Can Countries go Bankrupt? November 4, 2008
Posted by Andy Roberts in : economics , 1 comment so farThe IMF has a $250 billion bailout fund for use in emergencies to lend to countries that could go bankrupt, but this is not enough to cope with today’s mounting crises so some of the rich oil producing states are being asked to contribute to an extension fund.
Ukraine accepted a 40 billion dollar loan from the IMF to avoid bankruptcy, Romania is currently negotiating and Iceland has already taken drastic measures after the collapse of its financial sector. Belarus and Hungary are also on the critical danger list but the UK and Switzerland have serious national debt and currency problems as well.
Iceland has enough natural resources to survive in some way outside of the global financial system but The UK should be especially worried, as one of the main importers of goods in Western Europe. UK national borrowings also tend to be in other currencies so the debt balance will almost certainly increase as the pound sterling weakens against both the dollar and the euro, after printing and lending out huge sums of money to avert the banking and finance sector crisis.
When Gordon Brown the UK prime minister went to tell the Eurozone leaders how to restructure their banking industries along the lines of the UK model this appeared as a great act of economic statesmanship, but I bet Sarkozy and Merkel had a quiet word in his ear about the UK ditching the pound and joining the euro zone eventually. The big question would be at what rate? The present rate doesn’t look too great, having fallen from 1.5 Euros to the Pound down to 1.25 over the past year or so, but as the financial crisis gets worse over the next few months the worsening terms could end up looking look more like a collapse and rescue operation rather than a dignified merger.
How is wealth destroyed and where does wealth come from? October 11, 2008
Posted by Andy Roberts in : economics, theory , 14commentsWhere did the wealth destroyed on Stock Markets come from?
If 20 percent of the value of world stock markets can be wiped out in one week, as has just happened, then where does that wealth actually disappear to? Is it buried in a big hole somewhere, scuttled at sea or sent on a rocket into outer space? Apparently not, but if money can simply disappear from world markets how can we make any sense of the concept of value in finance. How is it measured and where did it come from in the first place?
Theories of value
In the first post of this series I asked “where does money come from” and gave a brief history of the origins of money in the form of precious metal coins used to facilitate the process of trade from simple barter to the exchange of goods of different values. Without exactly defining where money comes from I hinted at the idea that monetary value is realted to the total amount of work or labour which is tied up in bringing the goods to market. That’s a theory which is known as the labour theory of value and is not always widely accepted, probably due to association with a certain Karl Marx who took that theory, which was already known by cpaitalist economists, and developed it a bit further with his concept of “socially necessary labour time”.
Money grows on trees
People who don’t subscribe to the labour theory of value believe that money comes from being rewarded for taking risks, that value is determined entirely by the balance between supply and demand, and that substantial sums of money can somehow just “grow”. They say that money doesn’t grow on trees, but that’s not too dissimilar to the idea that interest just accumulates on investments because money begets more money. In reality, investments such as stocks and bank deposits typically pass through a number of hands but end up being used to buy goods not for consumption but for increased or more efficient production. Investment of capital buys machine tools, land, property and other wherewithal to employing labour in order to create goods or services for the market which can be sold at a profit. The important point here is that the capital doesn’t generate a single penny of orginal value until the employment of labour has happened. To be profitable, the output from this process of applying labour to previously accumulated capital must be of actual use to a buying market, and must be produced with a total number of labour hours which is competitive with alternative setups, such as differently tooled machine shops employing labour under different terms and conditions. That’s pretty much all that’s meant by the “socially necessary labour time” formulation really, to counter the idea that simply getting enough people to work hard for the the most minimal wages will necessarily creaste wealth.
Wealth Ceated by Labour
All wealth is created in the first place by labour, and that is the real answer to the question answer “where does money come from”. It comes from work that has been done by somebody, that has been abstracted and turned into a type of commodity itself, which can then change hands and accumulate, which can be exchanged for special kinds of products, Which can then be deployed in the employment of further labour. Capital is an accumulation of the results of previous rounds of expended labour, or “dead labour” as is sometimes expressed. The capital exchanged on world money markets then represents a further abstraction as speculators buy and sell options to receive the fruits of other people’s labour in the future, that hasn’t even been expended yet, and place bets on the likelihood of prices rising and falling.
Destruction of Wealth in a Slump
In a serious recession, when stock markets crash, and seemingly abstract wealth is destroyed, this is not just a accountancy game played out with pieces of paper or rather electronic transfers. It does actually play out into the very real destruction of productive capacity as enterprises go under or cut back and the very concrete machinery, buildings, expertise and systems are abandoned due to lack of a buying market that can afford their products at a profitable price. All of that overcapicity which has been built up out of the relentless requirement to reinvest and expand will be scrapped, levelled, and laid waste at the greatest of human cost until enough real capital has been wiped out for the accumulation cycle to begin all over again. In the current circumstances the effects are particularly catastrophic because the downturn had been temporarily postponed for a couple of decades or so through the use of massively expanded credit, which could distort the outward shape of the cycle for a short while, but never the underlying forces at work in any free market system based on the private ownership of capital.
Where does Money come from? September 26, 2008
Posted by Andy Roberts in : economics, theory , 6commentsHave you ever been asked, Where does money come from?
This might sound like a stupid question - “where does money come from” - but how many people actually know?
In recent days European and UK national banks have pumped billions of Euros and pounds into the economies to try and stabilise a volatile market. The US is debating whether to spend $700 billion dollars on covering bad housing debts. People are asking why should tax payers pay for the well heeled banking speculators mistakes, and will it be enough! Where does $700 billion come from? Where does one dollar, Pound or Euro come from?
Origins of Money
Money originated soon after the time when the simplest forms of trading began. Once people got the hang of surviving from day to day in a hand to mouth existence, they had a little spare time to themselves. Different people started to specialise in different types of work. So if I could make more than enough animal skin coats for myself and family, and somebody else could catch more fish than they needed, we might give some away to each other. At first this must have been how it worked. Descended from primates who lived in large social groups, we mostly looked after each other by instinct.
Early Humans
As things progressed, early humans who were genetically pretty much identical to ourselves became more efficient at simple farming, making pots and other basic crafts. The opposable thumb left over from gripping tree branches was a big help, as was the ability to form grammatical meaning out of vocal cries.
Surplus and Transport
The extended families grew into tribes and the tribes into larger communities. People wandered further afield and bumped into other settlements, sometimes specialised for a slightly different lifestyle. Rivers and coasts were the super highways along which regular travels could be undertaken and occasional trading relationships were established.
But there was only ever anything to trade as long as people were surviving reasonably well and had some spare capacity to create a surplus of worthwhile products. Without refrigeration, a surplus of fish became a stinking heap after a few days so that was no use. A good pot could be used for preserving foraged food for longer though, so a pot was well worth bartering for if you haven’t got one. But how many animal skins are worth two pots?
The Underlying Calculation of Barter
The calculation would have been based roughly on availability. If community A had produced a surplus of 4 pots since the last trade and commuity B had produced 8 extra animal skins then two skins for one pot would have seemed like a fair trade. As the surpluses grew and the number of parties taking part increased so the bartering became more complicated. One canoe is worth 9 animal skins so if I give you 5 pots you can give me one skin change, which I don’t really need, but I might be able to swap for some particularly tasty berries. In this example the animal skin is being used for its exchange value rather than its intrinsic value, and it’s exchange value is still linked to the amount of time and effort put into catching the animal and processing the skin, including some part of making the tools for hunting and scraping.
Precious Metal Coin Money
The inconvenience of carrying around skins, pots and canoes just for use as small change soon became a burden, so anything just as valuable but smaller and more transportable was preferred. In it’s earliest form, money was made out of precious metals and the value of the coin was related to the weight and value of the silver or gold. That is, to the amount of work involved in finding, mining and refining the precious metals. This worked so well you could set off from Phonoecia (Iraq/Lebanon) and sail across the Med, through the straits of Gibraltar, up past the coast of Gallicia all the way to the West of the British Isles just to collect some tin and drop off a load of grain.
Confidence in the value of metal coins was such that some people were even able to give up farming, boatbuilding, mining and pottery to become full time travellers and traders.
End of Where does money come from part one - more next week..
Thanks for reading Andy Roberts articles about economics
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