What’s happening to money?

In my youth I was taught prudence and generosity with money. It left me careful but kindly, a pretty good mix for wartime (WWII) and postwar Britain. Everyone got fed up with that philosophy at the start of the 1960s. The Advertising Agents were later depicted as Madmen. They were – and so was the rest of society as it tried, not without success, to spend its way out of gloom. Then came the roaring inflation of the 1970s. One year, Britain’s rose to 25%. At that level economists say people start rioting. It took Margaret Thatcher to put that blaze out.

For these first fifty years of my life money was depicted as a symbol of goods and services. How I learnt to handle it was right for that description. People understood the different meanings of a dollar to the rich man and the beggar. For the one it was power and ostentation; for the other, survival. Hence the different tax rates. At one time very high earners in the UK were taxed at over 100% – and that was before they had paid for the advice on how to sell up and get out.

All this time we regarded money as a fixture. The value of it fluctuated, of course, according to how well it showed returns on its investment. Money squandered reduced in value. Money spent prudently increased in value. ‘Prudently’ is a much overused word now in money circles.  Your prudence can quickly turn to my disappointment. However, there is a generally accepted view that luxury up to a certain point is good and beyond that point is not so good. The reasons for this are more sociological than fiscal.

It took us longer to realise the true difference between one sort of money and another. Accountants tell us they discovered it when they delineated Capital from Current. Actually they didn’t. All Capital is Current in the long run – that time when Keynes assures us that we are all dead. Then came the Big Crash. It reminded us that money is supported not by tangible assets but by confidence. We instinctively prefer to have our money in a pillowcase under the bed. Then we know it’s there.

So as soon as we see others cashing out – or notice a rapid rise in pillowcase sales – we run to, and eventually ‘on’, the bank. Confidence has gone, so has the bank balance. The Big Crash didn’t reduce us to Pillowcash but it did something rather more profound. It taught us that issuing paper that purported to be valuable money, worked. It was meant to be a stop-gap, confidence-restoring enough to allow the old system to return. The price of it would be inflation. That, again, would need to be brought under control since inflation could become a Very Bad Thing.

Two contradictory things then happened at the same time. There certainly was inflation – just look at the prices before and after. And yet, the inflation indices went to zero, even to deflationary. So much so that certain types of deposit in what are thought to be secure banks now attract a charge rather than an interest payment. Apart from the jiggery-pokery of different inflation indices being imposed by governments, what caused this? The answer is simple – Long Irredeemable Debt (LID). Christine Lagarde knows how much of it there is about and so do many others.

We started to ask ourselves why it was possible that LID might be a Good Thing when we had been raised to believe the opposite. The answer, of course, is that it doesn’t become irredeemable until the end of time – something we have never seriously contemplated until we saw 1M hectares of forest on fire in New South Wales. Now there is a very real possibility that our planet’s time is running its course. People divide between the (largely) young wanting to survive and others who want to ‘eat, drink and be merry’. Certainly, tomorrow we may die.

The impact of these things coming together has been to make us realise that money repayable beyond a certain date is not real money anyway, or is certainly unreal enough to someone with a normal human lifespan. This is different from Capital which has to show a credible return in a measurable time in order to attract the original investment. We’ll call this LID money NIMBL (Not In My Blooming Lifetime). It seems then that if you lift (increase) the LID in the right way you can be quite NIMBL. Posterity won’t thank you. You didn’t know you had made the investment in the first place.

LID does indeed increase inflation. Assets acquired with it are invariably over-priced. But who cares? It hasn’t come out of your taxes nor have you been asked to subscribe for it. It has slipped, snake-like, into the system. The Day of Reckoning is a long way off. So we conclude that printing money is good. Which, if the case, comes with a warning. Putting off the real decisions was summarised neatly by Mr Micawber in David Copperfield. He said ‘Annual income 20 pounds, annual expenditure 19 pounds, 19 shillings and six pence, result happiness. Annual income 20 pounds, annual expenditure 20 pounds ought and six, result misery.’

Paul Volcker, who died recently, was somewhat of this persuasion. Such simple accountancy may seem a little out of date today. Our sophisticated bankers must be able to do better than that for us. I’m sure they can. But as Patrick Jenkins said in FT 10Dec19 “If…we fail to preserve a robust and harmonised global approach to banking regulation, history is likely to judge us harshly.”

You can say that again, Patrick.