Economic complexities

Economic complexities

Economies are complex. One factor influences another. The weather affects the harvest. The mines never produce the same volume of useful matter each year. Fashions change. Demand changes. Supply runs dry, supply exceeds demand. Those that make economic forecasts, guess. Those that produce economic theories are sometimes overly optimistic, sometimes mis-informed and sometimes hoping that they can influence the behaviour of others. Many economic theories can work in practice, but only for so long.

Lucy is waiting for the metal fabricator to finish making the tools before she can start work. The metal fabricator is waiting for some metal to arrive from the mill. The mill is short of money as they have paid the metal miner in advance but has yet to receive the iron ore. The mill has asked the coking coal provider to deliver some coking coal. One day he will use electricity to heat the iron, but for now, coke is used. It is reliable and cheap anyway. The coking coal provider wants payment on delivery and the mill is in what we call a cash flow situation. The mill is waiting on payments from the metal fabricator, has paid for the ore and has work in progress. Things are in a bit of a jam. There are delays to proceedings. The wholesaler has amassed a bundle of promissory notes but has not had time to pay his debt to the dependable grifter nor settle the invoice from the metal fabricator. Work is being held up by payment issues.

If there were more promissory notes available there would be fewer financial jams. More money would flow. As money flows quicker, more people get more done. However, the more of something, the less it is worth. That applies to money as it does to apples, tools, gold and false teeth. If there is a surplus of apples, people lower the price. If a false teeth maker makes false teeth more cheaply by utilising new false teeth manufacturing processes, he can lower the price to gain more sales, competing with the other false teeth makers. Prices can come down as processes improve.

An economy can have extra money introduced to help reduce the jams, aid spending, aid buying, aiding the flow of goods and services. A magic trick that pulls a rabbit out of the hat. A rabbit with very large teeth. Teeth that bite the poor the most. Why. The rich gain from asset appreciation, the poor see what little that have dwindle and their salary becomes less meaningful. To simplify the argument, I will like you to consider a campfire. When the fire is less of a fire and more akin to a little glow with a dismal wispy plume of smoke slowly filling the air, one can put a set of bellows to work. Pump in the air, pump it a while, and the fire takes hold. Pump it too much and you have a problem. You run out of wood. Fast. To keep the fire going one must obtain more wood. One must wait for trees to grow, for people to chop the wood, season the wood and bring it to you. This takes time. A new jam. A different jam, a time-based jam.

The shepherd has fifty sheep in his flock. He has written the number down in a ledger. It is the same ledger in principle to the ledger that the dependable grifter uses. The dependable grifter can change an entry from fifty to five hundred by adding a zero. So can the shepherd. When the ledger has been changed to show that there are now five hundred sheep in the field, are there five hundred sheep in the field? To increase the number of sheep in reality, we must encourage the ewes to have lambs. This takes time. We can perform magic tricks with money that we can’t with production. Magic is sleight of hand, smoke and mirrors – a trick of some sort. As is financial magic. Financial magic tricks do not instantly boost the number of sheep in a field. Financial magic tricks can boost the fire in an economy, make it glow brighter for a short while. There is a however a price to pay soon afterwards.

No amount of money will make trees appear overnight. No amount of printed money will increase the number of sheep you have overnight. If you use the printed money to buy trees and sheep from another country, the trick fails. Your currency buys less and less as more money is created. The nation you trade with will demand more money for each sheep.