Money, Money, Money. It's a Rich Man's World. Not!
Max Williams,
Principal Consultant
When the Congress of the United States decided to let the investment bank Lehman Brothers fail last September, it was the final admission, if any were needed, that some serious fundamentals of the theories of money and commerce had been comprehensively ignored.
Two months ago, former Australian Prime Minister Paul Keating proudly claimed in a radio interview that his government, and by implication he personally, had enabled "the banks to create money". It is a sorry day when a former Prime Minister and Treasurer fails such a test of the theory of money.
Banks create money - that is what they do! Have always done!
Of course, the key element in any theory of money is the underlying demand for confidence. Even with cash itself. A $50 bill is only worth $50 because we each believe that we can exchange it for $50 worth of goods - any time we choose. Take away that confidence, and it becomes a valueless piece of plastic.
In the case of cash, that confidence is backed by the Government's pledge to honour the note issued in its name. Money takes many forms, and much of it is in what's called 'commercial paper' - backed, not by governments, but by various institutions. Generally these institutions are solid enough to back their paper. In the last year or so, though, this has been questionable.
Even when the institution was not strong enough, most people had depended on the Government to back the institution, and guarantee the commercial paper being used as money. When the US let Lehamann Brothers collapse, that confidence was immediately shown to be completely misplaced.
Confidence collapsed, and with it the backing of hundreds of trillions of dollars of commercial paper being used as money. No backing - no value. Hundreds of trillions of dollars were just gone.
It is simply fatuous to imagine that such huge sums of value can be taken from the world economy without widespread consequences. It is just as fatuous to imagine that those consequences will not affect Australia and New Zealand. Fortunately, the Australian Government is applying a wide range of monetary and fiscal stimuli, and in New Zealand the new government is shaping up the same way. This will provide some relief when it is most needed.
Yet despite this attempt at insulating us from these tough times, the recent moves in Australia by GE Money and GMAC show just how globalized companies will bring the staff lay-offs to our shores. Their actions seriously impacted the entire Australian auto industry - importers as well as manufacturers.
Can anyone imagine that US federal support for the American auto industry will not mean heavy lay-offs? Can anyone imagine that a heavy hand will not be applied to both General Motors-Holden and Ford Motor Company of Australia to repatriate funds as quickly as they possibly can? That means local cut backs, pure and simple. Add in some local moves (for instance ANZ Bank and significant mining job cuts in Queensland), and the outlook seems blindingly obvious.
So we can argue about the depth and the timing of a recession in Australia and New Zealand, and whether it is technically a 'recession' (New Zealand is said to be in a technical recession already). What is clear is that business life is all set up to get tougher.
Elsewhere in this edition we refer to the 'Battle Plan for the Recession', so the weapons to beat this unwelcome recession are already here. Meanwhile, just for a few weeks, let's enjoy the summer break. Let's spend it with friends and loved ones. Next year we will bounce back, revitalized. Then we will have our own revenge on the 'Wallies of Wall Street' when we do succeed, and when we get stronger, in the worst recession for a good long time!
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