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The Man in the Street
Attempting to understand the root cause of a problem should, in theory, contribute to finding its solution. Applying this to the global financial situation however is not as easy as it sounds. For the man in the street, trying to identify who might have, or what might be a workable solution to the ever increasing levels of debt is made difficult by two things.
Financial Jargon
Firstly there’s the financial jargon to plough through, derivatives, credit default swaps, unfunded liabilities, ratio of debt to GDP, budget deficits, quantitative easing, to name but a few. Secondly there’s the issue of the increasing number of zeros, from millions, billions, trillions, to 10’s of trillions, numbers which become increasingly meaningless as each new zero is added.
The average person however does recognize that we’re in a lot of debt, levels never seen before in human history, and they’re growing.
Looking back In Time.
How were transactions carried out in the past and how did we get to where we are today.
Society progressed from a barter system of exchange into other forms of currency and then to gold and silver.
For convenience people stored their precious metals in vaults with a trusted third party, the goldsmith, and traded the receipts for the coins. At any time the receipt could be exchanged with the goldsmith for the designated amount of gold or silver.
As trade expanded and credit was required, the goldsmith began loaning out a portion of the depositors’ gold by issuing more receipts and keeping a small amount of gold in reserve.
This worked because the depositors rarely came back to collect their gold all at once, and if they did, not all at the same time. We use a similar system today with fiat currency and fractional reserve banking.
Fiat Currency
Today we use fiat currency which is declared by governments to be legal tender, but it isn’t backed by anything physical, we can’t go to a bank and exchange our paper for anything of value. However as long as people believe it represents something of value and that they can exchange it tomorrow with someone else for something of value, the system works. Fiat currency is based on faith and confidence in the government.
How Money Can Be Created
New money comes into existence through debt.
In the same way the goldsmith loaned out his depositors’ gold and kept some in reserve, banks today operate the same way through fractional reserve banking. In the US a bank is able to loan out nine times the amount it has on deposit.
When bank credit is required, the amount of the new loan is typed into a computer screen which then appears as new money the bank created from nothing. In signing the credit agreement the customer agrees to pay it back, with interest.
This is how most new money comes into existence, the remainder is created by governments also through debt instruments by issuing bonds, IOU's offered for sale.
Money Printing
Many predict that if central banks don't provide liquidity, (money) there will be a deflationary collapse leading to more money printing than ever. In order to keep all the plates in the air there is no choice but to continue printing and adding zeros to computer screens.
Cutting Through The Jargon
How long we can carry on in our current situation is impossible to predict. But if it’s true that money printing may be the only way forward this would have a significant impact on the value of peoples’ savings. High levels of inflation reduce purchasing power. Money tomorrow will not be able to buy the same amount of things it can today.
Many believe that in addition to cash, owning some hard assets such as physical gold will offer some level of protection in such circumstances and with the recent drop in gold price now might be a sensible time to buy.
OK, finances are not my thing but I did enjoy reading about goldsmiths and how they originally worked. Thanks for this
A great article for understanding the the depths of Financial Services. Hard to know what the right answer is to improve thing greed got us here lets hope we have a better solution to get us out of it
Thanks Shawn, and for clicking through to my site, I agree with you about the barter system.
A very interesting article and a great explanation Penny. Great stuff!
Thanks Maria, I know the situation in Greece isn't looking too good at the moment, you're doing the right thing by trying to get something going online. Good luck with it.
Good explanation. The world loses predictability when savings look useless! Some level of protection makes sense. For me, right now, that's building wealth within my head and my system as I build out my online presence and code up various pages to showcase recordings .... onward. Nice article. Useful in such a strange economic time as today!!
Thanks Cynthia, you seem to be making very good progress with it. There's some very useful information in your daily emails, keep up the great work..
Thanks Penny! Glad to learn that from you. Thanks for your compliments.
Thanks Lemuel, I'm glad you found it helpful. Interestingly there has been a rise in gold price since I wrote and submitted the article. Thanks for your comment.
I love the thought of 'not' money going around the world. At any given time there is billions of dollars on the move energetically without any 'hard currency' actually going anywhere. The idea that there is money passing through me right now means I'm potentially 'made of money'. It's really just an energetic concept. OK, Heather's getting weird again ;-) Enjoyed your article Penny. Agree with Christopher, it was easy for someone like me to understand!
Heather that's a great interpretation , as that's just what money is really, an energetic concept representing human effort and input. Thanks for commenting and putting your own unique slant on it.
An excellent article, Penny, yes the whole world is in a downward spiral for this very reason and who knows what the answer or solution is.. definitely not our governments that seem to be escalating to the problem hell bent for leather into the valley of doom. We unfortunately are just along for the ride....
Thanks Rob. As I just said to Chris I think the important thing is that people have some understanding off the situation. I don't like to be a prophet of doom though, humanity is resourceful and creative, we may have to go through a period of pain but I have no doubt that we will come through to the other side however long it takes.
Thanks, Penny, this was enjoyably written. Great presentation for laypeople like myself, easy to understand without all the troubling details. Too bad the overall understanding we come to is even more troubling. You do realize, I hope, that this same article, printed on the front page of the WSJ, would have the potential to rile up traders and business-people enough that it might cause a sharp drop in the Dow, or the AMEX. Every time we are reminded that currency is an agreed-upon fiction that we all live by, we get uneasy at the thought that money isn't everything--and it isn't even a real thing. Good job.
Thanks for stopping by to comment Chris. To some extent I think traders and business people already understand the situation and are already looking for ways to protect their assets. I think it's just as important though that the average person is also able to understand so that they too can plan accordingly for whatever may lie ahead. Thanks again for commenting Chris.
Wonder what is at the end of the road. We can't keep printing money. Scary. People are not as free to spend as they were ten years ago. Life style has gotten very pinched, with people working harder than ever just to run in place. Way over my head. What do you see as a solution Penny?
That's a good question Joan but unfortunately there doesn't appear to be a pain free solution. It's a complex issue made more so by the inter-connectedness of the global banking system. If an institution in one country failed and was unable to pay it's debts to an institution in another country, that may also fail and so on, known as the domino effect. Some say that governments will attempt to inflate away the debt. In other words use money that is worth less in the future to pay off debts we have incurred in the present . Other people say we should have allowed the collapse to happen in 2008 and by not doing so the next potential collapse would be much more severe. It's more than likely that at some point we will see a new global currency system, perhaps partially backed by gold that will enable balance to be restored. Thanks for commenting Joan.
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