Tuesday 7 August 2007

Interest- The Demon that Drives

Ed has challenged me to explain what he calls my dislike of Capitalism.
So I shall.
Actually it's not a dislike at all, it serves me well. I live in a rich country. I live very comfortably.
I make hay while the sun shines.

But I look ahead in alarm.
As does anyone in a position of power who is staring with alarm at the inevitable.
Trust me, this is what the Bilderburg Group REALLY discuss.
They discuss what to do, when they just can't control the demon anymore.
And they arm themselves against the riots. That's why they want a Police State now.

It's us they fear.

If the debt was all called in, the world would be in the red.
That day is doomsday.
Because then, the whole global economy sits on a house of cards.
But that day must come.

Lets just explain for a second, how the economy works.
In a pre-monetary culture, the value of everything is relative.

When cows are plenty, you get less turnips for a cow than when cows are scarce.

Silver being easier to carry around then cows, working out the value of everything relative to little lumps of silver is a good idea for people who seek to take the exhange of goods thing to a new level.

By watching when things are scarce or plenty and taking advantage of those cycles, they end up with more possessions.

So silver coinage becomes a facet of organised cultures.

In such culture, usury can be useful to an individual, but overall it is a social nuisance, unless kept to absolute necessity.
If I borrow ten silver coins and promise to repay you eleven, it stands to reason, I am looking to find some way of making twelve.
Whatever way I choose, means someone else being down two silver coins.

In a finite community, this sort of thing can spiral out of hand, because there really are only a finite amount of silver coins. In those days, money didn't just grow on trees. It's value was fixed.

So in this sort of culture usury aids those with lots of silver coins to profit from someone's misery, even if it isn't the borrower, but someone further down the line.

Monarchs and Rulers could benefit from it, and thus it survived.

But the advent of world trade changed that. Now usury had a purpose.

Usury was reinvented as a positive. Now it could provide funds for speculative ventures which would of their very nature, bring dividends. It was used to create the money tree which financed the plantations, the tea schooners and the slave ships.

And then people saw what the money tree could do.
And it did some pretty amazing things.
It powered the industrial revolution, it taught the common people to read and write, it built railways, steamships and telegraph lines.

Because there were always new markets. You borrowed ten thousand, promised to repay eleven thousand, and made twenty thousand through trade.

This was the miracle of free trade.

There is of course a problem.
Silver is finite. There is a limit to what is in the world. The world is finite.

Everyone can't borrow AND repay for ever. What are they going to repay with?

Now in a silver currency, you can have deflation as well as inflation. If someone finds a silver mine, the value of silver drops. Inflation.

If a fleet of Spanish ships sinks, deflation, The silver is worth more, there's less of it.

But a system used to perpetual growth gains a new dynamic. A continuous pressure on prices. The only brake on this is the fact that the coinage really is finite. There is only a finite amount of silver. In fact, by this time, most countries had adopted the gold standard, linking coinage to value in gold ingots.

The pressure is simple. With so many people in debt, if there is a hiccup and trade goes bad, they owe money they can't repay. Not only that, with goods being scarce, traders are tempted to put their prices up.
Both these problems mean that those not in debt want wage rises, just to put things back on a level.
These times were hard times, but eventually trade would pick up again.

Inflation on a modern scale was only seen in countries with 'fiat' money. This is money which is worth what people say it is. It isn't tied to anything. You CAN make as much as you like. So it keeps inflating.

But when the growth really did slow down for good, when it really did stop, there was a problem.

The banks were the mainstay of the world. They lived on interest. The world was driven by the motor of profit.
But it was a demon that needed feeding, and there was no more for it to eat.
Infinity is an imaginary number.

And since the war, it has continued.
Eating money that isn't there.
The imaginary debt figures rise, but who would repay it, if it was called in?

The Credit side goes down, the Debt side goes up.

And no one knows how to stop it.
In a sense it doesn't really mean too much. The world won't end when the crash comes, but the economy as we know it will.

Ed, I don't hate it, I can just see that it's an illusion, a growth spurt phase in the history of humanity.
And the last few decades the growth has been an illusion- fuelled mainly by the illusion that people were 'buying' their own homes, rather than taking out loans for life.
The Economy doesn't really grow any more, it's just the Interest is still fed.

When it can't eat any more, the system is f**ked.


Anonymous said...

Yay I m second!!

Anonymous said...

Thank Goodness I have lost my home and live in a tiny rented flat! Thank heaven for small mercies..I always thought the purpose of mortgages was to suck loads of money out of the economy into banks so people couldn't spend it on stuff..therebye driving up inflation. To get a mortgage on where I live would cost twice what I pay in rent...

Anonymous said...

In a summary of the Australian Census results from last year, one of the poorest groups were those with huge mortgages. In practical terms they were down there with those of low socio economic resources (poor folks). Debt is the great debilitator if it is not managed properly.

I can remember my mums working class community and the debt collectors who came around every week to pick up their payments for small loans that lasted ten years. Most have better access to credit, but are we better off?

Anonymous said...

I don't really know what to say! Yeah..I'm third!

Anonymous said...

That butthole Colin swooped in and made me looks like I can't count! Dang!

Anonymous said...

One should never borrow to finance spending, only to invest.

The rent I would pay to live in my flat is approximately equal to the mortgage interest I pay - the added advantage is that I don't have a landlord to tell me to move out at the drop of a hat.

You say that the world's resources are finite - that is correct but you are totally ignoring productivity improvements through technology.

Anonymous said...

looks like I can't count

Jenny can't count.

Anonymous said...

I see what you meant in your comment on my blog now! Crushed, this is an excellent post - as always - and I have the same reservations about capitalism as you do . It's just that everything else has failed! But that's a terrifying thought - if the debt were called in....

Anonymous said...

Okay, no nice little post about water shortage in Ankara and too much water elsewhere, tonight. You "swallow" all my time, Crushed! :-)))

Sorry, my closest friend just murmured: "You shouldn't have been such f...... (cancelled by me as a little more contenance would also help to solve some problems on this planet) lazy in learning vocabularies, idioms, patterns, prepositions. You could easily write your comments and post five times faster."

Trying to ignore this interjection!

Once I asked myself: What when all people will have a washing-machine, a TV, a car - okay two cars :) - etc. etc.?

"Answer": Somewhen people had two, three or more TVs, and when a couple would have two children and the children would get 18 there would suddenly be four cars.

The family would perhaps not have two washing machines, but a dryer, a "mega-modern" espresso machine, and some other "absolutely necessary" high tech inventions.

"Dad, how did you manage life when there was only one ring tone?"

1. As Ed stated, one should not neglect the "evolution" of technology. 2. Having a brand-new house and nice garden, one evening one might think of that a swimming-pool could look nice ... which is the "never being content with what I have effect".

Leaving 3. open for Mutley
I confess that although I'd love to celebrate my 113th as fit as fiddle, and although the only "ism" I'd perhaps built a temple would be named "Optim": I am not unhappy that I shall probably / hopefully have my home six feet under when it comes to what you fear/foresee.

But now!!! :) The Peace of the Night, everybody.

Anonymous said...

My dear, money does grow on trees. Why else would banks have branches? (Compliments of my niece.)

Anonymous said...

Mutley- When all the numbers on the screens at th ATMs disappear, possession WILL be nine tenths of the law!
Make Hay!

Colin- when I worked in Loans, i was surprised at the number of pensioners who sold their house, rented similar, and give a huge surplus to the children.
Wise move, though.

Jenny- Do you know what always happens to me? I answer all these, but someone always comments while I'm doing it.

Ed- that increases the amount of free labour- or should,
the fact it doesn't speaks volumes.
Materials, however, are finite.

Harde to see to see why people why would buy cheap free labour that has no materials to do anything with.

Welshcakes- For a while, it will be. till everyone suddenly realises, that it means nothing really.
The world will have no less resopurces, people will be no less intelligent, the technology will still work.

So why not carry on exactly as before?
But with a more effective distribution network, and a better run global infrastructure?

So yes, I do look forward to the collapse.
Twenty years later, we'll all live a lot better.
Be nice to seee my grandchildren in such a world.

Sean- My guess is before 2020. Just follow the National Debt. Look at the fact that no government anywhere can commit to tax cuts anymore. Not possible.
The economy is giving. It can't be cured.
But for you and I, who really cares?
I own nothing really, apart from a bit of furniture, some books nd CDs . The rest I rent one way or another.
Whatever keeps me comfortable :)

Alexys- Even if it did, you'd need to own the tree...
And the land it was on...

Anonymous said...

I hate that! It happens all the damn time to me too!

Anonymous said...

I don't think it's capitalism that has erred mankind, I think it is man that has learned to exploit man via capitalistic endeavors.

Between 1880 and 1920 (the period commonly called the second industrial revolution) big business saw a pinnacle (recall the Astors, Rockefellers, and Morgans over here), but had parameters established by the educated middle and upper classes and the federal government which kept them from wielding total feudalist control.

I still believe that many of our problems are due to the marketing manipulation and psychological coercion that has been inculcated on us from birth. Not in a freaky paranoid way, but cultural myths (home-ownership, higher education at an expensive school, etc.) are nearly impossible to change.

Anonymous said...

Yes, materials are finite - but we are forever discovering new ways of using the existing ones, inventing new ones (like plastic) and inventing clever ways to save energy and produce energy in new ways.

Technology doesn't make people redundant, it means they can do less menial tasks - so we don't need armies of telegraph operators so they can be typists, then we don't need so many typists so they can be PAs or teachers, or whatever. In the 60s predictions were made that in a few decades time there would be huge unemployment because all the jobs would be mechanised - it didn't happen that way because the mechanisation freed labourers up to do more "enlightening" office work or whatever.

There may be a finite end point but we are nowhere remotely close to it.

Anonymous said...

government anywhere can commit to tax cuts

In Europe. US, Canada, Australia all cutting back taxes.

Anonymous said...

I don't have anything to add to that. So I'll just say hi instead.

HI! *waves*

Anonymous said...

The biggest folly I see around me is that people find it increasingly impossible to live where they work, or work where they live...every morning everyone gets up and drives miles and miles to somewhere else, passing on the way people going in the opposite direction. Of course I believe in freedom of movement and choice, but for 99% there is no choice but to commute. You need wages from somewhere else, to pay the prices where you life... odd isn't it?

Anonymous said...

This is the most astonishing and well put article I have read EVER. You deserve and award Ingsoc.

Anonymous said...

I think some of the rich fuckers who own most of the money in this world need to read this post. Because there is a big gap between the wealthy and the poor which is a sign that eventually we're all going to be fucked.

Of course, part of the fucking problem is that the world is just too overcrowded also. My father used to always tell me this when I was little, "There are just too many people taking up all of the jobs. We need another war to kill some of these bastards off so I can make more money."

Of course, my father never took into consideration, back then, that the wars fought today would kill less people then they did back in his era.

It's ironic, huh? Do you think technology is really helping us as much as people think it is?

Or perhaps is it slowly just taking us out, one by one?

Anonymous said...

Helen- There was never anything wrong with the growth spurt while it was working.
But it could only work whilst it brought more resources (both raw materials and human energy) into the economy year in year out.
Once it could no longer acheive that, it could only be sustained by continuous inflation and ever increasing debt.
So ultimately, it became damaging at this point.
Your last point is bang on the mark.

Ed- The whole point of technological advance, surely SHOULD be, that humaniy as a whole has to invest less energy in the business of survival.

It's possible to sustain the current infracstructure with much less human energy than is realised.
But we don't use the surplus for much constructive.
Most of our energy is spent moving assets around- I sell products to businesses to enable them to sell to other businesses, it uses up energy and materials, but at no great benefit to anyone, except we all get paid.
It would make more sense if we were paid to do something useful.

The Tax cuts CAN be made, but only for short term gain. The national debt in all nations is out of control and can never paid off. Tax cuts now, mean significantly higher taxes somewhere down the line.

Phish- Well, Hi is nice.
Hi back.

Mutley- That's just bad social planning. Our inner cities should never have been allowed to become ghettos. Nowadays, most of the people who actually live in city centres don't work at all, whilst those who work there, fly away to the country at night.

E-K- The rules that govern an econmy shouldn't be seen as permanent- Mdieval Guilds were followed by Mercantilism, which was followed by Capitilism.
Each model is a phase, not an end result.
Ibelieve that to understand economics, you need to understand Marx, in an economic sense.

Marxism as practised by most of his followers, asc a bizarre outgrowth of his theories, and I don't think many of them really got the point.

Marx would have condemned the Russian revolution, because the Capitalist phase was not yet over. When it over, it won't need to be overthrown.
Whilst Capitalism was still the appropriate model, any other model would fail. It's day hadn't come.
Marx suggested what MIGHT come, and I think it still might.
But it won't be like the Soviet Union.
We won't have chosen the model for political reasons.
We will use it for economic reasons.
To run our society as efficiently as we can.

Anonymous said...

In summary the standard of living most of us have come to expect is unsustainable.

Anonymous said...

Shelly- Interesting poinjt.
One of the oints I always use in arguments, is what I call indicators of progress.
By which I mean, how far a society acheives useful technological advance.

There are only a limited number of ways to deal with overpopulation.
By far the best long term solution is to the time honoured one of seeking more space.

The good point is, this isn't unfeasible.
The bad point is that the resources that could be used in this are prety much squandered. (That energy is better used marketing Pokemon, apparently). The system is failing to drive necessary human progress.

Talking of taking jobs again, is bizarre. No jobs means no work to be done.
In two ways, that got to be crap.
Firstly having less work to do, as a society should be a good thing, if you think about it.
It's only Capitalism makes a negative. It can't find anything for us all to do eight hours a day, five days a week, even when it wastes most of our energy selling office equipment to eachother.
Problem is, that we're used to the idea that everyone must work forty hours a week at least to get fed.

We could of course, pay ourselves the same to work twenty a week.
It would acheive the same.

And anyway, how can there never be positive ways to use human energy?

Anonymous said...

E-K- Myth.
When the crash comes, we'll have the same raw materials, the same knowledge and the same capacity to produce.
We'll just find a better way to do it, and quicker than people think.

I actually believe that thirty years after the collapse, the whole world WILL live like the better off do in the west.
Technologically, we can do it. And we have the human energy.
But right now, much of it is wasted.

Jenny- QED.

Anonymous said...

When the 'carry trade'—the ability of banks to borrow at near zero interest rates in Japan, or 1 pc in Switzerland, which they can relend anywhere in the world that offers higher yields- ends, (and one day it will) then the shit is going to hit the fan. The effect of the crisis will impact with a magnitude far beyond any individual nation or currency.

Anonymous said...

We've turned intoa waste-n-dump society, abusing the fast paced commercialism in the worst possible way. Instead of enabling ourselves, we gotten to a point where we disable ourselves - I never leave home without my cellphone, PDA, mp3-player, USB-memory stick nor digital camera... not to mention that my cell has both an mp3-player and a digital camera, and the memory stick in it can be used as a USB... and yes, my world DOES fall apart when I forget one or the other... I'm that screwed up, and 99% of my generation with me.

So, bring me some more money, honey, I've got some serious shopping to do.

Do I NEED 103 pairs of summer shoes? No... it's just fun to have.
Would I DIE without them? Seriously???? My life would be much easier if I wasn't facing 103 pairs of decisions each and every morning.

But still I shop, I get new things, I kid myself they'll make my life better...

Then again, money maybe wont make my life better or make me happier, but I'd rather cry in a limo then on a bike... ;)

Anonymous said...

Did any of you busy bloggers find time to read "Empire" by Hardt and Negri?
One does not have to agree to everything they write: Perhaps that's why I do recommend the reading.

Anonymous said...

I have never understood why the whole house of cards doesn't come crashing down.
The other thing I have never understood was how so many people in the economy don't produce anything concrete.
The simplest economy is trading one item for another. But in the working world how many people produce anything that any one else can make use of in the simplest way, as a consumer of goods. Nowhere is this more true than in the West, where we consume products produced off shore on the whole, but where is almost full employment but doing what? Not producing goods, that's for sure. But that's what we buy and use.

It's a mystery to me.
Good post.

Anonymous said...

I was building to a fisking...see my place!

Anonymous said...

Istanbul T- You are right of course. The global economy will hit meltdown. Sorting it out will involve a whole new level of international co-operation.
A global system of credit points, replacing curency will be a start.

Heart- Don't confuse money with material possessions. If all the money in the world ceased to exist, the meterials would still be there.
Money esists on computer screns- itjust means the purchasing power your pincode has.
Adnmittedly, I like to see at least four digits there on the screen. More things I can buy!

Sean- I haven't read it, I'm a very sporadic reader- I'll check it out!

Jmb- I see this everyday,when I talk to businesses, especially in manufacturing. There is just no way anything can be produced in the UK and make a profit.
We live off materials extracted and processed elsewhere.

CityUn- I've already responded!