Saturday 7 July 2012

How to arrange the perfect financial storm



Ask any ten economists you can find and I guarantee that each will give you a slightly different answer to the question of how we have come to the financial position we are currently in globally. Lets have a look at where we are at present, then move on to try to analyse how we have got here. In Europe we have a situation where the recession that began with the banking crisis in 2008 is still ongoing. There is talk that it is a double dip recession, but this is based on massaged figures and we are in reality still in the same recession. Every single European country with the exception of Germany is in debt to many times their Gross Domestic Product (GDP) and the debt level is rising. The same is true of America, Russia, Japan, China and Australia, and this situation begs a couple of questions. Firstly, if every country is in debt, who exactly are they in debt to? It can't be too each other, that makes no sense, but someone, somewhere is making a killing out of this situation. The second question is whose debt is this? Countries don't have money, they don't pop down the shops for a pint of milk or fill the car up. People have money, and countries, or at least governments take some of that money in the form of taxes, so if countries don't have money, but their citizens do, is it not the citizens who are technically in debt? Each and every one of us, no matter how frugal we are, how careful we have been, how much we avoid credit, we are still in debt, far more than we can ever possibly repay.

Ok, so that is the current position, but how have we got here? In order to answer that, and in contrast to many thinkers on this subject it may be useful to take a quick tour of the history of money. Thousands of years ago at the dawn of civilisation trade was conducted by barter. If I kept chickens and they laid more eggs than I could use, then I could take my surplus eggs and find someone who had something I wanted, and who needed eggs, and I could exchange my eggs for their goods, lets say, some wool, both parties being happy that they had gained value in the trade. The key point here is that my eggs, and my trading partners wool both had perceived value, thereby allowing the trade to take place. Now, clearly there are flaws in this barter system. It relies on my ability to find someone who has products that I want and who also wants my eggs, which may not be easy or convenient. To get around this, a system was implemented to create a means of representing goods to be bartered by use of tokens. In order to make the system equitable these tokens had to have intrinsic value in and of themselves, such that I would happily accept such tokens for my eggs in the knowledge that the tokens represented a fair exchange, and would be accepted in exchange for goods at some future point, and that their value would not radically change. This was the foundation of money, and the tokens, or coins, were made of precious metals, typically copper for small values, silver and gold for higher value.

This system worked well, but another problem arose. There is a finite supply of precious metal, and this limits the amount of trade that can be actioned. Additionally since the tokens have intrinsic value some people will have a tendency to hoard the tokens rather than keeping them circulating thereby weakening the ability to trade. So another decision was taken that these tokens could be replaced by a note, backed by the promise of exchange for the original tokens, but having no intrinsic value beyond this. This led the way to the idea that people would have no reason to exchange the notes for the backing tokens, the gold and silver, so there was really no need to keep all that gold and silver around and that allowed the creation of more and more notes, or paper money, notionally backed but in reality, technically worthless. Essentially this created the myth of money.

Having reached this point it becomes possible to create the current situation whereby everything is based on an illusion of wealth and the reality is that there is no value left in currency other than that which we are persuaded it has and by the fear of what life may be like if the system really does collapse. It becomes apparent that within this process there is room for the possibility of someone or some group in the background controlling this process over many generations, gently steering society to a position in which we are utterly reliant on maintaining the fantasy no matter what the long term cost. The big question of course is who they are......

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