the price of everything

The following article is Chapter Nine of a book entitled Finishing The Rat Race which I am posting chapter by chapter throughout this year. Since blog posts are stacked in a reverse time sequence (always with the latest at the top), I have decided that the best approach is to post the chapters in reverse order.

All previously uploaded chapters are available (in sequence) by following the link above or from category link in the main menu, where you will also find a brief introductory article about the book itself and why I started writing it.

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When the accumulation of wealth is no longer of high social importance, there will be great changes in the code of morals. We shall be able to rid ourselves of many of the pseudo-moral principles which have hag-ridden us for two hundred years, by which we have exalted some of the most distasteful of human qualities into the position of the highest virtues. We shall be able to afford to dare to assess the money-motive at its true value. The love of money as a possession — as distinguished from the love of money as a means to the enjoyments and realities of life — will be recognised for what it is, a somewhat disgusting morbidity, one of those semi-criminal, semi-pathological propensities which one hands over with a shudder to the specialists in mental disease…”

John Maynard Keynes 1

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Have you ever wondered what it’s like to be rich? Here I don’t just mean well-off, with a paltry few tens of millions in the bank, I mean proper rich – megabucks! So much money that, as I heard one comedian put it (aiming his joke squarely at the world’s richest entrepreneur), if Bill Gates were to stuff all his cash under the mattress, then due to interest alone, if he fell out of bed he’d never hit the ground!

I suppose what I’m wondering is this – and perhaps you’ve found yourself thinking along similar lines – why are these super-rich guys always so intent on accruing ever greater wealth when they already possess more than enough funds to guarantee the needs of a small country. Think about it this way: Gates and the others are, barring a few very necessary legal constraints, completely at liberty to do whatever they choose at every moment of every day. They can eat the best food, drink the most delicious vintage wines, smoke the finest cigars, play golf morning, noon, and evening, and then after the sun goes down, and if it is their wont, have liaison with the most voluptuous women (or men) available. Quite literally, they have means to go anywhere and do everything to their heart’s content and all at a moment’s notice. Just imagine that. So why be bothering about sales at all? I mean wouldn’t you eventually get bored of simply accumulating more and more money when you’ve already got so much – and let’s face it, money itself is pretty boring stuff. So just what is it that keeps them all going after it? After all, there are only so many swimming pools, grand pianos, swimming pools in the shape of grand pianos, Aston Martins, Lear Jets, and acreages of real estate that one man (or woman) can profitably use (in the non-profit-making sense obviously). Economists would call this the law of diminishing marginal utility, although in this instance it is basic common sense.2

Presented with evidence of this kind, some will say that here is further proof of the essential greediness of human beings. That, as a species, we are simply never satisfied until we have the lot. Fine then, let us take on this modern variant of original sin, since it certainly holds more than a grain of truth. For the sake of argument, we might presume that all men and women are greedy to an almost limitless extent. That this is truly the natural order, from our conception having been evolutionarily programmed to grab as much as we can for ourselves – our most primeval reflex being to snatch.

So I shall not waste too much time here. Only to say that I do not find such unrestrained cupidity within the circles of people with whom I have chosen to associate, most being happy enough to share out the peanuts and fork out for the next round of beers, quite oblivious to outcomes in terms of commensurate returns. What comes around goes around… There is, of course, no doubting that most folks will, very naturally, if opportunity arises, take good advantage to feather their own nests. Making life a little more comfortable for themselves, and reserving the ample share of their fortune for their immediate family and closest friends. But then, why not…? Charity begins at home, right?

What most don’t do (at least in the circles I know best) is devote their whole lives to the narrow utilitarian project outlined above. And why? Because, though quite understandably, money and property are greatly prized assets, they offer lesser rewards than companionship and love. And, in any case, pure generosity is its own reward – and I do mean “is”, and not “has” or “brings” – the reward being an inseparable part of the act itself: a something received as it was given, like a hug, like a kiss. That said, if you still prefer to believe that we are all to a man, woman and child, innately and incurably selfish and greedy, then next time you take a look into the mirror, do consider those all-too beady eyes staring back. It’s very easy to generalise about mankind when you forget to count yourself in.

But if not intractably a part of human nature, then we must find other reasons to account for how our world is nevertheless so horribly disfigured by rampant and greedy exploitation. For if greed is not an inherently human trait, and here I mean greed with a capital Grrr, then this monomaniacal obsession is all too frequently acquired, especially in those who approach the top of the greasy pole. There is an obvious circularity in this, of course. That those whose progress has depended upon making a buck, very often become addicted. As money-junkies, they, like other addicts, then prioritise their own fix above all else. Whether or not these types are congenitally predisposed to becoming excessively greedy, we have no way of knowing. What we can be certain of is this: that by virtue of having acquired such great wealth, they disproportionately shape the environment they and we live in. So they are not merely money-junkies, but also money-pushers. If you’re not a money-junkie then you don’t know what you’re missing. There’s nothing new in this. This is the way the world has been for many centuries, and perhaps ever since money was first invented.

So here’s Oscar Wilde addressing the same questions about money and our unhealthy relationship to it; his thoughts leaping more than a century, during which time very little has apparently changed:

“In a community like ours, where property confers immense distinction, social position, honour, respect, titles, and other pleasant things of this kind, man, being naturally ambitious, makes it his aim to accumulate this property, and goes on wearily and tediously accumulating it long after he has got far more than he wants, or can use, or enjoy, or perhaps even know of. Man will kill himself by overwork in order to secure property, and really, considering the enormous advantages that property brings, one is hardly surprised. One’s regret is that society should be constructed on such a basis that man has been forced into a groove in which he cannot freely develop what is wonderful, and fascinating, and delightful in him – in which, in fact, he misses the true pleasure of joy and living.”3

Embedded below is a recent interview [from December 2013] Pulitzer Prize-winning journalist Chris Hedges gave on “The Real News” in which he talked about – based to a large extent on his own personal experience – how the super rich are isolated and disconnected from the rest of society. He explains how this creates a deluded sense of entitlement and a pathological callousness:

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Isn’t money funny stuff! Funny peculiar, I mean. We just take it so much for granted, almost as though it were a natural substance (disappointingly, of course, it doesn’t actually grow on trees). But when we do think about it, money has far stranger properties than anything in the natural world. And our relationship to it is more peculiar than our relationship to almost anything else.

Money, that’s what I want… sang the Beatles on one of their less celebrated tracks. But the truth will out. So just why did the Beatles want money, and, for that matter, why do I, and why do you? It doesn’t work, you can’t eat it, and it’s not, of a rule, a thing of special beauty. Money is absolutely useless in fact, right until you decide to swap it for what you actually want.

Money can’t buy me love, true again, but it might buy me a chocolate bar. Because money is really just a tool, a technology: a highly specialised kind of lubricant, that enables people to exchange their goods and services with greater ease and flexibility. The adoption of a money system enabling levels of parity for otherwise complex exchanges to be quickly agreed and settled. The great thing about money being, to provide a concrete illustration, that although £1 of tinned herring is probably equivalent to about thirty seconds of emergency plumbing (if you’re lucky), you won’t require crates of herring to pay for the call-out. So far so simple.

Except wait. We all know how the price of herring can go up as well as down, and likewise for the price of emergency plumbers. So why such a dynamic relationship? Well, there’s “the market”, a price-fixing system that arises spontaneously, regulating the rates of exchange between goods and services on the basis of supply adjusting to match demand. Thus by a stroke of good fortune, we find that money is not merely a lubricant for exchange, but also regulatory of useful production and services. This, at least, is the (widely accepted) theory.

Prices rise and fall in accordance with demand. Things that are in short supply become expensive, things that are abundant are cheaper. This is basic economic theory and it means, amongst other things, that in every transaction the “real value” of your money is actually relative, for the simple reason that the amount required depends not only on what you’re after, but also upon whether or not other people are after the same kind of thing. Money then, in terms of its “real value” to any individual or group, is something that is constantly varying. We might call this “the relativity of money”.

One consequence of the relative nature of money, is that the useful value of money overall can also rise and fall. It is possible that wholesale, retail and labour costs can all more or less rise or fall together, although the general tendency, as we all know from experience, is for overall rising costs. Indeed such “inflation” is regarded as normal and expected, and, as a consequence, it comes to seem just as natural as money itself. Yet since you always need more and more money to buy the same things then the value of your money must, in some important way, be constantly falling. But just why does money as a whole lose its value in this way? What makes yesterday’s money worth less than today’s? Well it turns out that this is a huge question and one that economists have argued long and hard about.

One partial account of inflation goes as follows: businesses and people in business are constantly looking for a little bit more. For how else can they maximise profits? In direct consequence, we, as customers, necessarily require more dosh to pay for the same goods or services. But to enlarge our budget, this automatically requires a commensurate increase in income, which means successfully negotiating for a larger salary. In the bigger picture then, the businesses supplying our wants and needs, are now needing to cover their larger wage-bills, which means higher prices to compensate. So prices and incomes rise together, with money becoming worth less and less precisely because everyone is trying to accumulate more and more of it. This endless tail-chasing escalation, which is given the fancy title of “the price/wage spiral”, serves as an excellent example of why money is really very odd stuff indeed.

And what is money in any case? The first traders most likely exchanged shells, precious stones, or other baubles to aid in bartering, but then naturally enough, over time these exchanges would have been formalised, agreements arising with regards to which objects and materials were most acceptable as currency. The material that became most widely accepted was eventually, of course, gold. But why gold? Well, no one actually knows but we can make some educated guesses.

Firstly, gold is scarce, and it is also rare in other ways – for instance, having a unique and unusual colour, which just happens to correspond to the colour of the Sun. The fact that it is almost chemically inert and so doesn’t tarnish, means that it also shines eternally, and so again is like the Sun. Indeed, Aldous Huxley, in Heaven and Hell (his sequel to The Doors of Perception) points out that almost every substance that humans have ever regarded as valuable shares this property of shininess. To Huxley this is evidence that even money owes it origins, in part at least, to a common spiritual longing. Our wish to own a precious piece of paradise.

But back to more mundane matters, if gold (or any other substance) is chosen as your currency, then there arises another problem. How to guarantee the quantity and quality of the gold in circulation? For if gold is worth faking or adulterating then it’s certain that somebody will try cheating.

Well, one answer could be the adoption of some kind of official seal, a hallmark, and this solution leads, naturally enough, to the earliest forms of coinage. But then, if the coins are difficult to counterfeit, why bother to make them out of gold in the first place? Just the official seal would be enough to ensure authenticity. And why bother with metal, which is bulky and heavy. So again it’s an obvious and logical leap to begin producing paper banknotes. The value of these coins and banknotes, although far less intrinsically valuable in material terms than the gold they represent, is still backed by the promise that they are redeemable into gold. But hang on, what’s so special about the gold anyway (aside from its shininess). And doesn’t the gold, which is now locked up in bullion reserves, in fact have real uses of its own? And doesn’t this mean that the gold also has a monetary value? So why not cut loose from the circularity and admit that the value of money can exist entirely independent from the gold or from any other common standard. Indeed, why couldn’t the issuing authority, which might be a government but is more often a central bank, simply make up a “legal tender”4 with no intrinsic or directly correlated value whatsoever and issue that? Not that the money issued need even correspond to the amount of real coins or paper banknotes in circulation – most of the world’s money being bits and bytes, ones and zeroes, orbiting out in cyber-space. Which brings us to just how funny money has now become.

The Pound Sterling, the various dollars, the Euro and every major currency on Earth are, to apply the correct terminology, “fiat currencies”5 With fiat currencies there is no parity to the value of any other commodities and so they are, if you like, new forms of gold. As such, and given their shifting relative values, these new fiat currencies can also be traded as another kind of commodity. Money, in the form of currency, becoming an investment in itself. Money is strange stuff indeed.

Yet money also remains as an instrument. And we use this instrument to measure just about everything. To establish the value of raw materials and manufactured items. The value of land and, by extension, the value of the space it occupies. The value of labour, and thus a value on the time used. And, since works of art are also bought and sold, money is even applied as a measure of such absolutely intangible qualities as beauty.

So money is basically a universally adaptable gauge, and this is its great strength. It is perhaps the big reason why its invention gradually caught on in such a fundamental way. From humble trading token, money has risen to become a primary measure of all things. But remember, remember… Money, whether fiat currency or gold standard, can never be real in the same way as tins of herring and plumbers are real, and neither is “monetary value” an absolute and intrinsic property, but only ever relative and acquired. Money, we ought to constantly remind ourselves (since we clearly need reminding) is nothing without us or without our highly structured civilisation – intrinsically, it is worthless. It is very strange stuff.

Perhaps the future benchmark for money will no longer be gold but ‘virtual gold’ in the form of cryptocurrencies – bitcoin being currently the most well-known of these. One advocate of these alternatives to traditional forms of money is financial expert Max Keiser. On February 3rd 2014, he spoke with coder, hacker and cryptocurrency specialist Andreas Antonopoulos about the regulation of bitcoin transactions; the advent of bitcoin derivatives, which he believes these are less of a threat than ordinary derivatives (a subject I’m coming to next); the fact that unlike gold, cryptocurrencies can be ‘teleported’; and a future in which bitcoin is used widely by businesses as much as by individuals. He says that a time is coming when the prevalent misgivings and doubts about bitcoin and other cryptos have long since been forgotten. Is he right? I don’t know and remain highly skeptical, but I find the debate an interesting one:

Incidentally, there are less radical and more tangible alternatives to the currencies we now have in circulation. “Treasury notes” are one such alternative and these have historical precedence in the form of both the American “greenback” and the UK’s Bradbury Pound. To read more about this and also for links to campaigns to reintroduce them please read the addendum at the end of the chapter.

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Little more than a century ago, and even in the richest corners of the world, there were no dependable mechanisms to safeguard against the vicissitudes of fortune. If you weren’t already poor and hungry (as most were), then you could rest assured that potential poverty and hunger were waiting just around the corner. Anyone with aspirations to scale the ladder to secure prosperity faced the almost insurmountable barriers of class and (a generally corresponding) lack of education. A lower class person of such ambitions would be very well aware that if they could step onto the ladder at all, there was very little in the way of protection to save them in the event of falling; errors of judgement or sheer misfortune resulting in almost certain and unmitigated personal disaster. This was the sorry situation for people at all levels of society aside from the highest echelons.

One tremendous advantage then, of living in a modern society, is that, aside from having slightly less restricted social mobility (not that we now live in the classless society we are told to believe in), there are basic safety nets in place, with additional protection that is optionally available. For those languishing at the bottom of the heap, there are the reliable though meagre alms provided through a welfare system, whilst for the ever-expanding middle classes there is plenty of extra cover in the form of saving schemes, pension schemes, and, in the event of the most capricious and/or calamitous of misfortunes, the ever-expanding option of insurance policies. If the Merchant of Venice had been set in today’s world then the audience would feel little sympathy for his predicament. Why had he ventured on such a risk in the first place, casting his fortune adrift on dangerous waters? Why hadn’t he protected his assets by seeking independent financial advice and taking out some preferential cover? It’s a duller story altogether.

Systems for insurance are essential in any progressive civilisation. Protection against theft, against damage caused by floods, fires and other agents of destruction, and against loss of life and earnings. Having insurance means that we can all relax a bit, quite a lot, in fact. But it also means that, alongside the usual commodities, there’s another less tangible factor to be costed and valued. That risk itself needs to be given a price, and that necessarily means speculating about the future.

Indeed, speculations about the future have become very much to the forefront of financial trading. As a consequence of this, at least in part, today’s financial traders have become accustomed to dealing in “commodities” that have no intrinsic use or value whatsoever. They might, for example, exchange government bonds for promises of debt repayment. Or, feeling a little more adventurous, they might speculate on the basis of future rates of foreign exchange, or in interest rates, or share prices, or rates of inflation, or in a multitude of other kinds of “underlying assets” (including that most changeable of underlying variables: the weather) by exchange of promissory notes known most commonly as “derivatives”, since they derive their value entirely on the basis of the future value of something else. And derivatives can be “structured” in any myriad of ways. Here are a just few you may have heard of :–

  • futures (or forwards) are contracts to buy or sell the “underlying asset” up until a future date on the basis of today’s price.
  • options allow the holder the right, without obligation (hence “option”), to buy (a “call option”) or to sell (a “put option”) the “underlying asset.”
  • swaps are contracts agreeing to exchange money up until a specified future date, based on the underlying value of exchange rates, interest rates, commodity prices, stocks, bonds, etc.

You name it: there are now paper promises for paper promises of every conceivable kind. Now the thing is that because you don’t need to own the “underlying asset” itself, there is no limit to the amounts of these paper promises that can be traded. Not that this is as novel as it may first appear.

Anyone who’s ever bought a lottery ticket has in effect speculated on a derivative, its value in this case being entirely dependent upon the random motion of coloured balls in a large transparent tumbler at an allocated future time. All betting works this way, and so all bets are familiar forms of derivatives. And then there are, if you like, negative bets. Bets you’d rather lose. For instance, £200 says my house will burn down this year, is presumably a bet you’d rather lose, but it is still a bet that many of us annually make with an insurance company. And general insurance policies are indeed another form of familiar derivative – they are in effect “put options”.

However there is one extremely important difference here between an ordinary insurance policy and a “put option” – in the case of the “put option”, you don’t actually need to own the “underlying asset”, which means, to draw an obvious comparison, you might take out house insurance on your neighbour’s property rather than your own. And if their house burns down, ah hum accidentally, of course, then good for you. Cash in your paper promise and buy a few more – who knows, perhaps your neighbour is also a terrible driver. There are almost numberless opportunities for insuring other people’s assets and with only the law preventing you, then why not change the law. Which is exactly what has happened, with some kinds of derivatives circumventing the law in precisely this way, and permitting profitable speculation on the basis of third party failures. When it comes to derivatives then, someone can always be making a profit come rain or shine, come boom or total financial meltdown.

But, why stop there? Especially when the next step is so obvious that it almost seems inevitable. Yes, why not trade in speculations on the future value of the derivatives themselves? After all, treating the derivative itself as an “underlying asset” opens the way for multiple higher order derivatives, creating with it, the opportunity for still more financial “products” to be traded. Sure, these “exotic financial instruments” quickly become so complex and convoluted that you literally need a degree in mathematics in order to begin to decipher them. Indeed those on the inside make use of what are called “the Greeks”, and “the Higher Order Greeks”, since valuation requires the application of complex mathematical formulas comprised of strings of Greek letters, the traders here fully aware, of course, that it’s all Greek to the rest of us. Never mind – ever more financial “products” means ever more trade, and that’s to the benefit of all, right…?

Deregulation of the markets – kicked off in Britain by the Thatcher government’s so-called “Big Bang” and simultaneously across the Atlantic through the laissez-faire of “Reagonomics”6 – both enabled and encouraged this giddying maelstrom, allowing in the process the banking and insurance firms, the stockbrokerage and hedge funds that make up today’s “finance industry” to become the single most important “wealth creator” in the Anglo-American world. Meanwhile, declines in manufacturing output in Britain and America meant both nations were becoming increasingly dependent on a sustained growth in the financial sector – with “derivatives” satisfying that requirement for growth by virtue of their seemingly unbound potential. Indeed, having risen to become by far the largest business sector simply in terms of profit-making, many of the largest banks and insurance groups had become “too big to fail”7. Failure leading potentially to national, if not international, economic ruin. Which is how the very systems that were supposedly designed to protect us, systems of insurance, have, whether by accident or design, left us more vulnerable than ever.

And then came the bombshell, as we learnt that the banks themselves were becoming bankrupt, having gambled their investments in the frenzy of deregulated speculation. Turns out that some of the money-men didn’t fully understand the complexity of their own systems; a few admitting with hindsight that they’d little more knowledge of what they were buying into than the rest of us. They’d “invested” because their competitors “invested”, and, given the ever-growing buoyancy of the markets at the time, not following suit would have left them at a competitive disadvantage. A desperate but strangely appropriate response to the demands of free market capitalism gone wild.

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It is currently estimated that somewhere in the order of a quadrillion US dollars (yes, that’s with a qu-) has been staked on derivations of various kinds. Believe it or not, the precise figure is actually uncertain because many deals are brokered in private. In the jargon of the trade these are called “over the counter” derivatives, which is an odd choice of jargon when the only thing the average customer buys over the counter are drugs. Could it be that they’re unconsciously trying to tell us something again?

So just how big is one quadrillion dollars? Well, let’s begin with quadrillion. Quadrillion means a thousand trillion. Written at length it is one with a string of fifteen zeros. A number so humungous that it’s humanly impossible to properly comprehend: all comparisons fail. I read somewhere that if you took a quadrillion pound coins and put them side by side then they would stretch further than the edge of the solar system. The Voyager space programme was, of course, a much cheaper alternative. Or how about this: counting a number every second, it would take 32 million years to count up to a quadrillion… Now obviously that’s simply impossible – I mean just try saying “nine hundred and ninety-nine trillion, nine hundred and ninety-nine billion, nine hundred and ninety-nine million, nine hundred and ninety-nine thousand, nine hundred and ninety-nine” in the space of one second! You see it really doesn’t help to try to imagine any number as big as a quadrillion.

However, there are still useful ways to compare a quadrillion dollars. For instance, we can compare it against the entire world GDP which turns out to be a mere 60 trillion US dollars8. One quadrillion being nearly twenty times larger. Or we might compare it against the estimated monetary wealth of the whole world: about $75 trillion in real estate, and a further $100 trillion in world stock and bonds. So one quadrillion is a number far exceeding even the total monetary value of the entire world – material and immaterial! A little freaky to say the least! Especially when we discover that many of these derivatives are now considered to be “toxic assets”, which is a characteristically misleading way of saying they are worth nothing – yes, worthless assets! – whatever the hell that means!

So just like the Sorcerer’s Apprentice, it seems that the spell has gone out of control, and instead of these mysterious engines making new money out of old money, the system has created instead an enormous black hole of debt. A debt that we, the people, are now in the process of bailing out, with extremely painful consequences. Efforts to save us from a greater catastrophe having already forced the British and US governments to pump multiple hundreds of billions of public money into the coffers of the private banks. Yet the banks and the economy remain broken of course, because how is any debt larger than the monetary value of the entire world ever to be repaid?

Another tactic to halt descent into a full-blown economic meltdown has involved the issuance of additional fiat currency in both Britain and America; a “quantitative easing” designed to increase the supply of money by simply conjuring it up (a trick that fiat currency happily permits). Money may not grow on trees but it can most certainly be produced out of thin air. But here’s the rub. For in accordance with the most basic tenets of economic theory, whenever extra banknotes are introduced into circulation, the currency is correspondingly devalued. So you may be able to conjure money from thin air, but all economists will readily agree that you cannot conjure “real value”, meaning real purchasing power. Indeed this common mistake of confusing “nominal value” (i.e., the number of pounds written on the banknote) with “real value”, is actually given a name by economists. They call it: “the money illusion”. And it’s useful to remind ourselves again that money has only relative value.

To understand this, we might again consider money to be a commodity (which in part it is, traded on the currency markets). As such, and as with all other commodities, relative scarcity or abundance will alter its market value, and, in obedience to the law of supply and demand, more will automatically mean less. This is just as true for the value of money as it is for tins of herring, plumbers, scotch eggs and diamonds. So it seems that if too much of our quantitative is eased, then we’d better be prepared for a drastic rise in inflation, or much worse again, for hyperinflation. Printing too much money is how hyperinflation has always been caused.

Our future is bleak, they tell us. Our future is in the red. So much for security, so much for insurance. We’d apparently forgotten to beware of “the Greeks” and of the “higher order Greeks” when they’d first proffered gifts.

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I said earlier, just in passing, that money is actually pretty boring stuff, and it is… Truly, madly and deeply boring! So when I hear on the news how “the markets” are hoping that the latest round of “quantitative easing” will enable governments to provide the necessary “fiscal stimulus”, I am barely even titillated. Whilst explanations, both in the popular press and supposedly more serious media, that like to describe such injections of new money as in some way analogous to filling up my car with imaginary petrol provide me only with a far, far more entertaining distraction: to wit, a magical car that runs on air.

But then, of course, money isn’t really stuff at all! More properly considered, money is perhaps a sort of proto-derivative, since its worth is evidently dependent upon something other than the paper it’s (increasingly not) written on. So what is it that money’s worth depends upon? What underlies money? Well, the accepted answer to this question is apparently that money is a “store of value”. Although this leads immediately to the obvious follow-up question: in this context, what precisely is the meaning of “value”? But, here again there is a problem, since “value”, although a keystone to economic thinking, has remained something of an enigma. Economists unable to agree upon any single definitive meaning.

Is “value” a determinant of usefulness? Or is it generated by the amount of effort required in the production of things? Or perhaps there is some other kind of innate economic worth? For instance in a thing’s scarcity. And can this worth be attributed at the individual level or only socially imputed?

There are a wide variety of definitions and explanations of “value”, that, being so foundational, have then encouraged the various branches of economic theory to diverge. And here is another important reason why economics is in no way equivalent to the physical sciences. Ask any physicist what energy is, and they will provide both an unambiguous definition and, no less importantly, offer established methods for measurement. Because of this, if ever one physicist talks to another physicist about energy (or any other physical quantity) they can be absolutely certain that they are talking about the same thing. Which is very certainly not the case when economists talk about “value”.

“A cynic is a man who knows the price of everything and the value of nothing,” said Oscar Wilde, distinguishing with playful wisdom the difference in human terms between “price” and “value”. The great pity is that the overwhelming majority of today’s economists have become so cynical – but then perhaps they always were.

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As part of his on-going assault against religion, Richard Dawkins recently published a book called The God Delusion. It’s the old hobby-horse again; one that he shares with a great many millions of other broadly liberal, literate and intelligent people. That religion is an evil of which humanity must rid ourselves totally. And yes, much of religion has been dumb and dangerous, this I will very readily concede (and already have conceded in earlier chapters). But really and truly, is it “the God delusion” that we should be most concerned about in these torrid times? For regardless of Dawkins claims, it is quite evident that religion is a wounded animal, and for good or ill, the secular world is most certainly in the ascendant. Right throughout the world, aside from a few retreating pockets of resistance, faith in the old gods has been gravely shaken. It is not that human faith, by which I mean merely a belief and/or worship of something greater, is extinguished, for it never can be, but that it has been reattached to new idol-ologies. And in those parts of the world where the old religions have been most effectively disarmed or expelled, namely the West, one idol-ology above all others has gathered strength from Religion’s demise.

Richard Dawkins has said many times that instructing young children in religious obedience is a form of psychological child abuse and on this point I wholeheartedly support him. Children’s minds are naturally pliable for very sound developmental reasons. But is it less pernicious to fill their precious minds with boundless affection for let’s say Ronald McDonald? For this is merely one stark but obvious illustration of how a new fundamentalism has been inculcated in the young. Devotion to the brand. Love of corporations. Worship of the dollar and the pound.

This new kind of fundamentalism has long since swept across the world, but it is unusual, although not unique, in that it denies its own inherent religiosity whilst claiming to have no idols. This is the fundamentalism of free market neoliberal economics. The Father, Son and Holy Ghost having been forsaken, only to have been usurped by the IMF, the World Bank and the WTO. If you think I’m joking, or that this is mere hyperbole, then think again. When things are tough we no longer turn to the heavens, but instead ask what sacrifices can be made to “reassure the markets”. Sacrifices to make it rain money again.

By far and above, here is the most pernicious delusion of our age. And it has next to nothing to do with God, or Yahweh, or Allah, or even the Buddha. The prophets of our times talk of nothing besides profits or losses. They turn their eyes to the Dow Jones Index, trusting not in God, but only in money. So I call for Dawkins to leave aside his God delusion, for a moment, and pay a little attention to the rise and rise of “the money delusion”. If future historians reflect on our times, this is what they will see, and given the mess this “money delusion” is creating they will scratch their heads in disbelief and disgust.

*

I have already discussed the so-called “money illusion” – of mistaking nominal banknote value for real purchasing value – but this is merely one of many nested and interrelated illusions that make up “the money delusion”. Illusions that have become so ingrained within our permitted economic thinking that they are completely taken for granted.

Foundational is the belief that individuals always make rational choices. According to the definition of making rational choices, this requires that we all choose with consistency and always with the aim of choosing more over less. That a huge advertising industry now exists to tempt us into irrationality is never factored in. Nor are the other corrosive influences that so obviously deflect our rational intentions: the coercion of peer pressure, our widespread obsession with celebrities and celebrity endorsement, and that never-ending pseudo-scientific babble that fills up many of the remaining column inches and broadcast hours of our commercial media. We are always eager for the latest fashionable fads, and perhaps we always were. Yet this glaring fact, that people make wholly irrational choices time and again, whether due to innate human irrationality or by deliberate design, is of little concern to most economists. It is overlooked and omitted.

Likewise, a shared opinion has arisen under the name of neoliberalism that economics can itself be neutral, usefully shaping the world without the nuisance of having to rely on value judgements or needing any broader social agenda. If only individuals were left to make rational choices, as of course they do by definition, or so the idea goes, and the market could also be unshackled, then at last the people will be free to choose. Thus, goes the claim, individual freedom can only be guaranteed by having freedom within the marketplace. Freedom trickling down with the money it brings. “Wealth creation” alone must solve our problems by virtue of it being an unmitigated good.

Of course, back in the real world, one man’s timber very often involves the destruction of another man’s forest. Making profits from the sale of drugs, tobacco and alcohol has social consequences. Factories pollute. Wealth creation has its costs, which are very often hidden. There is, in other words, and more often than not, some direct negative impact on a third party, known to economists as “spillover” or “externalities”, that is difficult to quantify. Or we might say that “wealth creation” for some is rather likely therefore to lead to “illth creation” for others.

Illth creation? This was the term coined by romantic artist, critic and social reformer, John Ruskin, and first used in his influential critique of nineteenth century capitalism entitled Unto This Last. Ruskin had presumably never heard of “the trickle-down effect”:

“The whole question, therefore, respecting not only the advantage, but even the quantity, of national wealth, resolves itself finally into one of abstract justice. It is impossible to conclude, of any given mass of acquired wealth, merely by the fact of its existence, whether it signifies good or evil to the nation in the midst of which it exists. Its real value depends on the moral sign attached to it, just as sternly as that of a mathematical quantity depends on the algebraical sign attached to it. Any given accumulation of commercial wealth may be indicative, on the one hand, of faithful industries, progressive energies, and productive ingenuities: or, on the other, it may be indicative of mortal luxury, merciless tyranny, ruinous chicane.”9

*

We are in the habit of regarding all money as equal. Presuming that the pounds and pence which make up my own meagre savings are equivalent in some directly proportional manner to the billions owned by let’s say George Soros. A cursory consideration shows how this is laughable.

For instance, we might recall that on “Black Wednesday” in 1992, Soros single-handedly shook the British economy (although, the then-Chancellor of the Exchequer Norman Lamont was left to shoulder the blame)10. But to illustrate this point a little further, let me tell you about my own small venture into the property market.

Lucky enough to have been bequeathed a tidy though not considerable fortune, I recently decided to purchase a house to live in. The amount, although not inconsiderable by everyday standards (if compared say with the income and savings of Mr and Mrs Average), and very gratefully received, was barely sufficient to cover local house prices, except that I had one enormous advantage: I had cash, and cash is king.

For reasons of convenience, cash is worth significantly more than nominally equivalent amounts of borrowed money. In this instance I can estimate that it was probably worth a further 20–30%. Enough to buy a far nicer house than if I’d needed to see my bank manager. A bird in the hand…

Having more money also has other advantages. One very obvious example being that it enables bulk purchases, which being cheaper, again inflates its relative value. The rule in fact is perfectly straightforward: when it comes to money, more is always more, and in sufficient quantities, it is much, much more than that.

But then, of course, we have the market itself. The market that is supposedly free and thus equal. The reality being, however, that since money accumulates by virtue of attracting its own likeness, the leading players in the market, whether wealthy individuals or giant corporations, by wielding larger capital resources, can operate with an unassailable competitive advantage. These financial giants can and do stack the odds even higher in their favour by more indirect means, such as buying political influence with donations to campaign funds and by other insidious means such as lobbying – all of which is simply legally permitted bribery. The flaunted notion of a free market is therefore the biggest nonsense of all. There is no such thing as a free market: never has been and never will be.

The most ardent supporters of free market neoliberalism say that it is a non-normative system, which permits us finally to rid ourselves of disagreements over pesky value judgements. The truth, however, is very much simpler. By ignoring values, it becomes a system devoid of all moral underpinning. Being morally bankrupt, it is unscrupulous in the truest sense of the word.

*

If I had enough money and a whim, I might choose to buy all the plumbers and tins of herrings in Britain. Then, since money is (in part) a measure of scarcity, I could sell them back later with a sizeable mark-up. Too far-fetched? Well, perhaps, but only in my choice of commodity. The market in other commodities has without any question been cornered many times in the past. For instance, by the end of the 1970s, two brothers, Nelson Bunker and William Herbert Hunt, had accumulated and held what was then estimated to be one third of all the world’s silver. This led to serious problems both for high-street jewellers11 and for the economy more generally12, and as it happened, when the bubble burst on what became know as “Silver Thursday”, it also spelt trouble for the brothers’ own fortune. Fortunately for them, however, the situation was considered so serious that a consortium of banks came forward to help to bail them out13. They had lost, their fortune diminished, although by no means wiped out. As relatively small players they’d played too rough; meanwhile much larger players ensure that the markets are routinely rigged through such manufacture of scarcity. Going back as early as 1860, John Ruskin had already pointed out a different but closely-related deficiency in any market-driven capitalist system of trade:

“Take another example, more consistent with the ordinary course of affairs of trade. Suppose that three men, instead of two, formed the little isolated republic, and found themselves obliged to separate, in order to farm different pieces of land at some distance from each other along the coast: each estate furnishing a distinct kind of produce, and each more or less in need of the material raised on the other. Suppose that the third man, in order to save the time of all three, undertakes simply to superintend the transference of commodities from one farm to the other; on condition of receiving some sufficiently remunerative share of every parcel of goods conveyed, or of some other parcel received in exchange for it.

“If this carrier or messenger always brings to each estate, from the other, what is chiefly wanted, at the right time, the operations of the two farmers will go on prosperously, and the largest possible result in produce, or wealth, will be attained by the little community. But suppose no intercourse between the landowners is possible, except through the travelling agent; and that, after a time, this agent, watching the course of each man’s agriculture, keeps back the articles with which he has been entrusted until there comes a period of extreme necessity for them, on one side or other, and then exacts in exchange for them all that the distressed farmer can spare of other kinds of produce: it is easy to see that by ingeniously watching his opportunities, he might possess himself regularly of the greater part of the superfluous produce of the two estates, and at last, in some year of severest trial or scarcity, purchase both for himself and maintain the former proprietors thenceforward as his labourers or servants.”14

By restricting the choices of others, one’s power over them is increased, and it this that brings us to the real reason why money becomes such addiction, especially for those who already have more than they know what to do with. For truly the absolute bottom line is this: that money and power become almost inseparable unless somehow a separation can be enforced. And whilst wealth, especially when excessive, accumulates, as it almost invariably does, then along with it goes the accumulation of power. This is underlying and centralising mechanism has perhaps always operated at the heart of all civilisation. But even the power of money has its limits, as Ruskin points out:

“It has been shown that the chief value and virtue of money consists in its having power over human beings; that, without this power, large material possessions are useless, and to any person possessing such power, comparatively unnecessary. But power over human beings is attainable by other means than by money. As I said a few pages back, the money power is always imperfect and doubtful; there are many things which cannot be reached with it, others which cannot be retained by it. Many joys may be given to men which cannot be bought for gold, and many fidelities found in them which cannot be rewarded with it.

“Trite enough, – the reader thinks. Yes: but it is not so trite, – I wish it were, – that in this moral power, quite inscrutable and immeasurable though it be, there is a monetary value just as real as that represented by more ponderous currencies. A man’s hand may be full of invisible gold, and the wave of it, or the grasp, shall do more than another’s with a shower of bullion. This invisible gold, also, does not necessarily diminish in spending. Political economists will do well some day to take heed of it, though they cannot take measure.”15

Until such a time, every action and probable outcome must continue to be evaluated on the basis of strict cost and benefit estimates. Our “ponderous currencies” literally enabling a figure to be set against each human life – an application fraught with the most serious moral dilemmas and objections – and beyond even this, we have price tags for protecting (or else ruining) the natural environment all our lives depend upon. For only the market can secure our futures, optimally delivering us from evil, though inevitably it moves in mysterious ways. Which is how the whole world – land, water, air and every living organism – came to be priced and costed. Everything set against a notional scale that judges exclusively in terms of usefulness and availability, such is the madness of our money delusion.

We are reaching a crisis point. A thoroughgoing reappraisal of our financial systems, our economic orthodoxes, and our attitudes to money per se is desperately required. Our survival as a species may depend on it. Money ought to be our useful servant, but instead remains, at least for the vast majority, a terrible master. As a consequence, our real wealth has been too long overlooked. Time then for this genii called money to be forced back tight inside its bottle. Ceaselessly chasing its golden behind, and mistaking its tight fist for the judicious hand of God, is leading us ever further down the garden path. Further and further away from the land it promises.

Next chapter…

*

 Addendum: Q & A

Back in April 2012, I forwarded a draft of this chapter to friends in Spain (a nation already suffering under imposed “austerity measures”). They sent an extended reply which raised two interesting and important questions. Both questions along with my replies are offered below:

Q1: You seem to be saying that printing money (as the US and UK, who are in control of their own currency, are doing ) is as bad as dealing with the debt problem by means of austerity (the “Merkozy” approach). But the latter is surely definitely worse.

A. I think these are simply two sides of the same scam. The bankers create an enormous unpayable debt and then get governments to create new money to bail them out. This is sold to us as a way of bailing out a few chosen victims (Greece, Spain, Portugal, Ireland) although it simply means a huge transfer of wealth from public into private hands. To make that money useful to the bankers (and the rest of the ruling elite) ‘austerity measures’ are put in place which not only steal money off the average person but also permit the fire sale of national assets. Meanwhile, in Britain and America, the governments are helping to pay for these bailouts by creating money out of thin air, which means the real value of our money is reduced through inflation (effectively a hidden tax). If the money were invested in infrastructure or education or whatever, then this could potentially be a good thing (even though it still creates inflation), so certainly QE could have been beneficial but not when you use the money only to keep afloat a huge Ponzi scheme. But then you ask later…

Q2: ‘but how come the pound is high now and the euro low’

A. That’s a very good question and I won’t pretend that I understand this completely, but I gather there are plenty of ways for keeping currencies higher than they ought to be by manipulating the markets [incidentally, the Forex Scandal to manipulate and rig the daily foreign exchange rates did not come to light until Summer 2013]. The market is rigged in any case by virtue of the fact that the dollar remains the world’s reserve currency and that oil is traded entirely in dollars. But essentially what’s going on here is a huge currency war, and the euro is constantly under attack from speculators. I am fairly certain that the chickens will come home to roost sooner or later in America and Britain (and in Germany too), but meanwhile the governments simply go about cooking the books and telling us how inflation is only 4% or whatever when fuel prices, for instance, have rocketed during the past few years. In any case, we get ‘austerity’ too, not as hardline yet as the ‘austerity’ being imposed elsewhere, but it will come – of this I have no doubt. Either it will happen slowly, or worse, there will be a huge war and the ‘austerity’ will be brought into place to justify the expense of that. This is a deliberate attack by the bankers against the people of the world, and until the people of the world say that’s enough, and most of the debts are cancelled outright, I don’t see any way this can be reversed.

*

Another topic I briefly touched upon in the chapter above is the matter of inflation. What is it and what causes it? My answers were sketchy, in part, because I wished to avoid getting too bogged down in technicalities beyond my training. But this question about the causes of inflation is, in any case, an extremely thorny one. Different schools of economists provide different explanations.

One less orthodox account that I have frequently come across is that our fractional reserve banking system when combined with a central bank’s issuance of a fiat currency is inherently inflationary. That in the long term, and solely because of these extant monetary mechanisms, inflation is baked into the cake. So I wrote to a friend who holds with the above opinion and asked if he would explain “in the briefest terms that are sufficient” why he and others believe that central bank issuance of currency and fractional reserve banking are the primary underlying cause of inflation. Here is his succinct but detailed reply:

In a central bank system, money is created in the first instance by governments issuing bonds to banks and banks “printing” money and handing it over to the government in return. The government then owe the banks the money plus interest. If they ever pay back any of the principal, then a corresponding amount of bonds are handed back, i.e. cancelled. In that case, the money repaid goes out of existence!

Before elaborating any further, let’s take a step back. Fractional reserve lending doesn’t require central banks, nor does it require governments to create money by issuing bonds in exchange for it. Fractional reserve lending is simply the act of taking someone’s money to “look after it”, then turning around and lending a fraction of it to someone else. If the lender has enough depositors, then sum of all the unlent fractions of each deposit should cover him if one of them suddenly comes through the door asking for all their money back in one go. As I’m sure you know, if too many turn up at once looking for their money, a run ensues. Fractional reserve banking doesn’t even require a government sanctioned paper currency to exist. Depositors can simply deposit something like gold and the lenders can issue receipts which become the paper currency.

In olden times, when depositors of gold first found out that the goldsmiths they were paying to store their gold safely were lending it out for a percentage fee, they were outraged. The goldsmiths appeased them by offering them a cut of the fee for their interest in the scam. Accordingly, this money became known as ‘interest’.

So where do central banks fit in? Countries like the Unites States prior to 1913 have operated without central banks. There were thousands of banks of all sizes. To compete with one another, they had to endeavour to offer higher interest to depositors, lower interest rates to borrowers or to cut the fraction of deposits that they kept in reserve. This latter aspect was what caused banks occasionally to go to the wall, to the detriment of their depositors.

Central banking avoids this risk because the same fractional reserve ratio applies to all the banks under a central bank’s jurisdiction. However, it is really a way to avoid competition and if the system ever does get into trouble, the government feel obliged to bail it out or risk collapse of the whole system.

Now to answer your question about inflation.

In a fractional reserve central bank system, money is created as I’ve described by the government issuing bonds to the bank, receiving money created out of thin air and having to pay interest on it. When they spend it by paying salaries of government employees, contractors, arms manufacturers and so on, that money goes straight into bank accounts and the bankers can’t wait to lend out as much of it as possible, up to the limit of whatever fractional reserve ratio applies. So now there is a double claim on the money. The government employee thinks their salary is sitting in the bank but 90 percent of it is in the pocket of a borrower who thinks it’s theirs as long as they keep up with interest. That borrower, will inevitably either put the borrowed sum in their own bank account or spend it. Either way it will end up in another bank account somewhere. Then the same thing happens again; up to 90 percent of it gets lent out (81 percent of the original government-created money) and so on…

We end up in a situation where all of the money in circulation has arisen from someone somewhere, signing the dotted line to put themselves in debt. The money isn’t backed by a commodity such as gold. Instead it is backed by the ability of the borrower to repay. All these borrowers, including the government are paying interest. If interest is to be paid on every penny in circulation, then it doesn’t take a genius to figure out that new money must be continuously ‘created’ to keep paying this. That occurs by governments constantly borrowing so that their debts keep on increasing and borrowers constantly borrowing more and more. This seems to work as long as prices, wages and asset values keep increasing. Generation after generation, workers can afford to pay more and more for the houses that they live in because the price of the house keeps going up so it looks like good collateral to the lender and also their wages keep going up, so the borrower can meet payments in the eyes of the lender.

Working out what the rate of inflation is at any given time is practically impossible. Government figures such as RPI and CPI are just another tool for the propagandists to use as they see fit at any given time. However for the banks to gain anything from the game, the rate of inflation must be:

  • less than the rate of interest paid by borrowers and;
  • greater than the rate of interest paid to savers.

This is why savers money is ‘eroded’ if they just leave it sitting in a bank account.
Now imagine a different system where:

  • governments issue paper money by printing it themselves;
  • the amount in circulation is absolutely fixed;
  • there is no central bank but there are plenty of independent banks.

In such a country, there is no need for the government to have any debt and there is ample historical evidence of nations that have existed without government debt for very long stretches of time. What borrowers there are have to find the interest by earning it from the fixed pool of currency that is in circulation. There is little need for anyone to borrow but that’s something that most people you speak to have difficulty accepting. That’s because they’ve only ever lived in a system where they spend their lives in the service of debt and cannot conceive of it being any different.

The bankers right at the top of the system aren’t out to grab hold of all the money in the world. They’re not after all the tangible in the world either. Their only goal is to ensure that as much human labour as possible is in the service of debt.

Now for something different. How can this whole thing go horribly wrong for the bankers? I don’t just mean a run on banks or a recession. That happens periodically and is known as the business cycle. People lose confidence and are reluctant to borrow for a number of years, then they regain confidence and start to borrow again and the whole thing picks up and the cycle repeats.

What can go horribly wrong is if, after generations and generations and generations of increasing prices and debts, everyone gets more spooked by debt than ever before and totally fixated on repaying it. They sell assets but there are so many folk doing that that asset prices start to decline. That spooks people further. A spiral is under way. Banks try to ‘stimulate’ the economy by lowering interest rates but there is very little confidence around, especially if asset prices are declining compared with debts and wages aren’t rising either (or may be in decline), so that the ability to repay debt is impaired. This decline can be long and protracted. Also there can be many ups and downs along the way, although the long term trend is down. Ups can be deceptive as they are perceived as “coming out of the recession” by those used to the normal business cycles we’ve experienced throughout the whole of the twentieth century. In this way, asset prices can bleed away until eventually they reach something like a tenth of of their peak value. This process can reach a very late stage before a lot of people recognise what’s really going on. This is just a scenario but one worth considering seriously. We could be in for long term deflation but it will be well under way and too late for many people in debt by the time it gets mainstream acknowledgement.

A closely-related question and one that automatically follows is why do countries bother having central banks at all? Instead of a government issuing bonds, why not directly issue the currency instead, thereby cutting out the middle men? It is an approach that actually has a number of historical precedents as pointed out in this open letter to Obama urging him to reissue ‘greenbacks’ and the campaign in Britain to print ‘treasury notes’ like the Bradbury Pound. So in a further reply to my friend I asked him, “do you think that the re-issuance of ‘greenbacks’ in America or the Bradbury Pound in the UK might offer a realistic solution to the current crisis?” His response:

The issue of greenbacks or whatever you call them (essentially government-issued money) would probably make no immediate difference. Already, the money created by quantitative easing is not working its way into the system, so why would money issued by any other means?

In the longer term, such a fundamental upheaval would make a huge difference as the government wouldn’t need to be in debt the whole time and people wouldn’t have to keep paying increasing prices for houses and cars on top of interest. Pensioners wouldn’t be on a treadmill, having to ‘invest’ their savings just in vain an effort to keep up with inflation.

There’s a risk that the government might be tempted to print more and more money, which is often cited as a point in favour of the present system. It is claimed that having to pay interest and ultimately repay the whole principal is a disincentive in this respect. However, the current system ensures constant “printing” all the time as there’s no way that everyone involved can pay interest otherwise.

There’s talk at the moment about banks charging people a few percent for holding their money on deposit, i.e “negative interest”. People think they’ll lose money as their account balances will go down over time. However, it’s no different to being paid say six percent interest at a time when inflation is at 9 percent and the cheapest loan you can get is 12 percent.

I’m amazed at how people in the alternative media can inform us that banks are going to charge us ‘negative interest’ for our deposits, express outrage and then in the next breath claim that we’re in a hyperinflationary environment. Low/negative interest is a sure sign of massive deflationary pressure. I don’t know what’s going to happen but I’m convinced that deflation’s the one to watch. It has the potential to catch people out.

Getting back to your original question, the direct issuing of money by the government would represent a seismic shift of power from bankers to governments; a shift in the right direction, no doubt. It’s only possible if everyone knows what’s exactly going on. We’re a very long way off yet. Peoples’ understanding of the banking scam is very very poor.

I would add that very much front and centre in that scam is the role of the central banks. These extraordinarily powerful commercial bodies that adopt the outward appearance of public institutions when in fact they work for commercial interests. The US Federal Reserve, for instance, is a de facto private corporation and all of its shareholders are private banks. The status of the Bank of England is more complicated. This is what the main wikipedia entry intriguingly has to tell us:

Established in 1694, it is the second oldest central bank in the world, after the Sveriges Riksbank, and the world’s 8th oldest bank. It was established to act as the English Government’s banker, and is still the banker for HM Government. The Bank was privately owned [clarification needed (Privately owned by whom? See talk page.)] from its foundation in 1694 until nationalised in 1946.[3][4] 

Original references retained.

Clarification needed indeed! Anyway, nowadays it is officially (since 1998) an ‘independent public organisation’. However, the BoE is not really as independent as it might first appear, since along with eighteen other central banks from around the world (including the US Federal Reserve) it is a member of the executive of “the central bank for central banks” – the little known Bank for International Settlements (BIS) based in Basel, Switzerland. To hear more about the history, ownership and function of this highly profitable (tax free and extraterritorial) organisation, I recommend listening to this interview with Adam LeBor, author of the recently released book The Tower of Basel:

For my own more detailed thoughts on effective remedies to the on-going financial crisis please read this earlier post.

*

Please note that for the purposes of ‘publishing’ here I have taken advantage of the option to incorporate hypertext links and embed videos – in order to distinguish additional commentary from the original text all newly incorporated text has been italised.

*

1 From “The Future”, Essays in Persuasion (1931) Ch. 5, John Maynard Keynes, CW, IX, pp.329 — 331, Economic Possibilities for our Grandchildren (1930).

2 Adam Smith applied “the law of diminishing utility” to solve “the paradox of water and diamonds”. Water is a vital resource and most precious to life and yet it is far less expensive to purchase than diamonds, comparatively useless shiny crystals, which in his own times would have been used solely for ornamentation or engraving. The reason, Smith decides, is that water is readily abundant, such that any loss or gain is of little concern to most people in most places. By contrast, the rarity of diamonds means that, although less useful overall, any loss or gain of use is more significant, or to put it more formally the “marginal utility” is greater.

3 Extract taken from The soul of man under socialism by Oscar Wilde (first published 1891).

4 Legal tender is a technical legal term that basically means an offer of payment that cannot be refused in settlement of a debt.

5 Fiat (Latin), “let it be done” meaning that these currencies are guaranteed by government decree only.

6 Milton Friedman pays homage to Ronald Reagan’s record on deregulation in an essay entitled “Freedom’s friend” published in the Wall Street Journal on June 11, 2004. Drawing evidence from The Federal Register, “records the thousands of detailed rules and regulations that federal agencies churn out in the course of a year”, Friedman contrasts Reagan’s record with that of Presidential incumbents before and since: “They [the rules and regulations] are not laws and yet they have the effect of laws and like laws impose costs and restrain activities. Here too, the period before President Reagan was one of galloping socialism. The Reagan years were ones of retreating socialism, and the post-Reagan years, of creeping socialism.” For socialism read regulation. http://online.wsj.com/news/articles/SB108691016978034663

7 Definition of “too big to fail” taken from Businessdictionary.com: “Idea that certain businesses are so important to the nation, that it would be disastrous if they were allowed to fail. This term is often applied to some of the nation’s largest banks, because if these banks were to fail, it could cause serious problems for the economy. By declaring a company too big to fail, however, it means that the government might be tempted to step in if this company gets into a bad situation, either due to problems within the company or problems from outside the company. While government bailouts or intervention might help the company survive, some opponents think that this is counterproductive, and simply helping a company that maybe should be allowed to fail. This concept was integral to the financial crisis of the late 2000s.”

8 According to IMF economic database for October 2010, World GDP is $61,963.429 billion (US dollars).

9 Unto This Last is based on a collection of four essays first published in the monthly Cornhill Magazine, 1860, and then reprinted as Unto This Last in 1862. This extract is drawn from his second essay: “The Veins of Wealth”

10 George Soros proudly explains the events of “Black Wednesday” on his official website: “In 1992, with the economy of the United Kingdom in recession, Quantum Fund’s managers anticipated that British authorities would be forced to break from the European Exchange Rate Mechanism (ERM) then in force and allow the British pound to devalue in relation to other currencies, in particular the German mark. Quantum Fund sold short (betting on a decline in value) more than $10 billion worth of pounds sterling. On September 16, 1992—later dubbed “Black Wednesday”—the British government abandoned the ERM and the pound was devalued by twenty percent.” http://www.georgesoros.com/faqs/archive/category/finance/

11Last year [1979] Bunker and his syndicate began buying silver again, this time on a truly gargantuan scale. They were soon imitated by other speculators shaken by international crises and distrustful of paper money. It was this that sent the price of silver from $6 per oz. in early 1979 to $50 per oz. in January of this year. Chairman Walter Hoving of Tiffany & Co., the famous jewelry store, was incensed. Tiffany ran an ad in the New York Times last week asserting: ‘We think it is unconscionable for anyone to hoard several billion, yes billion, dollars worth of silver and thus drive the price up so high that others must pay artificially high prices for articles made of silver from baby spoons to tea sets, as well as photographic film and other products.’” Extract taken from “He Has a Passion for Silver”, article published in Time Magazine, Monday 7April, 1980. http://content.time.com/time/magazine/article/0,9171,921964-2,00.html

12Many Government officials feared that if the Hunts were unable to meet all their debts, some Wall Street brokerage firms and some large banks might collapse.” Extract taken from “Bunker’s busted silver bubble”, article published in Time Magazine, Monday 12 May, 1980. http://content.time.com/time/magazine/article/0,9171,920875,00.html

13What may deal the Hunt fortune a fatal blow is the fallout from the brothers’ role in the great silver-price boom and bust of 1980. Thousands of investors who lost money in the debacle are suing the Hunts. On Saturday the brothers lost a civil case that could set an ominous precedent. A six-member federal jury in New York City found that the Hunts conspired to corner the silver market, and held them liable to pay $63 million in damages to Minpeco, a Peruvian mineral-marketing company that suffered heavy losses in the silver crash. Under federal antitrust law, the penalty is automatically tripled to $189 million, but after subtractions for previous settlements with Minpeco, the total value of the judgment against the Hunts is $134 million.” Extract taken from “Big bill for a bullion binge”, article published in Time Magazine, Monday 29 August, 1988. http://content.time.com/time/magazine/article/0,9171,968272-1,00.html

14 Extract also taken from the second essay, entitled: “The Veins of Wealth” of Unto This Last by John Ruskin.

15 Ibid.

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Filed under analysis & opinion, « finishing the rat race », financial derivatives, Max Keiser, neo-liberalism

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