Continuing my commendably civic concern for the political fallout of last week's riots across England, I note with some chagrin that the dastardly bankers are coming under fire again, particularly on Twitter. "How can you condemn looters when the bankers looted our country and got away with it?" cry the shrill voices. The reason, dear readers, is that "bankers" did nothing of the sort. Indeed, it was more or less inevitable that credit would be extended too far as a result of the nature of modern economics. Allow me to explain.
Fiat Money
In 1971 Richard Nixon ended the dollar's last link with gold, effectively bringing the era of the Gold Standard to a close. Since then, all world currencies, but most importantly the reserve currencies, have floated against each other to a greater or lesser degree. Since money now has no physical anchor, it is intrinsically worthless and means something only because we believe it does. Money therefore now exists primarily as computer data, and can as a result be summoned in and out of existence at the push of a button. Moreover, since the money used to buy stock, shares, derivatives, bonds, gilts or any number of other financial instruments is worthless, these investments have no true monetary worth either. This is why Facebook can be valued at a sum out of all proportion to reality, and global debt now stands at $126 trillion, or just over 200% of global GDP. To put it another way, the entire world would have to devote every single penny to reducing debt for more than two years to do away with it. Evidently there is no way this can ever be paid off, and it is when you get into this situation, where non-existent assets attract huge values and debt is meaningless that the whole system starts to creak. So why do financiers allow such a thing to happen? Well, the simple answer is they don't, at least not actively. The primary reason is that
People (not bankers) are Greedy
That's right, you read correctly. The vast majority of people in the developed world keep their money in banks. Why? Evidently they are not safe places to do this - banks have been failing since their invention. No, most people keep their money in banks because they are greedy, and they want the interest. But that's it. That's all they think about. But think now for a minute. Why do banks pay interest? Where does the money come from? I'll tell you. Banks lend each other money and make investments with your money. As a fee for the use of your money, they pay you interest. And it's not just liquid assets that people muck about with. Banks frequently lend money and give credit - you tell them that you will pay them back the full amount, plus a bit in interest at some future date. They lend to you because these days that is where a lot of the revenues of a high street bank come from - it's their job. But then if you fail to pay the banks back, they come and take your house or your stuff to balance the payment. If enough people do this, suddenly the bank has no more money and cannot lend. Nobody can borrow money, so they stop buying things, and those who owe money have their house repossessed. That is a credit crunch. The important thing to note, however, is it is not the fault of the banks. They may have extended too much credit - been too credulous - but that is not wrongdoing. The debtors who failed to make good on their loans are at fault, as they have failed to keep the promise they made. If you require bankers to do your banking for you, do not whinge and moan if they encounter trouble because you fail to honour your responsibilities. As with all things, banking and finance in general constitute a two-way effort.
Everybody Is Too Rich For Their Own Good
Almost everybody in the UK has more than enough money, by which I mean money critical to survival. The UN categorises one of the markers of poverty as not owning a television. I do not own a television, but I am no poorer because of it, as a TV is not necessary to survival. Once everybody has enough to eat, well and good, but there are many people with a lot more money than that. And what do you do when you have everything? What does the upper-middle class do with its spare cash? It invests it, in any number of different things. Property is a favourite, and financial vehicles are popular too. But all this money swilling around simply feeds the two problems above. For a start, it doesn't really mean anything, and secondly it all feeds the behemoth of global finance. It's all a huge circle made of hot air and optimism, so if you don't like bankers sending your money on this merry-go-round, don't put it in a bank, and don't spend more than you earn. It's not that hard. Otherwise, stop whining and learn the rules of the game.
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