This is a picture of a market. I understand it. On this market, people sell things to other people and the people who sell the things make sure that they sell them for a bit more than they paid for them, so that they can make a profit by which to pay for the opportunity to have a stall on the market and with enough left over to pay for things that they need to buy at other markets. What could be simpler?
All the newspapers today are reporting meltdown in the market. But it is a more complicated market. It is the stock market. It is not based upon things being sold, it is based upon the idea of things being sold. It is based upon selling the idea of something. The people who sell these ideas do not meet the people that they sell them to. In fact, most of the selling of ideas is done by third parties, who buy and sell the things that do not exist on behalf of the people who actually own the things, and are paid to do so. Already, this is a more complicated market than the market in the picture.
I am not very good at economics. I understand how much money I’ve got, which is a minus figure, as I owe money to a bank who foolishly lent it to me to buy a house I cannot afford, on the understanding that I will pay the money back to them by a certain date. Unfortunately, I have to pay them back more than the sum they lent me. This is how they make money. I make money by rearranging the English language, either by hand, or with my mouth, and every month, I hope that enough people pay me to do this for me to pay the bank what I owe it for lending me a sum of money. Any money I have left over after paying the bank, I am free to spend on whatever I like, although because I have a house, and a car, there are certain things I have to pay first, to insurance companies and to the council, for instance. It sounds pretty stupid when you lay it out, but I do at least understand it. Once I have bought food and household goods, I might have enough left over to go to the market and buy something nice for myself. Because I am self-employed, I do not have a boss, and cannot be sacked, but neither do I have any security. Those who pay me today are under no obligation whatsoeer to pay me tomorrow, or ever again. Because of this, I tend not to go the market to buy nice things as often as I’d like. Why? Because there is a recession on.
The recession started in 2007 and really started to get serious in 2008, when house prices fell and people who had been lent more money than they could pay back defaulted on their mortgages, meaning that the whole house of cards came crashing down. The banks and building societies had been lending money for years to people who couldn’t pay it back based upon the idea – another idea – that house prices would just keep going up. They stopped going up and started going down. It turned out that all the countries that thought they were rich and doing well, were only rich and doing well because they expected house prices to keep going up, thereby making everybody richer without actually doing anything. If you watched Property Ladder with Sarah Beeny in the mid-2000s, one thing you knew was that the amateur developers who tried to increase the value of a property but spent too much in doing so by buying stupid taps could have made money by just doing nothing for three months. Because the market went up anyway while they were mucking about with taps.
There was a banking crisis, which I understood, because it was to do with the banks having lent money that wasn’t theirs to people who couldn’t pay it back, so they ran out of money, and the money wasn’t even theirs. It was our money that they had lent to other people. Some people tried to get their money out of the banks but many banks had to be lent money by the government, who used the money we had given them by paying tax to help the banks. I’m not stupid, but I couldn’t really work this one out. Since 2008-2009, the best thing I could think of doing to beat the recession was spend less of my money. So I did.
Now, we read the news and find that America, the richest country in the world, cannot afford to pay money back to the people who lend it money. Why is America rich if all its money is borrowed? It is rich because of an idea. The idea is: if everybody works really hard, especially the poor, and we allow the rich to keep all their money, they will create more money. The stock market deals in ideas. Wealth is an idea. If you do not own the house you live in, your house is an idea. You might own some of it, in that if you ran out of money, you could sell it to pay off the money you still owe, but it’s not yours. Because Greece and possibly Spain and Portugal and Ireland are all in financial trouble based upon an idea – the idea being: all the money we have is borrowed but we might carry on making more money if house prices continue to go up – there are fears that the Eurozone will collapse.
As I believe I’ve mentioned, I’m not very good at economics, but I know that the single currency for some but not all European nations was introduced so that money could be simpler. Instead of lots of currencies which have to be exchanged all the time, some but not all European countries would have the same currency, which would make trading between some but not all European countries easier, and fairer. However, this Utopian ideal seems to be in trouble. Because Greece, which doesn’t really make anything, or Ireland, which doesn’t really make anything, or Spain, which doesn’t really make anything, built the idea of their wealth upon the idea that house prices would continue to go up, and they have gone down, almost an entire continent using the same currency seems to be in more trouble than it might have been if it still had lots of different currencies.
I love Ireland. It is my favourite country. I have been there a lot, and regularly, over the past 20 years. It used to be a small, modest, rural economy, self-sufficient, surrounded by water, and with enough tourism to give it a bit of spare money to buy nice things at a market. It joined the EU, became eligible for all sorts of grants and funding, and built better roads. These were really good roads, and they joined the place up a bit. Having joined the Euro, Ireland started advertising itself as a great place for foreign businesses to move to. So lots of foreign businesses did indeed move there, as rent was low, tax was low, services were almost free, and labour was cheap. And money came in. And Ireland started building houses, which people who couldn’t afford them borrowed money to buy. And people from other countries moved to Ireland to work for the businesses, and rented houses from landlords who had bought too many houses. Then, when it stopped being a good place for foreign businesses to be based in, the employers and many of the employees moved out again, to find a cheaper place to work and be based in, and Ireland’s wealth, based on an idea, disappeared. This is how quickly ideas can disappear. Now the people of Ireland are moving out, which means less tax, and tax is not an idea, it is real. This is why U2 moved their business to Holland. This is what happens if you have actual money. You move it to where people can’t get at it. (This involves not caring about the country you are moving it from, which U2 clearly don’t.)
If the current recession, and the predicted next one, which I refuse to call a “double dip” as it makes it sound like fun, tells us anything about wealth is that it is only real for the wealthy. The rest of us might feel wealthy because we have credit cards and big tellies, but we are just as poor as we were when we didn’t have them. Men in stock markets are moving money that doesn’t exist around a huge, global market, and it’s not our money, and yet the success or failure of the men who move it around affects us all. Why? Because global meltdown affects the amount of extra tax we are expected to pay on goods, and the amount of interest we have to pay the institutions who lent us money we can’t afford to pay back.
The previous government in this country ran it on the basis of an idea, and that idea turned out to be a bad idea. They spent all our money, which was not even money we had in the first place, and then borrowed against money we had not yet paid them to save the banks which had lost all of our money. Luckily, this money didn’t exist, so in a way, we had lost nothing, but we had lost nothing twice. Does that sound ridiculous? It should do. The current government didn’t actually lose our money as they weren’t in power when it was lost, but they have decided that the best way to pay it off is to put quite a lot of us out of work, so that employers won’t have to pay us. But when we are out of work, other people who are in work have to pay us not to be in work, and it’s not very much money, so we can’t afford to go to the market and buy nice things, which cost more because the government have put up tax on nice things in order to pay themselves back for losing all our money, twice.
The bad thing about our government is that is that it is run by men who are rich. They were rich before they went into politics and don’t know what it is like to be poor. (Poor being what nearly all of us are, in reality.) So they have come up with a Plan A that protects people who are rich, but hurts people who are poor. It is a shit plan.
If you are actually rich – in other words, you own the house you live in, something only the rich actually do – you can pay people to prevent you from having to pay the government what you owe them in tax. This is a luxury only the rich can afford. So the rich, the very people who should be paying tax, don’t pay it. While the poor, which is nearly everybody else, pays tax that it can’t afford, but can’t afford not to pay. This is also an idea. This idea is called capitalism.
So all these sweaty men in coloured jackets and on phones we keep seeing on the news – who are, at the end of the day, just men with jobs they could lose as quickly as you could lose yours – are the most powerful men in the world, but unlike the people who work on the market in the picture above, they don’t have anything to sell. They don’t even have a stall. If you went up to the desk and tried to pay for the idea that they trade in with cash, they wouldn’t have anywhere to put the cash, and you wouldn’t have anything to show for it.
I wish the cakes weren’t so pricy in the British Library. But the British Library, which is a public service, pays a private company to make and sell its cakes. This is not a market, as there is only one place to buy cakes inside the Library.
Obviously this is a post about something rather important so I appreciate this response might seem flippant – but is that the Market Square in Northampton? I must admit it was the first thing that caught my eye … now I will actually read said post properly.
I believe it is, yes.
Your effort to understand these things is commendable – most people make no such effort. Which is a shame but it’s not really their fault because there exists a large group of people employed to make them not think about it.
I’ve recently started trying to understand these things too and have found that this book is a very good place to start: http://www.debtgeneration.org/index.php
I often wonder, why can’t all the no marks in the city pretend everything is just fine. Then they would have no problems pushing all their pretend money about.
Perhaps persuade them to do E instead of coke?
Good post. My grandfather was a banker decades ago, and he said in the eighties that he was glad he was retiring, as the global economy was getting too damned complicated, and was heading for a fall. Nobody listens to old men.
I saw an article in the Huffington Post the other day that you might be interested in, along similar lines. Basically, governments borrow money from each other, and who ends up making the biggest profit out of everybody else’s loss?
Neat analysis and great title Andrew, would that more of us were not as good at economics as you!
Hope the private monopoly cakes you buy in the British Library are more satisfying than the stock traders’ puff and wind anyway.
I think the real question here is, can I borrow £20? You can imagine I’ll pay you back in 6 easy instalments of £4 earning you a handsome imaginary 10% return.
No, a double dip just makes it sound like we’ll get screwed twice.
Perfectly accurate, then.
My husband sent me this article after I reacted badly to a report about the economic situation, yelling “THIS MAKES NO SENSE! WHAT AM I SUPPOSED TO DO ABOUT THIS?” repeatedly at the telly news last night. Unfortunately I still don’t know what I’m supposed to do about it, but I enjoyed your post on the issue. BTW, last month I gave my spare money to the East Africa Appeal, rather than buy nice things. At least I actually feel I can do something about that enormous fucking disaster.
The problems here in Ireland are primarily down to half-a-dozen developers who borrowed many many many billions of euro and are not being held to account. They couldn’t pay so the banks were in danger of failing and the state (meaning idiot tax payers like me) had to bail them out and will continue to do so probably for the remainder of my working life. These developers can’t be named (but if you search online you’ll find their names). The banks in Germany and the UK were hugely exposed because they are the origin of all the borrowing. So Irish tax payers are protecting UK and German tax payers from bailing out their banks. I’m not angry about that bit but it is an often forgotten fact in all of this. A tax payer somewhere was going to pay… unfortunately it was the Irish tax payer.
The problems here are much less to do with small-time property speculation. There has been some but it doesn’t compare to these hidden individuals mentioned above. Though I know of people earning half my salary who bought 4 or more properties using money from banks who have washed their hands of any responsibility in this arrangement. Madness…
The operating expenses for the country are messed up (that’s a technical financial term). Too many people living off the state (that’s us idiot tax payers again) and many more defrauding the state to an estimated 2.5 billion euro per year (according to a mate of mine who works in the civil service here).
Despite all that… it’s still a great place and now Andrew can afford to buy a holiday home in Galway (or rather… he’ll possibly be able to convince a bank to lend him money) I was there last weekend. It’s still great.
Interesting you should mention insurance. That legalised form of extortion….
I’m renewing my home insurance today… it strikes me as an odd arrangement. If I claim on the insurance my policy cost will increase and for the next 5 years. However the bank own my house so they have more to lose if it falls down. I’ll be ok because I’ve got family & friends who will give me a place to eat & sleep. The bank doesn’t have family or friends. So why isn’t the bank paying an insurance policy on their house ? Because the system is screwed up (there I go with the financial jargon again… stick with me). When I’ve paid off my mortgage (hahahhahaha) I’ll take out insurance. Until then I think the bank should be protecting their investment. While they’re at it they had better keep an eye on my health… oh wait they’re covered but I’m paying for it.
Lordy I feel dumb….
Still. It’s friday and it’s sunny here in Dublin.
Andrew, I need to correct a factual inaccuracy
“Then, when it stopped being a good place for foreign businesses to be based in, the employers and many of the employees moved out again, to find a cheaper place to work and be based in, and Ireland’s wealth, based on an idea, disappeared.”
This is not correct. Foreign inward investment has increased year-on-year. Ireland continues to be a good place for foreign businesses to be based in. In fact the cost of doing business has decreased significantly, particularly commercial rent. The low rate corporate tax has not changed (and will not change despite the best wishes of Mr Sarkozy).
Multinationals are not leaving Ireland, in fact according to the most recent IDA and Forfás reports they continue to come.
You are officially my Irish Correspondent. Don’t let the rest of us down, now!
Do I get a badge ?
So long as I’m not confused with someone who knows what they’re talking about I shall do my best.
I will never be confused with someone who knows what he’s talking about, but it doesn’t deter me. [*looks down* *gulps*]
You borrow money from a lender to buy a house. Whether you believe the money really exists or not, you’re borrowing on the expectation that you’ll be able to afford the repayments because you’re working. Whether the house value rises or falls is irrelevant as long as you keep earning, and you don’t need to sell the house for some reason. Your expectation is that the value of the house will rise, but that isn’t the basis upon which you take out the loan and it isn’t directly what underpins the process. It’s your earning power that underpins it. It’s the accumulation of wealth. The housing market reflects our earning power, or at least our perception of our future earning power. Sometimes our collective perception changes and the market shifts accordingly. And of course it’s at such times that people do find they’re no longer earning and they do need to sell the house. It seems to me that you’re looking at the house prices thing the wrong way around. But maybe you’re not and banks and governments are. Maybe that’s your point. I don’t know.
Because I don’t understand economics either. That may already have become apparent. I wouldn’t know.
But I do know this: when the bank’s lost all that money, it was savers’ money that was lost. Not all savers are rich, but the people who stood to lose the most if the banks failed were wealthy people. The people queuing up outside Northern Rock were savers. They understood the situation then. If the bank failed before they got their money out, they’d lose their savings.
I supported the bail outs because really it was the only thing to do. The state borrowed against the country’s future earnings in order to give the banks enough money to allow them to keep trading. If they kept trading they could re-capitalise, and ultimately that meant recovering “our” money that they lost. The banks must have lost considerably more than we spent keeping them afloat. And whether you believe that money was real or not, the balance of every bank account in the country was in jeopardy.
So we’ve all collectively borrowed money to pay to keep the banks trading, in order to allow us to pretend that we didn’t just lose all of “our” money. But we did lose it. And I keep putting “our” in quotes because we didn’t all lose it. Because some of us didn’t have any money to lose. Yes, all those people queuing outside Northern Rock understood at the time what was happening. But since then they – and people like them – have developed a strange form of amnesia.
They didn’t take their money out of mutuals and hand it over to banks in return for a quick bribe. They didn’t make bad investments and lose all their money. They’re savers. They’re prudent. It’s those something-for-nothing get-rich-quick borrowers who are to blame. And after all, what have savers got to do with borrowers? Don’t those greedy fools know that all they’ve got to do is save their money and they’ll get interest? Which doesn’t fuel greed and is really just a sort of award given in recognition of one’s prudence.
Let’s not forget that recapitalising the banks is a process largely funded by borrowers. And we have a government now that is looking after certain people’s interests. We all borrowed that money whether we – on the face of it – benefitted from it or not. But when it comes to paying for it, we’re not all pulling our weight. And indeed, those who benefitted the most seem to be the ones pulling the least.
The Tories want to scrap the 50% tax band apparently. According to today’s Independent it may only bring in “as little as £750m” in extra revenue. And it acts as a disincentive for “wealth generators”. Wealth generators are presumably people who generate over £150k extra wealth for themselves every year. (Why *did* that NHS computer system cost so much money?) Of course an extra £750m being paid towards the deficit every year isn’t worth bothering about. I think it’s a well established fact that not one single measure taken to cut public spending in the last year has saved less than £750m. Any proposed measure that was going to save less than three quarters of a billion would be thrown out immediately as a total waste of everyone’s time.
We’re all in this together. For fuck’s sake.
Can’t work out if we *are* in this together or not from your slightly aggressive last line, Dave. Are we? Borrowers? Savers? We’re all victims of the capitalist dream of “growth”, which drives everything. Build an airport because it drives growth. Drill in Alaska because it drives growth. What about the other kind of growth: the spiritual and cultural kind? Who has the time, or money, for that any more?
Apparently RBS the bank we own about 84% of is worth about half of what we paid for it. With the US getting their AAA rating reduced it seems this idea of pouring fantasy money into the problem isn’t really working.
I sometimes wonder if it would be better to let everything collapse and just fend for ourselves with sticks and arrows like some latter day Mad Maxes.
I fancy my chances on a one v one with any of the fat City shits.
Obviously, we don’t get on, unfortunately. But I have to say this is the best thing I’ve read about this. And I love the completely unnecessary and gratuitous line about U2.
One solution… revolution.
Capitalism isn’t working.
Do links in comments ever get clicked? I don’t know, but here’s a clip about the global debt crisis: http://youtu.be/4Z9WVZddH9w?t=1h9m13s.
I’d recommend watching all 2h 40m if you’ve got time to kill…
Unfortunately Ireland was far from self sufficient twenty years ago. In the 1980s there was mass emigration of young people, huge levels of unemployment and punitively high taxation for those who did work. On top of this there was the “troubles” in Northern Ireland which then looked like they would never end and the continuing sway the Catholic church held over secular life
In spite of the massive fall from the false peaks of the Celtic Tiger I think Ireland of today is a better one than that of the 1980s
You make some fair points, Sean, although I meant Ireland was “self-sufficient” long before “twenty years ago” (that’s just when I started visiting Ireland on a regular basis and got to know it a bit). The country has a troubled history, so clearly any suggestion that it was better “then” carries with it a lot of portent. But I have been re-reading a book about the failure of the Labour movement, written in 1978, as my yearning for a simpler time is slightly inflamed! Better that Ireland has a more modern attitude to Catholicism, I agree. And the Celtic Tiger peaks were indeed false – as they were in equivalence in other European countries, and America. But I look upon Northern Ireland and the Republic of Ireland as two separate entities, and wasn’t suggesting that Northern Ireland fun and games in the 80s in any way. That’s another blog.
“If you do not own the house you live in, your house is an idea.”
No, it’s definitely a house. Every second you spend enjoying the comfort and shelter of that house is a second you don’t have to spend outside, in the rain or nasty hot sun.
“The rest of us might feel wealthy because we have credit cards and big tellies, but we are just as poor as we were when we didn’t have them.”
Leaving aside the credit cards themselves, but staying with the big tellies – if you enjoy having a big telly, it is quite definitely a form of wealth. You didn’t have it before, now you have it, therefore you are more wealthy than before.
You seem skeptical about the existence of any form of wealth that is not permanent, but ultimately there is no such thing as permanent wealth. The best telly in the world breaks down eventually, houses burn down, banks go bust, gold bars are stolen, holidays end after a couple of weeks, and as Keynes said, in the long run we’re all dead. That doesn’t stop these things from being wealth while we have them and are enjoying them.
“If you are actually rich – in other words, you own the house you live in, something only the rich actually do – you can pay people to prevent you from having to pay the government what you owe them in tax.”
Although people who own the place they live outright are in an enviable position, they are not necessarily in a position to hire an accountant purely for tax avoidance purposes – it’s more likely that they would already have spent all their money paying off their mortgage.
Remember, when imagining up a “rich” person to get angry about, the richer you imagine them to be, the fewer real examples exist. And as you live in the UK, most of the human beings in the world are far worse off than you.
And you can’t (legally) pay someone to prevent you from having to pay what you owe. You can only pay someone to navigate the labyrinthine UK tax laws and figure out exactly what you do owe, to prevent you from paying more than that. If the result is that you pay a smaller proportion of your income than a poorer person would, then something fishy is going on, but you’d have the ask the government why they’ve arranged it that way. (And it is definitely a deliberate arrangement, unchallenged by generations of politicians of all parties).
You can also move somewhere else, to choose the tax regime that suits you. You criticise Bono for apparently not wishing to pay taxes in Ireland. But do you want to pay taxes in Ireland? You claim to be fond of the place – apparently no more fond than Bono though, or you’d perhaps have moved there to help pitch in with fixing the economy.
“So the rich, the very people who should be paying tax, don’t pay it. While the poor, which is nearly everybody else, pays tax that it can’t afford, but can’t afford not to pay.
It is certainly true that a rich person pays a smaller proportion of their income in tax, but nevertheless, because a small number of rich people are so very rich, even a smaller part of their income dwarfs the tax contributions of the vast majority of people put together. In the UK (and the US for that matter), the majority of income tax is payed by a small minority. This is despite the rich minority attempting to disguise most of their income as dividends on corporate earnings, which attracts a lower rate (ask Gordon Brown why this is).
“This is also an idea. This idea is called capitalism.”
A country could have pretty much any tax regime and yet still have a capitalist economy (whether it would be a successful one is another matter).