What Financial Crisis? November 6, 2008
Posted by Visionary in money, politics.Tags: Crisis, Currency, Economic, ethics, Financial crisis, money, philosophy, politics, The Global Economy
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The previous article in this series can be found here – What is Money
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Hands up if you think the current world financial crisis is a surprise? Hands up if you don’t believe that it was not only foreseeable over three hundred years ago but absolutely inevitable? Hands up if you think there is anything we can do to stop or change it. Hands up if you think our system isn’t actually designed to collapse.
The chances are that you will want to put your hand up to some or even all of the statements above but incredibly because you’ve never been taught and in all probability never thought to ask how the monetary system works, you won’t be able to because you just don’t know.
Despite the fact that all our daily lives depend so heavily on money, we actually know very little about it. As children, we just learn to accept that people in shops will give us what we want if we offer them a few round shiny pieces of metal. What a great deal, what use is this shiny metal disk to a kid anyway – yay give me sweets! As kids we just assume that the shop keeper magically conjurers up a shop full of goodies that he’s happy to dispense for a handful of metal or maybe a few pieces of paper. We don’t appreciate that there is a whole supply chain behind the manufacture and sale of the things we desire and to be honest, we don’t really care.
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We also learn that while we don’t have any idea where they get it from, mummy and daddy always seem to have some. Some of us might know that they have to ‘work‘ for money but that doesn’t really mean much to us either. It’s enough for us to know that to get what we want, all we have to do is ask mummy or daddy to give us some of that money stuff which they always seem to have in their purses and wallets.
This manna from heaven attitude is carried over to our adult life. Whilst we may accept as adults that we have to do some work to get our own money, we still don’t stop to think about what it represents or where it comes from. We just accept that if we have it we can buy what we want and that makes us ‘happy‘ and if we don’t have it we can’t have what we want and that makes us ‘sad‘. Where it comes from and what it is is of less significance than having lots of it. It’s one of those Lego building blocks on which our modern society is so firmly established that we just can’t imagine a world without it.
What the hell is a Global Financial crisis anyway, does anyone really know? We hear it reported daily on the news that a recession coming and just like children being told – “no sweeties today” we accept without question that there’s going to be less of everything, start to batten down the hatches and stop spending. Does anyone know where this recession is coming from or why? In global terms what’s actually changed in the last 12 months? Are there less people in the world, do they suddenly need less food, clothing and shelter than they did last year or has what they all want out of their lives suddenly and dramatically changed? The answer to all of these questions is no and we must conclude that in reality, not much has changed at all! So why the huge hiatus now when everything seemed fine last year?
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Standing outside a prestigious financial institution to add gravitas, financial news correspondents regurgitate words fed to them by government ministers, economists and bankers about how the crisis is due to bad investments and sub-prime markets. Just like vain courtiers pretending they could actually see the Emperor’s new clothes so they didn’t appear stupid, we nod sagely and pretend we understand. Whilst in our hearts we simply pray and hope that better minds than ours understand what’s happening and know how to fix it for us.
If nothing has really changed in terms of what we want and need, don’t you find it strange that the global economy is grinding to halt because there isn’t enough money? If money is just something we use to make transactions simpler and more fluid how can it be that there isn’t enough of it? How can there not be enough pieces of paper and little silver disks. After all we can make as many of those as we like – can’t we?
Well no we can’t because we all intuitively understand that the notes, coins and plastic we use to pay for things have no inherent value. We can’t actually eat money or build houses from it. We all know that money represents something. A currency only has the value we attach to it. The value of individual currencies goes up and down every day depending on our level of confidence in that currency. We all know that by simply creating as much money as we need would simply make it meaningless – wouldn’t it?
The answer to this question may seem intuitively obvious but sadly the world doesn’t work in intuitively obvious ways, not when there are such huge powerful vested interests pushing it in other directions!
Image via Wikipedia
A good question to ask ourselves is how can there be less money today than there was yesterday? Surely all the money that was here then is still here now? If there is a shortage of money today, isn’t it just that people are sitting on their money and not spending it out of fear? Could it be that an economic crisis is something we talk ourselves into, a simple problem of liquidity?
Whilst this seems like a plausible explanation its not as simple as that. The truth is that there really is less money in the system today than there was 1 year ago and to understand why you need to understand how the monetary system works today. You need to know how money is actually made, where it comes from and what it represents.
The explanation is so outrageously incredible that if I simply told you, in all probability you just wouldn’t believe me . To have any hope believing what I’m about to explain, you need to understand how we slowly and gradually arrived at the current situation over a long period of time. The best way to do this is to go back in and look a the history of money, why it evolved and what it is supposed to represent.
This will be the topic of the next article in this series.
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Wow, what an introduction! Sounds like it is going to be an interesting series.
The Confederation of British Industry (CBI) has said we are facing a financial crisis on a scale not experi… Year
It isn’t too much money. It’s an overproduction of goods. Produce too many new houses that are so expensive that people can’t afford them, and with the slightest little prodding (like, say, from a dramatic increase in the cost of crude oil) . . . whoops, the mortages can’t be paid, so the properties are foreclosed . . . so the banks lose the income they expected on repayment of those mortgages with interest . . . so the banks suffer losses . . . so it’s harder for them to loan money . . . so credit gets tighter . . . so businesses that need credit to expand their businesses don’t . . . so business begins to stagnate and contract . . . so there is less borrowing and therefore even lower profits for the banks . .. so they have to be even more careful about loaning money . . . so there is even less credit . . . so businesses tighten up even more and start to cut back on production and lay off workers . . . only then those workers can’t afford to buy other items that are also overproduced . . .
Thanks for dropping by and contributing guys.
@Luke – I hope my next article lives up to your expectations when I get it written
@pdgoselin – there is truth in what you say. However, just because the cart follows the horse, doesn’t mean that the horse is being pushed by the cart. Once you understand how the money markets work, I think you may change your opinion about what the driving force behind the current crisis is.
My reply to your comment became so large I have decided to post it as a separate article in the series. So thanks for the inspiration provided by your comment.
I will discuss the money markets and how money is created in the next article in this series after my reply to you and would love to hear your opinion after you have read it.
Over production should reduce prices not make things more expensive. If there is too much of something and not enough buyers then the price of an item drops. What makes houses expensive is a shortage in supply combined with an over supply of money.
Please read this for an explanation why.
Love V