Money! If you're “poor” (and I don't mean just middle-class poor), your life is consumed by finding enough of it. If you're rich, your life is consumed by figuring out what to do with it, protecting it, and very often, how to get even more of it. Then there are those of us that fit somewhere in-between. By Western, capitalist standards we are neither rich nor poor; we are middle-class. The poor think we're rich, and the rich know we're poor, while we constantly vacillate between counting our blessings, and bemoaning our incipient poverty. However, the one thing that we have in common with both the rich and the poor, is that we too spend much of our lives focused on money. Certainly, money has completely different meanings for each of these economic groups, and without doubt, I am generalising wildly – but you still know that its true. Money is arguably the most central thing in each of our lives, whatever our economic circumstances.
Let me add some perspective. According to the Kinsey Report, just over half of all men think about sex at least once a day. Just under half (most of the rest) think about it slightly less than every day, but still many times every week. (The so-called “fact” that men think about sex every seven seconds is not only impractical & illogical, but also apparently, completely mythical.) On the other hand (no innuendo intended – not even for the word innuendo), only about 20% of women think about sex on a daily basis. Well, aside from ensuring the inclusion of two prime search-engine keywords in this article – 'sex' and 'money', I do actually have a reason for my little detour into sexology. Thoughts about sex are much more titillating than thoughts about money, and seemingly even more acceptable as polite conversation. Consequently there is much more information available on how often we think about sex than there is on how often we think about money. Nonethe-less, and here's that perspective, it is a very rare day indeed, on which any one of us did not think about money at least once, even if it was just to buy a cup of coffee, or in the context of our work.
So here's my point, you think about sex a lot, but you think about money, either directly or indirectly, much, much more. No, this is not a criticism of your priorities, it is merely a statement of fact regarding the centrality of money in our lives. Based on the premise that we spend the most time thinking about and doing those things that are most important to us, money is almost undoubtedly one of the most important thing in our lives. Most of us, on a daily basis, force ourselves from our warm, comfortable beds, leave our loved ones, and brave weather, traffic, and morning radio shows to get to a job that, if truth be told, we don't like, and might even hate. Conservatively estimated, approximately 60% of our adult daylight hours are spent either at work, or getting there. (Assuming 12 hours of daylight, an 8 hour work day, 5 days/week + 1 hour travel either way) Ignoring those fortunate, if incomprehensible few that truly love their work, and would probably do it for nothing, what is our reason for this intense devotion? Money!
Once again, this is in no way a criticism. As a husband and father rapidly approaching my halfcentury here on earth, I am only too aware of the realities of life. We must have money to live. As spouses and parents, we make many sacrifices for the benefit of those we love, whether for their survival, or to give them a “better life”. Capitalism, for all its positive advantages, makes few, if any allowances for those that do not have money to spend. Spending – after money itself, is probably the most important keyword in the capitalist, free-market vocabulary. It is not the mere existence of vast quantities of money that keeps an economy alive, but rather the spending of vast quantities of money. If you do not spend your money, the economy will collapse. This is the ultimate vicious circle. We must all earn in order to spend, and we must all spend to enable the system to keep paying us. Earn to spend – spend to earn – ad infinitum – ad nauseum. If this cycle of earning and spending is broken on any level – mass individual, business, or government – the economic system begins to break down very quickly and catastrophically. Remember, money is really just a record of work, or energy (goods & services transactions) available within a communal system. Spending! Money is merely a way of keeping track of incomplete transactions, and encouraging broader and more constant commerce. Spending! It therefore stands to reason that any bottlenecks, or stoppages in the currency flow result in the breakdown of the system.
As a child, about forty years ago, when my parents first opened a building society account on my behalf (United Building Society, if memory serves), I remember there being a very strong emphasis on saving money. Banks and building societies came round to schools to teach us the benefits of saving money, and even gave us free money-boxes. They told us of the magical wonders of interest; how you got more money for free, just by leaving it in your account. Fast-forward to the present-day. In spite of apparent government pressure to promote saving during the past decade, only one bank instituted any major marketing strategy and advertising campaign to promote savings, and even that was for a relatively short time. In their defence, one of the reasons that they stopped marketing this savings product, a competition in which one could win one million Rand, was due to insufficient public interest. To be perfectly honest, I'm ashamed to say that although this was “my bank”, I was part of that “insufficient public interest”.
There are very obvious benefits to saving, as well as spending money, both to ourselves and to the economy. If we are truly honest, the vast majority of us can afford to put some money aside every month, even if it means cutting down slightly on one or two luxuries. So why don't we save? We go out in droves to buy Lotto tickets on which we are almost certain to lose money, but we won't put our money in a savings account, with guaranteed return of capital, plus interest, and better-than-Lotto-odds of winning a million Rand. Its quite baffling – or is it?
When you take a small step back, and look at the world in which we all live, its really not that confusing. For every advert that encourages saving, investment, or any kind of delayed gratification, there are literally millions of advertisements telling us that we can't, and shouldn't have to wait; countless voices telling us to spend it while we have it, and to apply for credit if we don't have it. Advertising doesn't merely inform us of what's available to fulfil our needs and desires. Truly successful advertising creates the desires and needs within us, its target audience, so that we will spend money on its product. If you are truly honest with yourself, how often, after watching an advert, have you caught yourself wondering how you managed to get by without the product that has just been touted? The perception of need has been created, and the spending of money will follow, very often along with the borrowing of money so that we can get that hit of instant gratification.
Now, this is all well and good where money is a true reflection of the energy/work/value within an economic system. However, it does not take much analysis to realise that this basic definition of money is no longer an accurate representation of our modern, capitalist, free-market society. In Part 1 we saw that the amount of money in any economic system was originally directly based on the amount of some or other valuable commodity, often gold, that was held in reserve by those exercising ultimate control over that economic system. The value of this reserve directly informed the value of the currency, and was a fairly accurate reflection of the actual amount of work/energy/value within the system. This system was largely objective and quite straight-forward, but was considered much too limiting, particularly by those nations without strong gold mining industries. Consequently, the gold-standard was dropped by most of the largest economies in the world, with the smaller, often gold-rich nations, like South Africa, quite quickly following suit.
So, that brings us back to the question, “What is it that informs the value of our currency, or in other words, the amount of money available within our economic system?” When the gold-standard was dropped, currency went back to having its value directly informed by the amount of work/energy/value within that particular economic system. This is still theoretically the case. However, in this, as in many other ways, I believe we humans are busy proving that our avarice easily overcomes our intelligence and creativity.
For a nation to base its currency value (the amount of currency available) on the work/energy/value within the system, it is necessary to do the following. First, carefully consider the state of the economy over the past few years. Second, analyse all this information to identify the economic trends. Third, create a budget based on this information and the trends that you have identified. Finally, use all this to form a slightly conservative, projected valuation of your currency for the coming year. Based on that evaluation, plan how much currency to create or withdraw from the system in order to maintain a stable currency value. The value of the currency is thus guaranteed by the government, often in the form of government bonds.
While I do realise that there are other factors that come into play, inflation is the result of ignoring these calculations, or getting them wrong. According to its simplest definition, inflation increases when currency is over-supplied. In other words, when there is more currency in the system than can be properly “backed” by the state of the economy, inflation results. But if there is such a seemingly simple formula for maintaining a healthy currency, why are we sitting with not only inflation problems, but also a global recession?
One reason is simply the fact that our current monetary system is largely based on credit. In the most basic currency system, I can only invest in a client's venture with the capital that I actually have. Thus, while money can “be lost” from the economy due to failed international business ventures, all money remains “real”. However, in our modern system of credit, the amount of money in the system can be multiplied many times over.
For example.
If I physically have one million Rand, and I extend credit not exceeding that amount, I maintain a relatively risk-free system in which the value of “my currency” remains strong. The larger the cash reserve that I maintain, the more risk-free and stable my economy remains.
On the other hand, if I lend out my million, and then borrow a further million Rand, I effectively have more money that I can lend out, or invest. However, I do not actually have this extra money because I must still pay it back. I have therefore effectively doubled that money within the larger economy. But what if the person from whom I borrowed it, had also borrowed it? The initial “real” money is then tripled, and so on.
While this may sound like a fairy tale, it is, when simplified, exactly what happens within our economy. While there are some safe-guards concerning this multiplication process, they are quite lax, and not always adhered to. Quite simply, this means that there is more money available in the economy than can be guaranteed, or backed-up by physical resources within the system. The fact that most of the money within our modern economic systems is digital, makes this even easier to do, after all, in one sense, we're just talking about numbers on a screen.
Unfortunately, in another very real sense, these numbers must still be based on real value if they are not to decrease the over-all value of the currency they represent. Sadly, we seem to have just accepted this, along with the accompanying fact of annual inflation. However, let's look at it from a slightly different angle. If inflation is ten percent per annum, we've learnt to calmly accept that our money is worth ten percent less this year than it was last year. This means that if I save my money at an interest rate of eleven percent, I'm only getting an effective interest rate of one percent. No wonder we'd rather borrow to spend than save to spend. But wait ... if you borrow now, you can increase the levels of inflation, and further decrease the value of your money.
The more that money is multiplied by means of credit, the less it is a true representation of actual value within the economy. The less our money is worth, and the more money we have to create. The very frightening thing is that we don't have to travel around that vicious circle too many times before we would find ourselves in the middle of a global recession. Oh, wait …
All it needs is for a country's central bank to get the inflationary balancing act a little wrong for a few years; add a drought or two along with some political instability, and we can very quickly find ourselves “living in Zimbabwe”, or Ireland. Ireland may not be quite as spectacularly far down the financial sewer as Zimbabwe, but they too are experiencing a massive collapse of their national economy. The Central Bank of Ireland, with the tacit approval of the European Central Bank, has “created” over fifty billion Euros in an economy that has lost almost all its value. This was done in order to “save” Irish commercial and retail banks that had over-extended themselves when the economy was stronger. However, the longer term effects will weaken the Euro as a whole. The United States government has similarly “created” thousands of billions of Dollars (mostly imaginary money) in order to provide bale-out packages to banks and businesses that were, for a while, rich on other imaginary money.
As individuals, financial advisors will tell us to beware of living too close to the bread-line. If you overspend, and/or over-borrow, you leave yourself little, or no margin to deal with the unexpected. Most people in the capitalist West are only a very few missed pay-cheques away from bankruptcy and homelessness, particularly when one considers the amount of debt that most of us carry.
I most certainly don't have all the answers, but even I can see that we, as individuals, as businesses, and as nations, need to re-assess our economies. More than ever, in this digital, and increasingly virtual world, it is vital that we seek to rebuild our individual and national economies on real value. Money is not the root of all evil, but continuing to build our lives on imaginary, nonexistent value can very quickly lead to disaster.
