Money, by Eric Lonergan; Acumen Publishing (part of the Art of Living Series); 149 Pages; ISBN 978-1-84465-203-7; Sterling £7.48
Never mind recapitalising the banks. The best way out of Ireland’s economic woes would be to distribute cash to all households in the country. Richard Whelan explains why.
Money is the problem and money will provide the answer.
Many of our beliefs about,money, debt and savings are little better than mediaeval prejudices. Saving is good, debt is bad, and so bank deposits are seen in a positive light, while bank lending is somehow bad. But depositing money is simply lending it to the bank while “borrowing is an act of generosity from your future, richer self, towards your current, poorer self.” And no we don’t have to wear a hair shirt to purge ourselves for our previous sins; we just need to get on with getting the money-go-round moving again, a bit more rationally this time.
We forget that as markets are social activities there is a social dimension to asset prices such as property. Peer pressure and our psychological reactions to asset price movements eventually give those asset prices the ability to hijack social and economic activity. (Look at the housing market in Ireland. During the later years of the Celtic Tiger, we stopped thinking of home as a place to live and it became an investment-the beginning of a national schizophrenia. )
In such a situation our brains are struggling to cope, and frequently failing. To go against the crowd, to not follow our very very strong herd instinct, is contrary to our nature as social animals and is frequently humiliating if not impossible. Collective beliefs are self-reinforcing and cyclical (optimism eventually leading to the opposite, pessimism) while a lengthy period of stability inevitably generates overconfidence (and the related willingness to take risks, over borrow, etc etc), which eventually produces instability, recession and depression and the related need for a correction.
Even and perhaps principally in our reaction to recession and depression, rationality is notably absent. Panic correlates. If we all fear a recession and save, then quite simply we create and maintain a recession . Contrary to what the experts say we may not need a lengthy recession to “cleanse” us of our ills. Complex and lengthy biblical punishment is not required.
The solution lies not in elaborate schemes to refinance banks, not in Tier 1 capital ratios, or the jargon of high finance, but in printing money and distributing it in equal proportions to every household in the country. A very simple way to restore confidence! This is the simple solution set out in a new book by Eric Lonergan, an Irish hedge fund manager working in London. Lonergan , with a degree in economics and philosophy from the London School of Economics , writes frequently for the Financial Times.
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Repeatedly throughout his book Lonergan shows that printing money to stabilise a panic or reverse a recession benefits everyone at no real cost to anyone. Most economists see printing money as potentially creating inflation, assuming that money is “neutral”, i.e. that it does not affect the level of economic activity, only the price. However Lonergan shows simply and convincingly that the availability of money in a panic or recession directly affects the level of economic activity and not just the price; economic contractions have enduring consequences; businesses close down, unemployment grows, and the economy contracts, with long-term social and economic consequences. Such can be avoided if confidence is restored (helping to maintain economic activity), and the quickest and costless method of doing so is to print money and distribute it equally to each household in the country. |
| Eric Lonergan |
Would it work? Ben Bernanke chairman of the US Federal Reserve Board recommended exactly this solution for Japan, then in the midst of an interminable recession in December 1999. In essence it is what China and Australia have done in very different ways over the last year or so – and they are in much better shape than most in the current recession. Fear stops us doing it – the legacy of fear of inflation that particularly dominates German financial thinking and therefore that of the European Central Bank and frequently a desire for retribution.
Early on in his book Lonergan set out his stall pointing out that as well as the normal economic understanding of it (a store of wealth, a unit of account, and a medium of exchange) “money can create peaceful societies and inter-generational ties, permit risk-taking, dominate our sense of status or cause manias and panics.” It is this combination of positives and negatives that makes money so attractive and also so dangerous. To understand this combination, Lonergan analyses the four philosophical properties of money – allure, interdependence, control of the future, and measurement.
We are all too aware of the allure of money. Interdependence contains some of its key positive and negative features. Money facilitates the division of labour, leading to a huge growth in productivity, which frees us from scarcity and enables us, using a surplus of resources, to care for others and to save. The resultant markets, and price mechanisms, are frequently forgotten as being an alternative to war and violence, particularly with respect to the distribution of scarce resources. (Simply put, oil, water and other scare resources can eventually either be allocated by war or by prices.)
The negative is that these properties gives us significant interdependence with others, and at a highly complex level, such as our banking system, can be a precondition for the correlated and very costly economic instability we are currently experiencing. Put another way money facilitates markets and eventually globalisation, overriding many of the negative features of nationalism, while at the same time, as we have all experienced, it makes us less connected to some of our fellow citizens, while as we currently begin to dimly understand, much more connected to a huge number of the citizens of the world.
Money also helps us to control the future, as humans want certainty, but are also excited by risk. The fourth property of money – measurement – is well known but as Lonergan explains, we frequently use it to measure things that cannot be measured, and distort the measurement of many others such as the value of human endeavour.
In this, and in many other areas throughout his book, Lonergan shows how irrational and/ or as it puts it non-rational we as humans can be (a point ignored by traditional economics, but now at the core of behavioural economics) with serious consequences personally and to society at large.
If ever we needed to be fully rational about money in Ireland it is now. This short and easily read book is a huge help in that regard.