Monday, 18 May 2009

“Trying to fucking con me you robbing cunt?” (Quantitative Easing Pt II)

He that is of the opinion money will do everything may well be suspected of doing everything for money.
Benjamin Franklin (1706 - 1790)

Money is so familiar to us it’s one of those things in life you don’t really think about, but the current financial crisis presents a rare opportunity to gain insight into the shockingly fraudulent underpinnings of our entire monetary system.

In all but the most primitive of economies, individuals will tend to have wants that exceed their own means to produce. For example, a hunter may need clothes, but his cloth manipulating skills may fall well below his hunting abilities. In this circumstance, the hunter could find someone good at making clothes, who are not good at catching food. The hunter gives the shirtmaker a leg of deer. In return the shirtmaker gives the hunter a shirt.

Barter has occurred.

So far so good. See the problem, though. You need to find someone who wants what you produce in order to swap it for something they produce. Not too convenient. You’re going to waste a lot of time playing the swapsies game. OK, so how about if we find something that everyone values already, make it portable, and work out what our produce is worth in terms of this proxy item? And of course, gold is a great choice, valued for itself as it is nice to look at, doesn’t rust and is rare. Make it into convenient to carry parcels (coins). Now decide how many coins a shirt, a piece of meat etc is work. Need a shirt? Just hand over the coins, you don’t need to have something that the shirtmaker wants. The value of the claim to a real resource is stored in the coins and the shirtmaker can hand them to someone else when they want something to cook for their dinner.

Simple. Ingenious. That’s what money has to be. Portable, widely accepted. A store of value.

Additionally, in the case of the gold coins, that money is worth something even without any claim on goods and services, i. e. it has intrinsic value.

Not so our modern money (or fiat money as it is called)

The “value” of our money is by government decree. Those pieces of paper and low quality metals in your wallet, or for that matter, electrons in a banks computer, are nearly worthless in of themselves. What gives modern fiat money value is the claim on goods and services it represents. If those goods and services do not exist, it does not have value.

Which brings is to the monetary policy of the government being pursued via their cronies in the Bank of England.

Their “quantitative easing” strategy, which let’s be clear is simply a modern equivalent of running the printing presses to create new money out of thin air, illustrates they don’t understand what money should be about at all.

The rationale of QE (that it can boost the economy when interest rates can be reduced no further because they are at or near zero) is easily demolished by a little thought experiment.

Take our simplified example above, where we only have the shirtmaker and the hunter (an entire economy consisting of just two individuals and two products). Let us further say that they are using modern, fiat money that has no intrinsic value, just like ours.

Now add a twist. The shirtmaker is also the monetary authority in this tiny economy. Yes, he holds the keys to the financial printing press! And one day he says, “Actually, I can’t really be bothered making shirts anymore. I’d like to just sit around and chill. What I’ll do is, I’ll turn on the printing press, print off a couple of crisp tenners to buy the leg of deer from the hunter, I get to eat, he gets his money and I’ve had to do fuck all in return. Sweet!”

So along comes the hunter. He has a leg of meat ready to sell and a couple of tenners ready to buy a shirt. He puts the leg of deer on the counter. “That’s twenty quid please, and here is twenty quid for a new shirt.”

The shirtmaker, sorry Central Bank Governor hands over twenty quid and reaches for the leg of meat. “Oh, by the way, sorry, I don’t make shirts anymore so I’ve got nothing to sell. You can put your money away”.

“Whoa, “, says the hunter, quickly putting the leg of deer back in his bag “so what am I supposed to spend my twenty quid on?”

“Erm.” Says the central bank governor. “Er…humph. Yes…well…Ah, I should say…er…in these difficult times I’m increasing liquidity in the financial system and -”

“Trying to fucking con me you robbing cunt?”, says the hunter. “Well, at least I won’t starve. Good fucking day to you.”

What happened? The shirtmaker, in his new role as central bank, created money with his printing press that was not backed by the creation of a real resource. Because there are only two players in this hypothetical economy, the attempted con job is immediately obvious to the innocent party in the tiny economy and the “Quantitative Easing” fails.

Just because our monetary systems is computerized and consists of millions of individuals making millions of transactions, Quantitative Easing (printing money) is a total rip-off in exactly the same way as the simplified scenario above, it’s just the fraud is much better disguised in the vast complexity of our economic system and they hope we won’t notice. With lots of economic entities involved, you don’t get outright refusal to accept the new money of course. The printed money ripples through the economy and devalues the purchasing power of the currency via higher prices. Those who got the newly created money first (can you guess who?) gain at the expense of those who get it last (can you guess who?)

So let’s all ask the Bank of England governor:

“Trying to fucking con me you robbing cunt?”