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Economics 101: The Cause of The Global Financial Crisis

By P.Leon

Everyone knows that we are in a global economic crisis; but how many of us really know why? Who really understands what’s going on? In this article, I shall attempt to present the basics of our predicament, and how certain Mongolia firms are a part of the problem.
In ancient times, people bartered goods for goods. If I was a sheep herder and you were a grain farmer, I would have traded sheep wool and sheep meat for your rice or wheat.
In time, people invented money. The first “money” was a commodity, such as silver or gold. It has been written that the best money is a commodity that loses the least value over time. In accordance to that principle, it is generally agreed that gold fits the bill as the best money on this planet.
Then, in the 7th century, Chinese people began to use paper as money in the form of promissory notes. The concept of paper currency wasn’t introduced to Europe until the 13th century A.D. by Marco Polo. The first proper European banknote appeared in the 17th century A.D.
Promissory notes were banknotes, which promised to pay some other valuable commodity later, such as copper, silver, or gold. The Mongolian Empire under Kublai Khan issued such banknotes that were backed by the state. However, the Kublai Khan dynasty began printing money without limit, and the Mongolian government did not have enough backing to cover the banknotes. Hmmm! Perhaps that is the real reason for the collapse of the Mongolian empire. Is history repeating itself?
Well, yes and no. What the Khan did is being done all over the world, which is why we have inflation; and this is why a loaf of bread, which cost 5 cents a hundred years ago, now costs twenty times that much. However, the current global financial problem is much, much worse than that. In fact, it is down right heinous.
With the invention of computers, came the digital age. Now banks can issue digital money, which doesn’t even exist. So, in essence, not only do we have countries issuing banknotes (promissory notes) that cannot be backed with any commodity because the country doesn’t have enough of resources to back the notes; but also, we also have banks issuing digital money, compounding the original problem to the “nth” degree.
Now, let’s look at some figures. According The Economist’s global debt clock, as of Sunday, September 22, 2012, the collective world debt is 48 trillion US dollars. As of 2011, the Federal Reserve Bank announced that there is about one trillion US dollars in circulation around the world. So, that means that there is around 47 trillion US dollars of debt in this world that exist only as mere abstractions in some computers, rather than in hard currency. Of the trillion US dollars of banknotes that do exist, none of them are promissory notes. That means that none of them are backed by any commodity. On every US banknote the following is printed, “Federal Reserve Note” and “This note is legal tender for all debts, public and private”. Thus, US dollar banknotes do not promise anything. They are not promissory notes. Again, I reiterate: They are not backed by any commodity. So, the Federal Reserve Bank, which issues the notes, does not have to exchange the notes for any commodity. Wow! What a fantastic idea! The Federal Reserve Bank, a privately owned bank, gets to print money out of thin air, and there is no promise to give anything in exchange for the notes.
As a result of so-called ‘quantitative easing’, a fancy word for printing insane amounts of Federal Reserve Notes; we, the people, receive inflation. Inflation is explained as follows: as the Federal Reserve Bank keeps issuing more and more notes, the value of the notes becomes reduced, meaning we have to pay more for our goods, while wages stay relatively the same.
In theory, we, the people, are not the only ones who suffer. In theory, creditors would suffer as well, because the value of the money that they collect for the loans that they’ve issue becomes less. However, many of the so-called “Too-Big-To-Fails” are not suffering as they have received bailouts from the US government, which has borrowed the money printed out of thin air by the Federal Reserve, and which must be paid back with interest at the tax-payers expense. In essence, some of the big banks are being protected while the rest of us suffer. I say, “…the rest of us,” because it is not just the American tax-payer that suffers. The whole word is suffering because of this mess.
That would not be so bad if it weren’t for the fact that those very “Too-Big-To-Fails” which received the bail-outs made extremely unsound loans and conducted imprudent speculations in the derivative market. And that, too, wouldn’t be so bad if it weren’t for the exorbitant salaries, bonuses and fiscal benefits that executives of aforementioned “Too-Big-To-Fails” have received with the “bail-out” funds.
While the “Too-Little-To-Saves” suffer and/or go bankrupt, individuals suffer in the form of lay-offs or salary cuts. That results in people spending less, and in turn that results in less revenue for businesses.
Sadly, the problem doesn’t end there. Greedy and corrupt individuals have created artificial scarcity of such things as oil in order to drive up prices. Even Mongolian merchants are aware of the concept of artificial scarcity. Recently, the Mongolian cashmere industry has become a victim of its own greed by trying to create artificial scarcity of cashmere. The Mongol Messenger reported on September 7, 2012 that Mongolian herders and traders of cashmere tried to set record high prices by holding on to their stock. Their plans totally backfired because the Chinese cashmere market filled the gap and actually drove cashmere prices down. To make matters worse, the Mongolian parliament had previously allocated MNT300 billion to the Mongolian textile industry. According to MP, T.Sedvanchig, “The loan granted to producers was supposed to be used to make their textiles factories operate at full potential, to provide more jobs, and to buy raw materials from local herders.” Yet, cashmere exports decreased this year by 36%. T.Sedvanchig concluded, “The failure of local producers to buy domestic raw cashmere at reasonable prices was irresponsible,” and “It is unfair to blame the Chinese.” Lastly, he said, “We did not issue these loans so local firms could conspire with each other putting the lives of our herders at risk.”
In conclusion, when I first arrived in Mongolia in 2010, I was in my honeymoon stage of culture acclimation. I thought that despite the harsh, bitterly cold and arid climate, this was a paradise. Now, I see that there is corruption everywhere in this world; and, I am bitterly disappointed.

Short URL: http://ubpost.mongolnews.mn/?p=1112

Posted by on Sep 24 2012. Filed under Opinion. You can follow any responses to this entry through the RSS 2.0. You can leave a response or trackback to this entry

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