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How to speak the language of money
PUBLISHED: 23 AUG 2014 05:10:52 | UPDATED: 23 AUG 2014 06:00:59

How to speak the language of money
The ideas of economists and political philosophers, both when they are right and when they are wrong, are more powerful than is commonly understood. Indeed the world is ruled by little else.

– John Maynard Keynes, The General Theory of Employment, Interest and Money

Sugar: You own a yacht? Which one is it? The big one?

Joe: Certainly not. With all the unrest in the world, I don’t think anybody should have a yacht that sleeps more than 12.

– Billy Wilder and I.A.L. Diamond, Some Like It Hot

The most important mystery of ancient Egypt was presided over by a priesthood. That mystery concerned the annual inundation of the Nile flood plain. It was this flooding which made Egyptian agriculture, and therefore civilisation, possible. It made ancient Egypt the most stable society the world has ever seen.

The Egyptian calendar itself was calculated with reference to the river, and was divided into three seasons, all of them linked to the Nile and the agricultural cycle it determined: Akhet, or the inundation, Peret, the growing season, and Shemu, the harvest. The size of the flood determined the size of the harvest: too little water and there would be famine; too much and there would be catastrophe; just the right amount and the whole country would bloom and prosper. Every detail of Egyptian life was linked to the flood: even the tax system.

The priests performed complicated rituals to divine the nature of that year’s flood and the resulting harvest. The religious elite had at their disposal a rich, emotionally satisfying mythological system and a position of unchallenged power at the centre of their extraordinarily stable society, one which remained in an essentially static condition for thousands of years.

But the priests were cheating, because they had something else too: they had a nilometer. This was a secret device made to measure and predict the level of flood water. It consisted of a large, permanent measuring station sited on the river, with lines and markers designed to predict the level of the annual flood. The calibrations used the water level to forecast levels of harvest from Hunger up through Suffering through to Happiness, Security and Abundance, to, in a year with too much water, Disaster.

Nilometers were a – perhaps the – priestly secret. They were situated in temples where only priests were allowed access. The nilo-meter was an essential tool for control of Egypt. It had to be kept secret by the ruling class and institutions, because it was a central component of their authority.

The world is full of priesthoods. The nilometer offers a perfect paradigm for many kinds of expertise, many varieties of religious and professional mystery. Many of the words for deliberately obfuscating nonsense come from priestly ritual: mumbo jumbo from the Mandinka word maamajomboo, a masked shamanic ceremonial dancer; hocus pocus from hoc est corpus meum in the Latin Mass.

Practitioners of almost every métier, from plumbers to chefs and nurses to teachers and police, have a gap between the way its practitioners talk to each other and the way they talk to their customers or audience.

Artist Grayson Perry is very funny on this phenomenon at work in the art world, as he described it in an interview with Brian Eno. “As for the language of the art world – ‘International Art English’ – I think obfuscation was part of its purpose, to protect what in fact was probably a fairly simple philosophical point . . . There was a fear that if it was made understandable, it wouldn’t seem important.” Sometimes, this very gap is the thing that attracts people to a trade in the first place – politics, for instance, is all about the difference between public and private.

To the outsider, economics, and the world of money more generally, looks a lot like the old nilometer trick. In The Economist not long ago, I read about a German bank which had observers worried. The journalist thought that, despite the worry, the bank would probably be OK, because “holdings of peripheral euro zone government bonds can be gently unwound by letting them run off”. What might that mean? There’s something kooky about the way the metaphor mixes unwinding and holding and running off – it’s like something out of a screwball comedy.

That’s inappropriate, given that what that phrase really means, spelt out, is this: the bank owns too much debt from euro zone countries such as Greece, Italy, Spain, Portugal and Ireland, but instead of selling off that debt, what the bank will do instead is wait for the loan period of the debt to come to an end, and then not buy any more of it. In this fashion the amount of such debt owned by the bank will gradually decrease over time, rather than shrinking quickly through being sold. In short, the holdings will be gently unwound by letting them run off.

When you hear money people talk about the effect of QE2 on M3, or the supply-side impact of some policy or other, or the effects of bond yield retardation, or of a scandal involving forward-settling ETFs, and all the other panoply of acronyms whose underlying reality is just as complicated as they sound – well, when you hear those things, it’s easy to think that somebody is trying to con you. Or, if not con you, then trying to put up a smokescreen.

During the credit crunch, there was a strong feeling that a lot of the terms for the products involved were deliberately obscure and confusing: it was hard to take in the fact that credit default swaps were on the point of taking down the entire global financial system when you’d never even heard of them until about two minutes before.

On the radio or the TV or in the papers, a voice might go on about fiscal this and monetary that and we sorta-kinda know what they mean, but not really, and not with the completeness which would allow us to follow the argument in real time.

I know all about this type of semi-know-ledge, because I was completely that person, the one who sorta-kinda knew what was being talked about, but not in enough detail to really engage with the argument in a fully informed, adult manner. Now that I know more about it, I think everybody else should too. Just as C.P. Snow said that everyone should know the second law of thermodynamics (the best concise explanation is that given by Flanders and Swann: Heat can’t pass from the cooler to the hotter. You can try if you like but you’d really better notter), everyone should know about interest rates, and why they matter, and also what monetarism is, and what GDP is, and what an inverted yield curve is, and why it’s scary.

And sure, yes, some of the time the language of finance is obscure and has the effect of hiding the truth.

One favourite came from the financial derivatives which played a role in the 2008 implosion: “a vanilla mezzanine RMBS synthetic CDO”. (An RMBS is a residential ­mortgage-backed security – it’s a type of pooled debt based on people’s mortgages, turned into something which investors can buy and sell. These things that can be bought and sold come in several different tranches, with different levels of safety and accordingly variable yields to the investor. Mezzanine means it’s neither the riskiest and highest-yielding tranche of this debt, nor the safest and lowest-yielding, but in the middle, and synthetic means it mimics something without having any of the components of the actual thing. So that’s a vanilla mezzanine synthetic RMBS. It’s not rocket science, but it’s also not The Cat in the Hat.)

More often, though, the language of money is complicated because the underlying realities are complicated, and need some explication and analysis before you can understand them.

This lack of transparency isn’t necessarily sinister, and has its parallel in other fields. In respect of wine, that’s how those of us who take an interest learn, for instance, to tell grape varietals apart: one day you catch the smell of gooseberries from a sauvignon blanc or cow Sh** from a shiraz, and from that point on you can recognise that varietal, and you know what people are talking about when they talk about those flavours.

The smell of a corked bottle of wine is something, once pointed out, that you never forget (and usually realise you have drunk a zillion times in the past, knowing something wasn’t quite right but not knowing exactly what). You don’t need to know that what you’re smelling is 2,4,6-trichloroanisole to remember the smell of corking for ever.

So this is how I think it works. As you learn to name things, you learn to taste and remember them. That might sound like a double benefit, a win-win: but there is a catch here, a potential trap.

We can use our new vocabulary to discuss wine with other people, to enter a dialogue with anyone; or almost anyone. This is the social aspect of the language, and it’s very powerful within the community who know what they are talking about.

But it’s also a potential problem. The words and references are only of value to people who’ve had the same experiences and use the same vocabulary: you’re referring to a shared basis of sensory experience and a shared language. People who don’t have those things are likely to think you are producing the thing which smells like shiraz, and they don’t mean it as praise.

Thus, as your vocabulary becomes more specific, more useful, more effective, it also becomes more exclusive. You are talking to a smaller audience. The language of money works like that too. It is powerful and efficient but also both exclusive and excluding.

When an economist talks about the effect of QE2 on M3, he or she isn’t just being deliberately bamboozling and obstructive. The fact is that it’s incredibly complicated to explain what QE2 is and how it works.

Many fields of thought have ideas which are far more difficult to understand, but which don’t have the same sense of a linguistic perimeter around them.

In physics, for instance, there are an enormous number of ideas of a complexity so great that they can’t really be grasped at all in ordinary language, but are available only to someone with an advanced level of maths. Even then they are very hard to understand. The great physicist Richard Feynman, who knew his subject as well as anyone who’s ever lived, and who explained it better than anyone who ever lived, said in The Character of Physical Law: “I think I can safely say that no one understands quantum mechanics.”

But you can still get a sense of what these fields of thought are about. The Large Hadron Collider? Well, it’s large and it collides with hadrons, whatever they are. Again, you can get the gist.

For many concepts in the world of money, that isn’t true. Often, there’s no way to break a term down and work out more or less what it means. “Consumer surplus”, for example, sounds like a surplus of consumers. It isn’t. (See pullout below; lexicon overleaf.) Bulls think the price of something is going to go up, and bears think the price is going to go down – but why? Why is it that way round? Who is Chocfinger? (It was Anthony Ward, a private school boy turned commodities trader who set up a hedge fund specialising in chocolate. Although at one stage the company had an implied valuation of over $US200 million, it was eventually sold for one dollar.)

Still, while the details of modern money are often complicated, the principles underlying those details aren’t. Money is a lot like babies, and once you know the language, the rule is the same as that put forward by Doctor Spock: “Trust yourself, you know more than you think you do.”

Just to stick with the example of QE2, what we’re talking about is the government buying back its own debt from participants in the market. These are banks and companies – in theory, but I think not much in practice – individuals too. Once the government has bought back that debt, well there’s no particular benefit to that: it’s like borrowing money from your neighbour and then paying the neighbour back the exact same amount. Nothing has changed. The trick in this case is that the money the government uses to buy back the debt is newly created electronic money.

It’s money that simply didn’t exist before. It’s like typing 100,000 at a keyboard and magically having £100,000 added to your bank account. Then you use that newly created money to pay off your debts.

That’s QE. As for QE2, well, that’s just the second lot of QE, put into place because the first one didn’t have enough of a stimulus effect on the economy. As for M3, that’s a way of measuring the amount of money in the economy. The whole question of how much money is moving in the economy is an entire branch of economics in itself: it’s a subject of huge argument just how much that number exactly matters. But that’s what they’re talking about when they talk about M3. Now, all those ideas are packed into the words “QE2’s effect on M3”, which money people don’t need to explain to themselves, or to anyone they’re in the habit of talking to.

The explanation is quite complex and demanding, and it’s much, much easier for everyone who already understands the language to just skip it to get on to the next point in the argument.

As for the majority of people, perhaps even the vastly overwhelming majority of people who don’t fully understand what QE2 and M3 are, you’ve already lost them. They’re no longer meaningfully participating in the conversation. The argumentative Elvis has left the building.

It’s important to bear something in mind here too. To use the language of money does not imply acceptance of any particular moral or ideological framework. The language doesn’t necessarily imply a viewpoint; what it does is make a certain kind of conversation possible.

I learned this for myself the hard way – gradually, protractedly, and by myself. My interest in the subject grew out of the novel I was writing. As a novelist you become increasingly preoccupied by this question: what’s the thing behind the thing? What’s the story behind the evident story?

I was thinking of writing a big fat novel about London. And I realised you can’t really write about London without starting to take an interest in the City – the financial centre – because finance is so central to the place London has become.

I came to think that there was a gap in the culture, in that most of the writing on these subjects was either by business journalists who thought that everything about the world of business was great, or by furious opponents from the left who thought that what was needed was rageful denunciation. Both sides missed the complexities, and therefore the interest, of the story – that was what I felt.

It wasn’t a crash course. I just followed the subject, for years, by reading the financial papers and financial pages, and following the economic news. Every time I didn’t understand a term or an idea, I’d Google it or go to any of the various books I was starting to accumulate on the subject.

A crucial part of my journey of discovery was that my father had worked for a bank. His kind of banking wasn’t at all the kind of fancy go-go modern investment banking that blew up the global financial system in 2008. The type of banking my father did was the kind which involved lending money to small businesses to get going. More than once, driving around Hong Kong in my childhood, he would point out a factory or a business where he’d been the person who said yes and approved the initial loan that got the business started. There were no vanilla mezzanine synthetic RMBSs in his work.

But the fact that he worked in the world of money had an effect on my sense that it was and is comprehensible. There were still times when the whole process felt a little bit like learning Chinese – figuring out the meaning, word by word. But that was how I learned to speak money.

I saw what I was doing as being an intermediary. I can remember vividly, though, the moment I realised I’d become one of Them. It was at a New Statesman lunch in 2009 which also functioned as an off-the-record briefing by Alistair Darling in the days when he was Chancellor of the Exchequer. He gave a short talk and then there were two question/responses, one from economic historian Robert Skidelsky and the other from Financial Times columnist Gillian Tett.

What I took away from the lunch was this weird, oddly demoralising realisation: I thought, oh Sh**, I understood that. I’ve crossed over. I’m now one of Them: I’m not going to be able to write about money any more.

That conclusion turned out to be wrong – I manifestly have kept writing about it. But it is a little different now. It is harder.

The difficulty is in communicating across the gap between the moneyists and everyone else, now that I know just how concise and powerful and plainly useful that language can be. It’s not that different from, say, plumbers: if they’re talking about their expertise, it’s much simpler if they don’t have to keep pausing to explain J-bends.

But imagine if plumbing became a national problem, a national emergency – which of course is exactly what it would become if the national sewage system stopped working. Then, although we could all remember happier times when we didn’t have to speak plumbing, we would now have a reason to learn.

But the plumbers would still have a tendency to talk to each other in their own technical language, if we let them, just because it’s more efficient that way. Economists are no different.

Disagreements in economics aren’t just about technicalities: they’re usually based on profound divergences in moral analysis. But the language of money doesn’t express any implied moral perspective. Judgments of what’s right and wrong are left out. This can make the language seem abrasive, even shocking, to people who habitually use a very different kind of discourse.

Since much of the language of public life has an implied moral and political load, this makes money-speak very distinctive. “Welfare scroungers” has a different spin from “benefit claimants”, who don’t sound at all the same as “the working poor”, even if these are all the same people. Aristotle was right when he said that man is a political animal; our language is one of the most political things about us.

Compared with these styles of public discourse, there’s something amoral and stripped-down about the language of money. It sets out to be less an expression of politics and more a tool for discussing them. Morality is left out, or left to one side or parked elsewhere, for the duration.

Some people, especially on the political left, find that intensely alienating.

I understand that, I really do. And at the same time there’s a bracing quality to talking about the technical details, the practical meat of the subject, without the outrage.

In any case, I have to admit that this amoral quality is one of the things I like about the language of money. Our public life is dominated by hypocrisy, by people holding back from saying exactly what they mean because they don’t want to offer targets for opponents or the media, especially targets for the form of fake outrage which dominates so much of our public discourse.

There’s less of that in the language of money; it is not, in general, hypocritical. As a result, it gets to the real matter under discussion with commendable speed – once you have the linguistic tools to join the conversation.

This is an edited extract from How to Speak Money by John Lanchester, published by Faber on August 27, $29.99.
The Australian Financial Review