Another day, another debt

Hurrah! The world, or at least the eurozone, is saved! For a whole two weeks at least!

It turns out that the solution to its chronic debt problem is stunningly simple—more debt!

The piteously old-fashioned and curmudgeonly Germans have decided that they don't want to break their own constitution (and that of the EU) by shovelling any more of their hard-earned in the direction of the Mediterranean. I guess they previously figured that €440 billion was too trifling for small-minded people to raise legal quibbles. It's only two months' German production after all. One would surely hope the man in the Strasse would be only too happy to donate two months' wages to keep a 50-year-old retired Greek civil servant in the manner to which he's become accustomed.

Anyway, they've rediscovered quaint concepts such as the law, and democracy, so they're not contributing a pfennig more—or so they're led to believe. A cool trillion is reckoned to solve all problems, including those of bankers who backed the wrong horses. (There's no point studying the form book when your friends beg, borrow and steal money to replenish your coffers.) So who's going to stump up the extra €560 billion, if not the German taxpayer? It turns out no-one knows. Find a bigger fool, quick!

Of course, there's only one entity on the planet for which €560 billion is loose change, and which doesn't haven't to go through the tiresome business of asking anyone's permission to spend it. I wonder what concessions the Chinese government will require before handing it over. Expect criticism of human rights abuses emanating from European chancelleries to become somewhat, shall we say, muted.

I can't have been paying proper attention to these developments. Amidst the usual cacophony of self-congratulation, I haven't heard any word of who is going to pay back this €560 billion, if it's ever raised, and when. But somehow, I think the diligent German worker has won only a temporary reprieve.

Of course, the British and American public will soon enough face their own variations on a common theme. Schadenfreude isn't what it used to be.

I've just invented the bank

I would like you to consider three scenarios in which I might lend money to someone.

Scenario 1. A young relative or friend, perhaps a friend of a friend, feels stuck in a rut in his current employment and would like to strike out on his own. Let’s say he’s a carpenter, but it doesn’t really matter. He reckons he can provide a premium service building custom furniture to fit in awkwardly shaped rooms. Anyone who’s been to my house knows what I mean. But to do that, he needs to invest in the tools of the trade, he needs to find a deposit for a rented workshop, he needs to pay for advertising and other promotional activities and he needs to modestly feed, clothe and house himself while he attracts a sufficient amount of business to sustain a reasonable cashflow. All in all, let’s say he needs to find £30,000 and promises to repay me £40,000 in five years’ time.

If that is to be funded by me, it will be from a surplus I’ve accumulated from my own labour and the bet I placed on my own ability to build a business a quarter of a century ago. I could use that money to buy a very nice new car, a modest second hand sailboat or a first-class, no expense spared, round-the-world trip—all of which are appealing (but don’t tell Helen about the boat). If I accept this deal, I will have to forego the fruits of my labour for a period (and permanently, should it all go horribly wrong).

On the other hand, I might like to retire in five years, at which point I will need all the resources I can muster to live comfortably, perhaps to a ripe old age. So maybe a temporary sacrifice will be worth it in the long run. Now, before any of you beat a path to my email address, you can be sure that before I put pen to paper, or finger to keyboard, I will research carefully conditions in the joinery market and form my own view of your character and skills (if I haven’t already). After all, I stand to lose permanently the use of£30,000 for which I’ve sweated.

But let’s be optimistic. If all goes well this investment will help fund my retirement, establish  a skilled craftsman in business—and provide the world with more and better furniture. Indeed, only if the last be true, at least to the tune of £10,000 worth of more and better furniture, can I make up for my five-year sacrifice. Win-win-win—me, him, you. Perfect sense.

Scenario 2. Another young acquaintance is bored with his second-hand Ford Fiesta and fancies a shiny, zippy new Lotus. That way, some shallow girl might fancy him. But he hasn’t £30,000, or indeed anything, to spare at the moment, and he figures I might. Let me think a minute. I’m certainly well beyond attracting girls but, nonetheless, I quite like driving fast cars myself. And I’ve earned the right, or at any rate the wherewithal, to do so.

Let’s not dismiss this proposition out of hand though. Perhaps the young gun will also offer to pay me back £40,000 in five years. But where could that money come from? I seriously doubt a mere Lotus Elise would attract the daughter of a Russian oligarch. This £30,000 isn’t really an investment at all. There will be no additional goods produced, nor services rendered, in five years’ time to have generated the £10,000 premium that has been carelessly offered. And the £30,000 value of the car will dwindle to no more than £10,000 by then, and that’s assuming it hasn’t lost an argument with a tree in the meantime. To sum up, never would the quaint English phrase “on yer bike” be more apposite.

Scenario 3. I ask you to indulge me in a flight of fancy. We’ll start off grounded by imagining the same prodigal acquaintance as in Scenario 2—everyone will agree they’re not so rare. Now, however, let’s suppose I have friends in high places. Let’s say Westminster, or perhaps Brussels. These friends have granted me the right (in return for favours of course, but we needn’t go there now) to operate a computer (it could be the laptop I’m using now, nothing special) but with some special—but not science-fiction—software. This software allows me to type in large numbers—30,000, for instance. It adds a £ sign to those, along with a digital portrait of the queen (or something), a unique serial number on each occasion, and all wrapped in a clever cryptographic envelope  to prevent counterfeiting (I won’t bore you further with my specialist subject). So far, so easy: the real service my pals have done for me is to allow me to send that electronic bundle to anyone (say, our prodigal friend) and—this is the clever bit—compel Lotus dealers to accept it as payment for their cars!

I’m feeling good about this, because I can get the kid off my back, and he can get his car without me having to forego any of my own pleasures. I can even get a matching Lotus if I like with money that I’ve previously earned. I’d like this deal to pan out even better though, and have him pay me back the £40,000 he promises. It’s still the case though that my capital “investment” (it’s obviously not an investment, but the meaning of words is elastic these days) will depreciate, while not causing any goods or services to be produced that might fund the £10,000 premium. But, at least the original £30,000 that my computer magicked for me is still in circulation, and there’s a chance an equivalent will stick in the mitts of our friend.

I’d still really like the extra £10,000 though. I hope to be retired for a long time, and wish to live in the manner to which I’ve become accustomed and, of course, to be honoured for my munificence. Fortunately, I haven’t got where I am today without a fertile imagination. I’ll just type 10,000 into the computer. The only condition my pals have made is that I then give it to someone else for it to circulate for a while before getting back to me. And fortunately, there’s no end of people who want—or need—money. It’s not my concern what they do with it. If they don’t create anything with it, and can’t pay it back with interest, I’ll just tap yet more figures into my computer.

This would be a very bad thing, you say. With money on tap, nobody would defer gratification while building a better mousetrap. And the bounty of the world would gravitate to the guy operating the computer. It can’t possibly last. Well, I haven’t thought that through. You’re probably right, but by that time I could be sipping cocktails on my gleaming yacht—if somebody hasn’t beaten me to it.