ship to chase new technology or opportunity becomes too high. In game theory terms, the development of a dominant strategy of capital consumption drops the level of allowable money supply per person dramatically, as mone floods from rental investment into capital investment, and from capital investment into consumption.

The solution, of course is being built even as the economic slump unfolds - the revenues to support asset prices are being created by the disruptive technology, even as the betrayl of the previous nash equilibrium is occuring.