...a blog by Richard Flowers

Tuesday, December 23, 2008

Day 2914: How to Fix the Economy (gosh, that's a brave title!)


WORLD CAPITALISM, it can do only one of two things: it can spiral UP or it can spiral DOWN.

People buy more stuff; so, companies have more cash; so, companies hire more workers; so, more people have money; so, people buy more stuff…


People buy LESS stuff; so, companies have LESS cash; so, companies lay off workers; so, FEWER people have money; so, people buy LESS stuff…

It's like a Law of Physics.

So, anyone saying (for example) that they have abolished "boom and bust" is as wrong as a sub-orbital hippopotamus saying it's abolished "plummeting and splatting" just because it's not reached the top of its parabola yet.

The banks have their own part in this spiral. If people have more money, they put some in the bank. Suppose I put £10 pocket money in the bank. The bank says: "well, Millennium won't want ALL of that money TODAY, so we will lend some of it to someone. Let's say he might want £1 for a STICKY BUN, and lend out £9 to Cuddly Cthulhu". So, now I have £10 (in the bank) and Cuddly Cthulhu has £9 – and the bank has, somehow, magically almost doubled the money.

But then, what does Cuddly Cthulhu do? Well, he puts it in the Unspeakable Bank of R'lyeh! And the Unspeakable Bank say to themselves: "well, Cthulhu won't want ALL of that money TODAY, so we will lend some of it to someone. Let's say he might want £1 for a Cultist Kebab, and lend out £8 to the Clangers".

So NOW, I have £10 and Cuddly Cthulhu has £9 and the Clangers have £8 and it seems like we've discovered the secret of making money out of NOTHING!

(And what, you may ask, are the Clangers doing banking at the Unspeakable Bank of R'lyeh?!)

The more money people make, the more they put in the bank, the more that the bank can multiply up by their magic, the more money there is to go back into the economy and push it further up the spiral.

And then, along comes the CREDIT CRUNCH.

Like Road Runner pointing out the obvious to Wile E. Coyote, someone like Mr Robert "Hey!" Presto comes along and says: hang on, this money doesn't really exist. And THEN look what happens!

My bank suddenly gets very nervous, and starts to say: "hmmm, what if Millennium wants £2 today? We'd better only lend £8 of his money to Cuddly Cthulhu".

And the Unspeakable Bank of R'lyeh suddenly gets very nervous (or, indeed, very much MORE nervous, being as banking in R'lyeh is enough to make ANYONE quite worried to begin with), and starts to say: "hmmm, what if Cthulhu wants £2 today? We'd better only lend £7 of his money to the Clangers".

Pretty soon, half of the magic money has just vanished – poof! – back into wherever it came from!

And now there is less ACTUAL money going round and round (or "in circulation", as pundits and Presto might say) so less STUFF can be bought and suddenly we are into the downward (BAD!) spiral.

Of course, it doesn't HAVE to be a credit crunch that tips the balance – inflation can do it too: too much inflation can also be a way to cut the amount that people have to spend on stuff (it doesn't cut the amount of MONEY, but because the money is worth LESS it cuts the amount of VALUE). The big recessions of the Eighties were caused by inflation, which is why Governments have been paranoid about it.

And possibly why the current Government's solutions are a MISTAKE.

Cutting VAT to make things cheaper is an anti-inflationary tactic to let people buy more stuff for the same amount of money. But with the oil prices now rapidly reversing their huge leaps of earlier in the year, inflation IS NOT the problem.

Mr Frown's attempts to galvanise the banks into unclenching their money fists are doomed to failure because he is AT THE SAME TIME ordering them to improve their security by holding on to more money. Loan more and keep more at the same time. You can see why the banks are ignoring him.

Besides, the banks currently have NO CONFIDENCE in themselves or each other, let alone any other business on the face of the planet.

So, what is the solution?

Let me have a look at recessions of earlier years. The recession of the nineties ended when the boom took off; the recession of the Eighties ended with the string of selling-off-the-family-silver privatisations and the right to buy (cheap) your Council House; even, if you think about it, the Great Depression ended when the world's Governments went out shopping for re-armament.

Basically, people start buying stuff when they think there's a get-rich-quick scheme in the offing. The banks themselves become more confident and slacken their credit controls and the whole magic money-go-round starts up again.

The crucial factors appear to be that it must be a GENUINE opportunity, and it must capture the PUBLIC IMAGINATION. There have to be real results so that people are convinced, but turning the corner will really be driven by aspiration when enough people think that they can share in the wealth too.

The REALLY HARD PART, of course, is guessing just what that aspirational opportunity will be.

I would really LOVE to say that Mr Clogg's Liberal Democrat "Green Road out of the Recession" is that answer. It MIGHT be. It's certainly a BETTER answer than anything the OTHER Parties have… because they have NOTHING.

Mr Frown's Hard Labour plan to SPEND their way out of recession lacks any focus and offers nothing by way of opportunity.

Mr Balloon's Conservatory plan to CUT spending offers nothing by way of inspiration OR reward.

The opportunity available from founding the Green Economy OUGHT to be obvious but it will only save the world IF it manages to inspire people.


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