Saturday, January 31, 2009
Global financial crisis- where has all the money gone?
The global financial crisis has got many thinking. In fact it has many worrying quite a lot. It has got me thinking, but thankfully not worrying. Where did all the money go?
There have been great losses on share markets across the world. This apparently was brought about my financial institutions collapsing due to bad losses on credit. Simply put they lent out too much money, or more accurately lent out money to people who could not repay the loans. These bad debts have triggered the crisis. There is no doubt that the greed of many banks in the US is to blame.
I have always thought of money as a finite resource. I am sure that many have thought the same. But I am coming to change the way I understand that concept. It used to be that a nation would only print as much money as represented the gold that they had in reserve. Back in those times, money was a finite concept. To go even further back in history, people had gold and silver coins, and there were no banks. Of course they could always find more gold in the ground. How things have changed in todays world.
Money is now a relative concept, not finite. It is fitting that such a concept has come about in a post modern world. The house of cards that is the US economy is crashing down. The rest of the world have been attaching our own economies to the US economy, and now the whole thing seems to be crashing down. Recent news reports have said that the global economy has now come to a complete stand still. This means that there is no net economic growth in the world, in fact there are losses, and this is what economic recession is.
But what is economic growth anyway? Well it represents productivity in a society, be that national or global. So there are some tangible things to attach the concept to. On a tangible level we have seen factories closing all over Russia and China. They are no longer productive. (India is still productive and I believe Canada is too.) If there is no product then there is no money. It's a little like if there is no wheat then there is no food for us to eat. Just like there can be a bumper crop of wheat some years, there can also be a bumper crop of money.
A bumper crop of money is when banks reap big dividends. People pay back their loans. Companies post big profits and their value soars. Essentially this means there is more money around to work with. Yes it is true that banks fictitiously create money, but this is only a part of the picture. In today's global economy money needs to be circulated. None of us need to hold on to the money all the time, so it is circulated around for some one else to use. It's a bit like a game of musical chairs. And just recently a whole bunch of chairs have been taken away.
Where did all the money go? Not into the hands of some other person. The money simply disappeared, burned in a fire, got washed away out to sea. Since there is less money to circulate, companies can not afford to pay their staff. This means that productivity goes down. Since there is less money to circulate, people become afraid to spend and then consumer demand drops, so productivity is in essence no longer needed.
Three quarters of Australia's economy depends on consumer spending. I am confident that many other western economies are built on similar principles. If we all spend our money happily then it will circulate and demand for productivity will go up.
Recently Kevin Rudd (Australian prime minister) thinks he knows the solution. He says that it is time to bring an end to traditional capitalism, and that a new age of social capitalism needs to begin. It sounds like a big experiment to me. Somehow I think the SRC School president does not know what he is talking about. Australia's economy is headed for a major deficit and a deep recession. The word depression is not on people's lips yet. But I think that is now a possibility.
Spend your money happily. It may be worth nothing tomorrow anyway.