I Promise To Pay The Bearer On Demand

The ongoing descent into recession gets more bizarre by the day. I guess none of us have ever seen anything like it. I left the UK in 1992, as that recession crushed the construction industry: I was an Interior Designer at the time, and the company I worked for had gone bust. I could have survived on state benefits for a bit, I suppose, but opted for the Norman Tebbitt 'get on your bike' approach. I cycled to Saudi Arabia, and then Dubai.

I know that recessions or economic downturns were supposed to operate on 11-year cycles, but we seem to have missed the one that was due for 2003. Ah, well, that's it then. Governments have abolished boom and bust, it's boom all the way from now on (actually wasn't 2003 when the dotcom bubble burst?).

What is happening now is pretty hard to comprehend. Banks began to realise, all of a sudden, that not only did they not have the money they thought they had, but they actually had anti-money in extremely large amounts. I find this to be totally astonishing. The idea of a bank is that it is a safe place to keep your money. You, as a customer, understand that while you are not actually using your money, your bank will use it for its own purposes (normally the creation of more money). That's okay, as long as you can get access to your money whenever you need it.

The problem is that banks are a bit more complex than that. If every single customer turns up on the same day and wants to withdraw all of their money, the bank will not be able to do it. Each bank branch only stocks enough cash to deal with its normal daily business. It could take them a few days to physically get cash money to the place where it is needed. But here's the thing: they will have cash tied up in medium or long-term deposits, in shares or bonds or whatever. They will not be able to immediately extract their money from these things.

And so there's a panic reaction from the public. There's a 'run on the bank'. There are paper assets but no actual cash. There's insolvency.

Normally a bank would get around short-term liquidity problems by borrowing from other banks, and that has worked well for centuries. But now, banks are wary of lending to each other. In fact, they're just not doing it. And then they discover that their highly-paid rocket-scientist investment bankers have placed the bank under some exceedingly large obligations. They have huge bills to pay, and they simply cannot raise the funds to pay them. There's insolvency.

How did all this happen? We have to blame Ronnie Reagan and Margaret Thatcher. They adopted an economic model that said markets were the best thing. You would find true value in a market. Traders in a market would never do anything bad, because the results would hurt them too.

Yeah, right.

So money market dudes were allowed to invent all kinds of stupid stuff that nobody could understand, with the end result, here in 2008, that the Western world owes itself more money than actually exists.

There is this place called Planet Zog. This is thought to be the location of the difference between the world's GDP and its financial liabilities. If it is, the place must be awash with money.

Which brings us to the real point of this post: what exactly is money?

Money is a means of exchange. It's a way to place a value on things. In the early days of currency (in the West - I'm not talking about conch-shells or stuff like that), money was real money: its value came from the value of the metal it was made from, gold, copper, brass or whatever. Then we got paper money, because the metal stuff was just too heavy to carry around. In Britain, banknotes carry the legend 'I promise to pay the bearer on demand the sum of x pounds.' What that used to mean was, 'this paper is worth the equivalent value in gold, and you can have the gold if you want.' What it means now is 'I want you to believe this is worth something, and don't ask for the gold because we sold it.'

We now have the slightly amusing sight of Western governments begging Arabian Gulf states and China for money. But guess what. They are broke too. We might as well adopt the Zimbabwe dollar as a global currency.