Here’s how economic life works.
You want to buy something and I own or make what you want to
buy. You don’t have enough cash at hand to pay for it. In order
to obtain enough ready cash to purchase my product or good, you
go to a bank and get a loan. This is called ‘being practical’.
The bank gets you to sign a contract. Now, in the real world a
contract is a document that sets out agreed terms that both
parties negotiate. When you go to the bank, the real world stops
at the door and you enter a parallel universe in which
negotiated contracts with mutually agreeable terms do not exist.
This is called ‘the invisible hand of the market’. But, seeing
as how you really want what I have to sell you, you sign the
contract and the bank raises a debt. This is called ‘debt
The place it raises the debt from exists in the same parallel
universe as the one that the contract came from. When you look
at the contract you realise the loan will cost you over three
times the amount you actually need to pay for the product or
good you want to purchase. When you realise this you are meant
to get a warm a fuzzy feeling inside, safe in the knowledge that
the bank is as ‘safe as houses’.
While you make your way back to my store, the bank is entering
this new debt into its system. Having found that, at the present
moment in time, you are fully capable of meeting the repayments,
it classifies your debt as ‘Triple A’ rated. The banker knows
that the product you are purchasing could not be insured or sold
for the value of the debt so have written into the contract
early termination or payout fees. They send the contract off and
make an offer for your debt to be taken over by ‘the market’.
This is called ‘business sense’.
Across the highway or byway, a worker in an office reads the
bank’s electronic communication notifying him that you have
agreed to pay back a sum equivalent to three times the cost of
the current purchase price. They realise that, over the life of
the loan, they will potentially have two thirds of the cost of
the loan to play with … I mean invest. This is called ‘an
Back in the real world, you come to my business and purchase the
goods or service I offer. I see that you’re all cashed up with a
pre-approved loan. You try to beat the price down by saying
that, with cash, you should get a discount. Of course, like the
bank, you have now entered another parallel universe. In this
one, I can’t offer you a discount because to do so would create
a ‘distortion in the market’ by exposing the true cost and
profit margins of the goods or services you want. So no, I won’t
give you a discount but I will throw in a free meal and movie
ticket. This is called a ‘purchase bonus’.
While you’re sitting down enjoying the meal I place an order
with my supplier. He checks my recent purchase history and notes
that I am ahead in my monthly repayments and that I qualify for
a free, all expenses paid trip to Hawaii. He tells me the good
news and says the goods or services will arrive within the week.
My supplier then rings the manufacturer to tell them I need
another good or service. This is called ‘the wheels of commerce
While you are watching the movie, the manufacturer is finding
that he needs new machinery to make the goods or service that
you ordered. He goes to the bank and asks for an extension on
his current overdraft. The bank says that will be fine but the
extension will increase his repayments. “Sure.” He says. “Things
are looking up. No worries”. He then goes back to his factory
and starts making your order. He gets his wife to book that trip
to France and buy that new car she was eyeing off. This is
called ‘an optimistic business outlook’.
By the end of the movie, the guy in the office of the company
across the highway or byway has sold your debt – the extra two
thirds of the amount you will pay back over and above the cost
of the goods or service you purchase – to an investment broker.
Over at the investment house, the bloke who receives the debt
makes an informed decision on the best way to take this debt and
turn it into a Ferrari. This is called ‘market speculation’.
By now you’re on your way home from the free meal and movie. By
the time you get home you are feeling rather queasy. By the time
the sun rises the next day, you feel like death warmed up but
struggle off to work. By the end of the week you are dead.
That’s called ‘bad luck’.
I try calling you to let you know your goods or services are
ready to be collected. I can’t get through. After a week I give
up and sell the goods or services I had ordered for you for less
than half the cost we had agreed on. That’s called ‘a discount
sale’. I don’t lose anything, nor does my supplier or the
manufacturer. That’s called ‘market forces’.
When the bank finds out you died, it seeks access to your estate
to recoup the debt you left behind. Eventually it is able to get
some of the debt. This is also called ‘bad luck’. However, the
two thirds of the money you would have paid back is still being
churned around the financial markets. This is called ‘market
In about 10 years time, it will become apparent that you and
hundreds of thousands of others just like you aren’t actually
paying back any money. Some have died. Some have won the lottery
and paid off their loan early. Others have given up and gone
broke. While the banks have sold off your and their assets the
amount raised doesn’t even cover the first third of the debt.
This is called ‘market equalisation’.
By the time the investment advisors and speculators realise they
have no cash to pay out their debts, it will be too late to do
anything about it. However, because there is still some real
cash floating around, the investment advisors and the
speculators decide they should retire and claim their pensions
and superannuation in cash. They get out of the market just as
it begins to fail. This is called ‘a market adjustment’.
By the time all the people who are affected by this situation
realise that their dollars are worth nothing and that they no
longer have anything of any value, the investment advisors and
speculators will have long gone. You will be little more than a
vague memory to just a few people. This is called ‘a shame’.
Just as people begin to realise that, in market terms, ‘they
have been screwed’, the government will step in and say it has
devised a ‘rescue plan’. It will pump millions of dollars into
the banks so they can pay off the two thirds they owe to the
investment advisors and speculators. This is called a ‘wise
fiscal rescue plan’. This creates what is known as a ‘bounce’ in
the markets. This is because the investment advisors and
speculators are bouncing up and down for joy as they realise
they don’t have retire and live off the cash they have
squirreled away. Now they can go back to work.
Meanwhile, your children see one of my advertisements and decide
they want to buy what I’m selling ...