Money as comedy.

Since the death of the great comedian and humanitarian Danny Kay (who he, I hear you ask) the works of that great Danish philosopher Hans Christian Anderson have rather faded from popular view. Understandable perhaps, popularity is a crowed place. Anderson’s great treaties, which translates in English as “The Naked Emperor” perfectly defines the basic operating mode of our modern society.  Fortunately, and thanks to Mr Kay, a simple yet accurate version of this work is available on Youtube, simply search Danny Kay Emperors New Clothes. Though appearing to be a simple children’s story, a fairy story, sung to a catchy little tune to a group or rosy cheeked children, the short narrative is in fact a perfect parody of our modern economic state. We believe that the paper money we have in our pockets has some real and intrinsic value. And so it does, until somebody rather naively questions the accepted view of value, and then the whole structure collapse. The Emperor is without cloths, paper money has no value.

Of course we are all, almost without exception, so invested in the idea that our money has value that we go along with the fiction for, though fiction it might be, it works, and works rather well. No longer do we have to measure the value of oranges against goats or cheese to songs, which we would have to do if we operated a “barter economy”. Instead we can use the simple and effective concept of paper money to guide as through these tricky questions.

A simple but rather old joke about the amount of money going around serves to highlight the current problem of what the economists call “liquidity” but which the former British Prime Minister Harold Wilson humorously referred to as “ the pound (yen/mark/dollar/ euro) in your pocket|  It goes like this:- “ if the ancient Phoenicians (Egyptians, Persians, you have a free choice here) invented money, why didn’t they invent more? Good question. And now we know the answer. This ancient concept of money was based on the rather crazy idea that money in itself had value. They found a substance which everybody valued, and worked out the price of everything against that. They chose gold, though it seems that at other times and in other places other people selected other much sort after commodities such as salt and  even, though hard to believe, Conch shells. What ever turns you as those lovely Californians like to say.

Now most people have at least some hazy idea about supply and demand. Maybe the don’t vocalise it as such, but they vaguely understand that if there is a lot of it about, the price is low, and if it is in short supply and people want it, the price is high. Until quite recently that was the accepted wisdom since what worked for salt worked equally well for money. If there was too much money about, goods such as cars, clothes and food, were worth more. This applied very strongly to land since, with the current state of science being what it is, we are unable to grow more. There are lots of historic examples of this phenomena the most famous example of which is probably the hyper inflation which occurred in post great war Germany where a loaf of bread required a whole barrow load of paper money. After all, you can’t eat money.

And so the accepted and dare I say logical conclusion was that the amount of money going around had to be carefully controlled by the government. This fine balance ensured that prices remained roughly stable and that inflation, the state where prices and wages constantly rose at an unpredictable rate, was kept under control.  So far, so good.

Now let us enter the new world order which came into existence as a result of the financial crisis of 2008. For those who had better things to do than to try to understand this crisis let me just say that suddenly a lot of major banks around the world found that their assets, the stock of money they had laying around, had suddenly disappeared. They no longer had any money. And somebody (just like the little boy in the Anderson story though in this case it seemed to be a quite large group of somebodies) shouted large and long that the what had previously be considered to be as good as money was in fact not just without any value at all but was actually a large negative value since these banks would have to find some real money to compensate the people who had believed the fairy story of value in the first place.

In times past the answer would have been to actually print more money, just at the German government did in the 1930’s but through the perfect vision of hindsight this was rejected. What was needed was a new and improved idea to produce more money but in a way which nobody would recognise as the old trick of speeding up the presses to print more. And for this magic trick governments turned not to economists or accountants but to the new creators of fairy stories, the marketing men. And so was born the idea of “quantitive easing”, an impressing sounding concept which was the same as printing more money, but didn’t actually sound like it. Brilliant. Hans Christian Anderson would have been proud.

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