Friday, 21 October 2011

Debt as money

With so much going on just now in the world regarding the economy and who owes what to who, what country owes what to other countries, its hard to know where we're going to end up. The tails of doom and gloom that abound in the main stream media seem to hint at some sort of apocalypse, even now I'm not sure anyone really knows what the outcome will be.

It seems to me to be entering the realms of farce when we have the people who caused it making the rules about how we deal with it given all the crap going down is because we let them make the rules while they caused it to happen, or something like that, I know what I mean. Some say we need 2 trillion to adequately deal with the debt in Europe alone, Greece (unfortunately seeming to reside at the bottom of the pile along with Portugal, Ireland and Spain) is due everyone money, Spain is due France money and France is due Germany money. It should be noted, when they talk about Greece being bailed out, that isn't true, all there doing is increasing its line of credit with French and German banks, in effect, French & German banks are being bailed out. The money isn't going to Greece to pay the wages of firemen etc, it's merely being added to the already bulging overdraft in German & French banks so they can loan even more money to Greece to pay those wages. Don't think it's just French & German banks either, I only use them for the sake of brevity, UK banks are in the shit with Greece and others as well.

Meanwhile the Greeks squeal because they're having to sell off public services to service a debt they have no possible way of ever clearing with a creditor who shouldn't have loaned the money in the first place.

Individually we're probably all decent sensible people, mostly anyway. As a mob though we are horrible grasping selfish oiks with only our own interests at heart. Why? Who knows, many blame Thatcher (many can no longer remember her) and many more blame New Labour (who many wish to forget.) Politics is boring this is true, but its important. They spend your money on your behalf, or at least they should, more recently they've been spending it on their own and the banks behalf. More importantly, not only have they spent your money now, they've spent it far into the future, your grandchildren will be paying for all of this.

I fully admit to being a bit of an idiot in these matters, I need things spelt out in the simplest terms and I think you do to so here goes. Think of this as the first economic pop-up book. If you do happen to know anything about global economics and see a mistake here, don't bother getting in touch, it's the Internet and nobody believes anything they read here anyway.

First of all the basics. In the simplest terms there are two types of debt, sovereign and personal debt. Sovereign debt is that which is owed by a countries government, personal debt is that which is owed by you. In the case of the former, a government might borrow money to pay for infrastructure projects (a hospital or bridge for example.) In the latter case (you) you might buy a frock and stick it on a store card or buy some Viagra online thinking it won't show up on your credit card bill but it does anyway.

From our point of view this seems fairly straight forward, except. From the Banks point of view it isn't. Its all the same money to them, it wasn't until after the credit crunch they decided to try and ring fence retail banking (our bit) and investment banking (the government and commercial bit.) Its already getting complicated isn't it but bear with me.

So retail banking. This is your current account, savings accounts, mortgages, pensions annuities and many more things beside that I know and don't know about. The investment banks (the commercial bit) took all that money and lent it out to countries and other banks. All that money you paid into your pension has been loaned to Greece, or I should say added to the overdraft limit Greece has with French and German Banks. That money has gone. The government might say they'll guarantee it but with what exactly, they don't have any money either.

I know what your thinking, if our money has gone, what are they borrowing now? Well, countries like Germany and China run a trade surplus, basically they make more stuff to sell more than they buy in. I suppose the easiest analogy would be you having money left over from your monthly income, you have a surplus. That extra money could be making more money, so they lend it at 3, 4 or 5% to other countries like Spain or Italy. (You will have heard of countries being 'downgraded by Moodies or Standard & Poor? They rate countries by their ability to pay, cunningly the less able a country is in paying its debt, the more expensive it is for that country to borrow money, turns the whole thing into a self-fueling perpetual motion nightmare.)

In all of that, the main difference between you, the government and a bank is this. When you get to the end of a month and you have no money; you have no money. When a bank gets to the end of a month and has no money, it can effectively open another bank account (or balance sheet,) shift the overdrawn total into it and pretend nothing ever happened (this is bank making up the rules as it goes.) When a government runs out of money at the end of the month it can borrow money from the bank after it's carried out that wee shuffle and crucially, if the bank decides actually, we've shuffled more than we should have, government steps in and tells the bank 'don't worry, we'll do some QE'ing which means you can extend the overdraft limit on those overdrawn accounts so you can keep lending'.

A lot of people talk about money being printed with bail outs and QE'ing (one and the same thing by the way) but no money is being printed, its being added on to the banks bottom line so the country (read; it's banks) overdraft limits don't look quite so bad, this (apparently) appeases big business & the 'markets' (read; the banks) and keeps things ticking over.

Now. I've tried to read all that back and if I'm being honest, it looks like I've been possessed by Robert Peston, well, Robert Peston on a really really bad day. Ok, not Robert Peston at all. The upshot of it all is we're stuffed, if I was you I'd start stock-piling tinned foods and weapons. As it happens socialism and capitalism doesn't work because as a group, we are all insanely greedy. Also, people who aspire to positions of great sway and power shouldn't be allowed to have it, they seem to have neither the wisdom or sense of civic responsibility to execute the role safely.

Anyone with a degree in politics should be forever barred from being a politician, they can be a pundit on the telly where they can do no harm. Anyone who aspires to be a banker, should be made to understand they personally will be held responsible for any loses they make, the country (us) will not socialise (shoulder) the debt their mistakes create.

Most importantly though, QE'ing stands for Quantitative Easing. Hold on though, there might be to many 'it's' in there, Quantititat- no... Quantatitat- don't think so... Quantatitative eas-...

Anyway, turns out that blog post about making toast and cooking pasta in the kettle might be handy after all since soon enough we won't be able to afford to turn our cookers on, if we even have cookers...

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Thanks for comment as always and I apologise if you have to jump through any hoops to do so. Its just that, I'm still being spammed by organisations who are certain I can't get it up or when it is up its not big enough or that I don't have anyone to get it up for.

Who knew blogging could be so bad for ones self-confidence?