Monday, February 7, 2011
You can't ignore MONEY
Today I am hardly a bastion of knowledge when it comes to the subject of money/finance. Don't ask me any questions about Keynesian economics (ask Ai-Ling!). I have very little in savings, zero investments and no assets. But a few things have changed since then.
Probably the biggest thing that has changed is: I have recently noticed that, uh, the whole world is currently in a tremendously momentous period of change due to developments in global and regional management of MONEY. If you are interested in the past, present and particularly the future path of human-kind, therefore, there is absolutely no way you can ignore this subject.
A problem that I have with the subject of money, is how enormous, expansive and complex the world economy is. There is no way that I will ever understand either its entirety or all of the tiny cogs and micro-machinations that it is composed of. I am not an economist, I do not work in finance and I never plan to. So it can be hard to come to any sort of understanding, when you only dedicating perhaps 1% of your time towards it.
One video that I found really helpful was Money as Debt by Paul Grignon. The most useful part of this video, I thought, was a very simple and visual explanation of how finance came to exist. So at first people were trading gold. Carrying gold around all the time was not very practical, so people started storing their gold with other people who offered the service. These first "bankers" then issued pieces of paper stating the amount of gold that each person had deposited, which people then used as currency. Then the bankers realised that they could easily issue MORE PIECES OF PAPER than ingots of gold... because people hardly ever came and retrieved the physical gold. I learnt that in these early times, rules were developed about the ratio of "paper money" to physical gold that the bankers were allowed to "create" ie, the birth of fractional reserve banking. But of course lots of people didn't abide by these rules. I don't know the figures,... but say,... at first the ration was 4 paper units:1 gold ingot,... this later became 10000 paper units:gold ingot... something like that. Of course this is all simplified but it really helped me to understand how the world of finance was born.
I was also pretty interested to find out, that when you take out a loan, the bank
WRITES THAT MONEY INTO EXISTENCE. Ie, you ask for $400K for a home loan. The bank says: "sure thing!" and then writes $400,000 on its balance sheet. Even though the $400 is in the negative, that debt can then be "re-packaged" into some-one else's investment. So when you see those clips on the news of money being printed... and you think that's how most money comes into existence,.. it's not really true. Money is virtual!
One thing that I find really bizarre and a bit scary, is that the world of finance/the amount of "virtual" money that is created and traded in the stock-market etc is way bigger than the actual world economy. The amounts of debt just kept increasing, puffing up like a massive balloon... and now, in most places in the world this has popped/or is rapidly deflating,... taking down with it the ACTUAL economy. The balance sheets of ACTUAL companies involved in real physical products and services.
So everyone is panicking, selling their "virtual" monies and buying physical gold again,... but unfortunately that is removing a lot of the actual finance and liquidity that was required by actual businesses to go on operating.
It's a little surreal, living in Australia where large effects from the global financial crisis have yet to hit home. I look at the rest of the world and feel sad for the low-middle classes of very normal people around the world who have now had the brunt of the crash forced upon them as austerity measures such as reduction/elimination of social services, pensions, welfare, public health, education etc. I think only time will tell if Australia will suffer a similar fate...
Anyway, to sum this post up,... we are now living in a time where MONEY is the biggest player of our times. It will be extremely interesting to see how things go from here,.. we can only hope that more people will try to understand it and hopefully be able to curtail its worst abuses.