I cannot tell a lie. I chanced upon this blog entry, originally written in August 2011 at the cusp of the UK’s “double-dip” recession, and realised that it is all still true, and all still relevant, which is quite depressing after 18 months of the world turning and money coming in and going out, so please forgive me if I republish it for anyone who missed it, or remembers it. I’m glad I wrote it. (If, at the end of it, you wish to read the 20 or so comments left under it at the time, they’re here.)
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, mostly by hand, occasionally by 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 whatsoever to pay me tomorrow, or ever again. Because of this, I tend not to go to 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 through 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 if 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 Spain and Portugal and Cyprus 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 “whichever-dip” recession 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.
I can’t believe that was (actually more than) 18 months ago… I’d have guessed less than six.
One thing that jumps out at me now is: “If you are actually rich – in other words you own the house you live in, something only the rich actually do…” All being well (which is by no means certain) I will own the house I live in within the next two years. I was heavily in debt before the financial crisis broke and thus none of the money that the banks lost was mine. So – unlike most of those who voted for UKIP and the Tories yesterday – I did not have to be bailed out by the state in 2008 (the lazy good for nothing scroungers). I’ve been saving like crazy since 2009 when I was fortunate enough to have work land in my lap. I’d be pretty badly paid if I were living in London, but I don’t live in London, and in the globalised economy we’ve been saddled with I am – like most people in Britain – somewhat overpaid. (Ironically the same people who are funding UKIP and the Tories – the ones who blame immigration for all our ills – are the ones who most strongly advocate globalisation. Hypocritical wankers.) So on the one hand I accept that I’m relatively well-off. Certainly I think that I should be paying more tax. And it seems pretty obvious to me that if you want to use public money to stimulate the economy then it makes no sense to give it to me because I’ll just save it, whereas if you give it to poor people in the form of benefits, they will have virtually no choice but to spend it.
But everything is relative. And if I do end up owning my house as soon as I hope, I’m not sure it’ll mean I’m rich. We lived in the south east for a time when I was growing up. I note that someone living there now in a house just like the one I’ve got would be able to sell his house and buy mine three times over. And he’d get to live in a nicer place to boot. Advocates of globalisation are thinner on the ground around here.
Anyway, I’m wittering. The other day I came across a letter I wrote to The Independent in April 2010, shortly before the election, in answer to a leading article about the quality of the political debate that seemed to me to be missing the point. I think it was published. It mentioned public sector workers and closed with: “Presumably the Tories mean to cut job after job until the economy is fixed. As long as that sounds like a plan to Britain’s hugely overpaid and under-performing business leaders, the debate will remain somewhat unreal.” It’s not a great letter but I too was glad to find I’d written it. Things seem to have gone beyond unreal now.
I worked for a while at the futures and options exchange in London. An option is where you have the right to buy, in the future, at an agreed price. Then weirdly they buy and sell this right to buy.
I too never really it got until I started thinking in terms of farmers at the market.
Farmer wants to sell his crop in six months, but there’s a glut and the price drops (and he can’t buy diesel for his tractor). But he’s agreed a price for some of his stock with a trader 6 months before so he takes that up. The rest is at market value. He sells his stock and can carry on his business.
Equally the trader might want to make an option on a lower price in case there’s a crop shortage (he might have to use the crop for his beer business for instance), so he takes a contract for the lower price and exercises it when the price goes sky high after a bad summer harvest.
So far relatively simple.
But as lots of people have a right to buy or sell at various prices and if there’s enough of them (market liquidity) and then they can swap, trade or buy these instruments, with each other. A bit like panini stickers. Some commodities can change hundreds of times en route to market. There are some traders that trade on the market but never take delivery of anything or see cocoa they are buying.
That’s what used to weird me out. Why would anyone living in London want to buy 3000 tonnes of cocoa.? Where would they put it in their flat?
There’s ‘derivative instruments’ like this on all sorts of things from currency, gas, property, potatoes, gold. In the old days you traded face to face, but now it’s all done by computers so you don’t even see the other trader and you don’t see the commodity.
Thing is, there’s very few traders that understand it themselves, that’s half the problem. They are in it for the money and just see numbers on screens. They don’t actually make or do anything and they’re certainly not making nice beer.
However if it makes the bank a bit of cash, then they can lend it to the farmer for a new farm, which if he’s lucky he owns in 25 years time.
Trouble is the banks aren’t lending and most sensible people like me and you are saving everything they have, not buying new houses or cars in order to be less reliant on the banks.
Trouble is we’re not going to market neither. (Northampton market is one third the size of that shown in your photo). I think that’s why British Library cakes have gone up in price.