Follow the Historical Cycles
There have always been cycles and there always will be cycles unless new massive regulation takes over that moderates the ability of Wall St, or the NEW Wall Street (wherever that may be) from making money. Essentially the money traders find a new thing to trade or to promote and they promote it until the wave starts, and grows, and grows until it collapses. That is essentially how most waves start and end. Until you find a way to eliminate greed and jealousy in humans, waves will come and go.
The Power of our Financial Institutions
The power of our financial institutions is based to a large extent on the commissions and bonuses earned by the people that work on Wall St. This is a natural thing. Imagine yourself working there and your boss says that you can make an extra $5,000 this week if you sell another bond, or another security, or whatever. Can you imagine yourself not trying to sell it? Hardly a person alive would refuse to sell it. If there is a harm done, it is done to someone far away, and someone that you will never meet and never see directly the long term effect of what you have sold.
So let’s get real. People will be people and cycles will come and go, just like they always have.
Government Steps In
A wave then collapses and people then demand that government step in and politicians realize that if they want to get elected in 2 or 3 years, they had better do something. So they do. They also have very educated and sophisticated financial persons to advise them and they rely on this advice.
Usually the collapse of a wave means that lenders – banks and financial institutions – become wary of lending because they worry that they may lose more money. After all, the collapse of the wave means they have lost money on some loans going bad. The last thing they want is shareholders criticizing them for losing more money. So they do the safest thing. They stop loaning except to the most creditworthy lenders, like other banks and countries.
The effect of this is a drying up of credit available and it is credit that fuels our economy, and every economy. Savings as the source of capital has been less and less relevant as the decades pass.
Why Money is Created
These very educated and sophisticated financial advisers realize that as less money is available, there will be less economic activity and this is like an expanding wave in a pond when you throw a pebble in the water. In order to counteract this reduced amount of money flowing, they advise the government to inject some money in the system. I will not dwell in this blog how this is done, except to say that various tools are used. In effect, money is created out of thin air, and it is this creation that critics and gold bugs fear. They fear that because as money is created, the existing money will be worth less.
The Bailout of Ireland
The bailout of Ireland is just what I have described except on a larger scale. The solvent sovereign states and institutions step in and inject liquidity to stop that ever expanding wave of destruction. If they didn’t, the effects of the collapse would be much more severe.
When you examine what is happening, and bring it down to the simplicity of the concepts, it becomes understandable.
So now the question is, does this creation of more money destroy our currencies, or does it simply smooth over the wave a bit so that life can go on.
The Excess of a Current Wave Steals Demand from the Future
When a wave occurs, as it builds momentum, with the impetus of the commission based Wall St traders behind it, the wave exceeds the natural demand, and in effect, the wave creates something that really shouldn’t have been created. The level of the wave is in fact stealing money from future demand. It can be argued, that the collapse simply is the recognition of that theft of money by the height of that wave, from the future, and the impetus (which all comes from borrowed money) is the funding that moderates the effect of that larger than reality wave.
So if one follows this reasoning, it is not the creation of money that is the problem. It is human greed and avarice that took the money that governments have to borrow to replace. Isn’t this an interesting way to look at the problem?
The Creation of Money
Governments have certain basic responsibilities including defense, sovereignty and the banking system, including the creation of money. Imagine if the amount of money remained fixed, while the population increases. Every time a new person comes into society by birth or immigration, every other person in that society has just a bit less money, because the new person has to have some money. Slowly the system squeezes itself until it dies.
To maintain equilibrium, governments provide more money. They do this continually and have many methods of doing it. When a wave breaks, to moderate the collapse’s effects, government creates a substantially larger amount of money than normal, but it is a normal thing.
The way the government has done this recently is to buy financial assets and create money to do it. The Fed’s November 3 decision to increase its asset purchases was met with widespread criticism. As with any decision to ease monetary policy, there are pluses and minuses, but the benefits outweigh the risks and the consequences of not acting would likely be severe.
How Much Extra Money is Created
The amount of extra money being created seems enormous, as does the bailout package for Ireland. Yet when these sums are compared to the normal flow of money and the normal amount of money in the system, it is just not that significant. It is manageable. These sums are so large in modern economies that the figures have become meaningless to the casual observer. I cannot phantom what a pile of currencies that totals ONE TRILLION DOLLARS would look like. It is beyond my imagination because the physical pile of currency would be enormous – I have no idea how big.
But the only way to judge it, is to compare it to numbers that are of similar size. When the economists do this, they decide the amount that is needed.
So the bottom line on all of this, is that this printing of money is intended to smooth out the largest effects of the crashing of the latest wave, and make things more palatable to the average voter.
Now what I have written here is an explanation of what is happening and I have tried to write it in a fashion that doesn’t force the reader to understand money flow and complicated economics.
Do I agree with how these waves are created and how they are dealt with? ABSOLUTELY NOT !
It is outrageous and it is preventable with some common sense. However, we are too bound up in ideology to take the time to understand cause and effect. So we ignore the obvious until the crisis hits, and then we scream for the government to help us.
Next time, perhaps we can talk about how to stop waves, how to protect our middle class, and how to bring sensibility to the system.