For many years my octogenarian mother who went through the Great Depression of the 1930′s had been telling our family that one day all our spendthrift ways would come unstuck and that there would be another day of reckoning. For years her advice went unheeded as my children and their friends grew up in a land of plenty and a summer without end. The examples of the younger generation was even more excessive that that of the baby boomer generation to which I belong. The dizzy heights of mortgages contrast with the frugal mores that she grew up with and still adheres to. She came from the generation where things were not wasted, or thrown out and food was bought which was in season or on sale. The idea of a bottle of wine for $100 or a night out amounting to much more was an anathema to her. She and my father saved well, did not borrow a cent and when they bought their first car for one hundred pounds they paid cash.
Well the wheel has turned full circle and history has a knack of repeating itself as the nature of man is immutable. But you may ask what has happened to all the money that governments have poured into banks and financial institutions over the past few months and what happened to all the countless trillions of dollars of hard earned savings and superannuation.
Until about WW2 we had the gold standard which meant that a dollar was a piece of paper that stood for a certain amount of gold that could be redeemed by the owner if he or she wanted. The federal banks guaranteed this. However the gold standard was a problem that no modern government wanted to be bound by as this required an objective value of money. Governments had legal printing presses and could make as many dollars as they thought prudent. The modern economies were deregulated so the currency reflected in essence the value of the economy of that country at that time depending on the vagaries of the market. An Aussie dollar was only worth what the world markets though an Aussie dollar was worth. This was a feeling they had in their water. Deregulation of the Australian economy and the banks was the brainchild of Prime Minister Paul Keating who boasted that in the early 1990′s we were having the recession we had to have. This deregulation had the effect of letting the corralled and prudential horse out of the stable to wander at will wherever the grass was greenest, the mares were most available and there were no jockeys, and it worked for some considerable time. However there were even more loosed horses in America which did as they pleased and grazed wherever they wanted and ate lots of grass and in the process became very fat and also let off lots of wind as horses and cows do. Their cowboys got fat watching them from afar as they did not have to work them but just drink beer all day and eat corn cobs with butter. In addition it was an unusually long spring and summer with no winter in sight.
Money is energy, formerly in gold or silver, more recently in paper form we call bank notes or now in a special form of digital expression I call “magic numbers”. You and I get paid in magic numbers not gold or paper money. Only certain people can make magic numbers and these are merchants who trade things or labour, banks and governments. If governments make too many we get devaluation. If they keep too many we call it a “surplus”. These numbers flow backward and forward across cyberspace day and night in the trading floor of the cosmos. However money is like water and unless it keeps moving it stagnates and grows algae and bacteria and becomes undrinkable. The pump that keeps the water flowing is commerce and each of us in turn are little pumps which help keep it going. If a lot accumulates too soon in a large place where it is not moving it is not good and can go off like milk. Indeed if it sits too long and if the pump i.e. bank interest, for the numbers is not working well, the water evaporates into the cosmos never to be seen again. This is called an “inflationary effect” which would be better called an “evaporative effect”. This is in accord with the thermodynamic process called entropy which states that the cosmos is moving in an unsteady state inexorably from order to disorder or in other words to a lower energy state which in reality means less money.
One important notion to understand is that financial jargon is full of euphemisms, and “spin” because calling a duck, a duck is a ‘No-No”. This also plays in well with politicians and “Yes, Ministers” people in bureaucracies private and public, as the truth must be hidden at all costs. Words and phrases like a ‘correction”, a “J-curve”, an “a temporary adjustment”, “down-turns” “stimulatory package” are the notes these boys sing to. The emperor has no clothes but all can admire his magnificent cloak.
As an aside, the current market system depends on the pump we call “growth” which is based on the idea that the planet we live on is infinite and can sustain growth forever. This idea would seem flawed to a two year old but seems to escape the attention of economists and even more, politicians most of which have the behavioural skills of a two year old….just listen to “Question Time” in Federal or State Parliament. The other principle the market depends on is the idea that no matter how bad it gets it will always get better, or that every winter is followed by a summer. How many market analysts, auditors or government security operatives warned our governments of this impending disaster a year ago when they were capable of telling our governments that Sadam Hussein had weapons of mass destruction and enough to warrant an illegal invasion? Did your stock broker tell you to sell your shares in 2007 and why not? He did not want to spook the market. If he had the market would have crashed and we would have had a depression. He would have told you to buy when things were bull, the hold when things were bear and even to buy then as well and never to sell. How’s that for higher thinking and unbridled optimism. I am glad he is not a doctor. What were the economic journalists saying in the financial reviews of the globe a year ago? Such a species are about as objective as a drug rep. Their masters are the companies and they don’t want to spook the market. The sober person is ridiculed at a drunk’s party.
The whole world system depends on sentiment and nothing else. On the weekend I was down at the local creek where I sail and was waiting for a friend on a jetty. There in the water were thousands of bait fish about 3 cm long all swimming in the same direction in a big shoal near the surface. They all swum in perfect unison, until suddenly one became spooked and in an instant a considerable number jumped out of the water. They all regrouped quickly, changed direction and swam off again, repeating the cycle ever minute or so. We are bait fish and we have been spooked. There may not be a shark or a heron for miles.
The cost of a fish is only what you and a thousand other people think a fish is worth and if there are too many, or it is easy to find a fish, it would appear that a fish will not be worth much energy. A two day old fish is not worth so much. On the other hand if it takes a lot of energy to catch a fish and if enough people want a fish and there are not many fish to go around, it is likely that fish will be afforded more energy, and hence more worth and more money per fish. What is a doctor worth when there are too many doctors?
At present, as there are too many cars being made and as there is not much energy in the system to buy a car as the “water” is stagnating, cars are less valuable and those who make them less valuable too. The only solution is to make fewer cars, get rid of the workers who make them so they become more sought after. The alternative is for the government to pump the “pump” into car production, to produce more cars no one wants and can’t afford. Simple! That is what the French are doing. I have memories of the Little Prince.
There is still a lot of money out there in Swiss Banks, private hands etc as our governments have been buying heaps of it from faceless money lenders and pumping it into the economy in an effort to keep it all moving. This is called “stimulating the economy” à la Keynesian economics. This will have to be paid for in the future by my grandchildren as there is no tooth fairy and the basic principle of the market is that all energy like water or money has to be kept pumping. The pump is what we call “interest” which will be paid by more merchants in the future (perhaps you and I) pumping energy into the big pond we call the economy. Energy cannot be created or destroyed but it can change and as in the case of water, it can evaporate into the vapour phase. If it sits too low it may freeze and become useless viz. frozen assets. The vapour phase is called “loss”. The vapour phase is alas impossible to retrieve as it costs too much additional energy namely money to convert it back into water. So if you wonder where all the trillions of dollars viz gallons of water have gone, it has all changed from the aqueous phase into the vapour phase. It is possible it might precipitate in the future but I don’t hold much hope for that and when it does Hell will have frozen over too and you and I will be but memories.
Well you may go to bed now with this non-economist’s view of the current economic mess we are all in. The lessons like with our recent Australian bushfires will be heeded for about a millisecond before another generation in twenty years rediscovers the simple truths of the world we live in. There is no free lunch, there is no way that excess is sustainable and that the world ultimately is a closed finite system which cannot sustain human economic growth forever. There are too many lemmings and we are they. We are nothing special although human narcissism thinks so. The globe is over-heating, food production is under threat even in bounteous Oz, our water supplies dwindling, our river systems are a mess e.g. the mighty Murray-Darling system, and our cities bursting to the seams with the tell-tale signs of social disintegration. Australia is proudly leading the world in all the above as our governments have been run by anti-intellectual fools with the foresight of a newt looking only at the next election in three years’ time. Our ecosystems are on life support, extinction of species is accelerating alarmingly and Homo sapiens (a misnomer) are multiplying at an unsustainable rate. In my opinion, this depression is just a curtain-raiser to a more serious ecological catastrophe but as my favourite modern bard, the incomparable Leonard Cohen says in his song, “Everybody Knows, “but I may be wrong”.