“Annual income twenty pounds, annual expenditure nineteen six, result happiness. Annual income twenty pounds, annual expenditure twenty pound ought and six, result misery.”
Wilkins Micawber
Sounds perfectly sensible to me, but then I’m no economist!
Now moving on to the bright ideas of John Maynard Keynes:
“In particular, he concluded that classical economics rested on a fundamental error. It assumed, mistakenly, that the balance between supply and demand would ensure full employment. On the contrary, in Keynes’s view, the economy was chronically unstable and subject to fluctuations, and supply and demand could well balance out at an equilibrium that did not deliver full employment. The reasons were inadequate investment and over-saving, both rooted in the psychology of uncertainty.
The solution to this conundrum was seemingly simple: Replace the missing private investment with public investment, financed by deliberate deficits. The government would borrow money to spend on such things as public works; and that deficit spending, in turn, would create jobs and increase purchasing power. Striving to balance the government’s budget during a slump would make things worse, not better.”
I know twenty- twenty hindsight is a wonderful thing but seriously, couldn’t anyone have spotted the problem with this? If you base an entire global economy on debt it depends on everyone believing that this will never have to be repaid, as long as you create enough consumers who can borrow enough to buy whatever is produced, I suppose it works. But it does seem to have gone horribly wrong: the bubble has burst!. I’m also not entirely convinced of the logic of making those economies that are verging on bankruptcy, pay more for their borrowing. This seems like a harsh punishment for those who have shown an unswerving loyalty and enthusiasm for Keynesian economics.
Boadicea's Chariot 
I was just face-timing with my son about this yesterday. I tend to agree with you, though I can see some point in an argument that, since the UK needs to spend some money on infrastructure anyway, new Airport, rail links, water pipes and what have you, it would make more sense to borrow money and spend it on that rather than borrowing it and flushing it down the gurgler. (The huhnatic chucking taxpayers’ cash around to fund more limos for corrupt third-world governments and this: http://www.dailymail.co.uk/news/article-2069343/Now-law-foreign-aid-Ministers-want-commit-Britain-billions-handouts.html
For example:
Why am I reading the Daily Mail/ Beats me – got that snippet about ‘aid’ on facebook and spotted the other headline while I was reading it.
When will the rest of the world realise that money has no existence except in the minds of men? It is as false as the many sky-fairies. There are no physics, no mathematics to prove its existence, nor can there be – because it doesn’t exist.
How then does anyone, Keynes or merchant banker, have the self-deceiving arrogance to set “laws” to define a dream – or a nightmare.
It’s all a psychotic delusion.
Yes, Bravo, I can see your point about investing in infrastructure in order to create employment and then more opportunities for trade and commerce, with the result that the population then has more money to spend. But, it has to be paid for in the end does it not?
The trouble is, the only requirement seems to be that we can as a country, afford to service our debt and borrow more “money”. With this sort of scenario, it seems that it is positively unpatriotic for the citizens not to have a huge mortgage and other assorted debts, because by paying as you go or saving you are taking chunks of money out of circulation. It’s total madness to spend your way out of debt, but governments aided by banks need to encourage this, and indeed it can work, up to a point!
Bearsy.
I fear you are right, it only works if the whole planet pretends to believe in the delusion, and no one suddenly sees through the plot!
Well, money can be seen as a skills-, or time-exchange system. I could learn how to raise milch-cows, plough land, cobble shoes… but it’s much more efficient to exchange those skills with someone who can already do those things. The medium of exchange is fiat money.
It works, until politicians get their grubby hands into it.
No, no, no. That’s good honest barter, Bravo. Nothing wrong with that.
The problem comes when that unit of work/skill exchange acquires a (totally unreal) value of its own, and can be traded, bringing wealth without work. That’s when it becomes a minor God, and the trouble begins.
Thanks, Araminta.
Have you ever considered that if all the trillions of dollars of debt were suddenly wiped out, nothing would actually change in the real world. Only when people reacted to this loss of an imaginary nothing would the fields cease being ploughed, people starve etc., etc..
It’s a very dangerous delusion.
Sorry, Araminta, I meant to add that, yes, indeed, it does have to be paid up in the end. I went debt-free after the last economic screw-up and have made darn sure I stay that way – I don’t even have a credit card, only debit cards.
How difficult is it for a politician to get his head round a simple fact – if you ain’t got it, don’t spend it!
Bearsy.
Your comment number 8, exactly right. Yes, and if we continue with this delusion, it creates a whole pyramid based on nothing! Where does it stop? If you think it through, it can’t work, it depends on an ever increasing world population, and we all know this is dangerous nonsense.
Bearsy, fiat money is virtual barter. Instead of trading x for y, I trade the promise of x to you for z… and round and round it goes.
That reminds me of this limerick:
A young metaphysicist from Keele
Said, ‘pain is imagined not real.
But, when I sit on a pin
And sense it go in
I dislike what I fancy I feel.’
Araminta and others, no matter what your views of money are, I think you will find this video very interesting. It is long, but very straightforward.
http://www.youtube.com/watch?v=Dc3sKwwAaCU&w=420&h=315
Thanks for the clip, Sipu.
I have seen it before, I found it on Peter Barnett’s own WordPress blog. Well worth taking the time to watch, I agree.
Money only works when it is backed by a gold standard.
Abolished in the early seventies and the developed world has been on a collision course ever since.
Debt levels only create any kind of stability when they are held within the ability to repay them, whether individual or country and generally in a ratio to the GNP or income of the debtor.
Once this tipping point has arrived a domino clusterfuck ensues. (To put it mildly!)
In the past mortgages were related to x3 earnings less expenses, all lending was rigorously inspected for the ability to repay. Equally, lending to countries was scrutinised and formulaic. The rot set in with credit cards in the 60s, followed by loss of gold standard, banking deregulation and the new derivative markets. Most people and countries live well above their punching weight.
There ain’t no free lunch. Despite the politicians attempt to prop up banks, countries and each other, the bill will be paid. The whole capitalist system has been traduced by greed. So be it.
Why do you think the chinks won’t touch EU debt? They would be complete fools to do so.
People and countries in the West are going to have to make do with a lot less of everything, it’s going to be a rough decade.
I wouldn’t worry to much about how much the PIIGS are paying for credit, it won’t be long before no-one will lend them a sniff of the proverbial oilrag at any price!
The Gold standard, Tina, was part of the old classic economic theory and didn’t really work long before it finally died a death in the seventies, but it was arguably preferable to Keynesian economics.
I really don’t think a system of debt levels really provides any stability at all, in the long term.
With regard to PIIGS, unfortunately I do worry, and so should everyone, in my opinion, and not just in Europe. Why do you think the US is keen to try to stave off disaster? Global economies are all interdependent.
The gold standard predates all economic theory.
Rescuing PIIGS only makes any sense if you wish to preserve the status quo. As the system is rotten to the core and favours capital over labour, fraud and insider trading which actually only favours less than 5% of the world’s population who are enriching themselves at the expense of the rest of us, what makes it worth preserving?
With the fiscal emasculation of the middle classes it is not in our interest or that of our children to preserve the status quo for our political masters.
I don’t think it worth preserving, Tina, but what do we put in its place? I suspect that Governments think it is worth preserving for exactly the reason you mentioned above. The alternative is a very tough decade and possibly longer. Would you re-elect a government with that agenda, if you lived in a democracy?
We may, but I bet you most of the electorate would not.
I don’t think we’ll get to choose!
I can see it going two ways a general accelerating collapse into anarchy or a take over by an authoritarian totalitarian state throughout the developed world.
Both accompanied by starvation and deprivation of power and water either by design for control or just incompetence.
Would give it 50/50 at the moment.
Politicians always restrict their interest to short-term ‘solutions’ beacuse their own shelf-life is limited. Unfortunately the mess the Eurozone has got itself into (nobody else to blame, sorry) demands long-term measures which the present flock of participants can’t/won’t address.
Anarchy is unlikely to be the result – nor a global dictator. I beleive most human beings believe in working together to find solutions and they’ll do it again.