Tackling the Money Mirage

By Martin George, MA MIET

The unfolding economic crisis has exposed several dangerous flaws and distortions in the way
modern economies operate. Unless these are urgently addressed on a global scale, then we risk a
human disaster of massive proportions, with huge numbers of people unable to earn a living, unable
to keep the roof over their head, or perhaps forced to return to some kind of mediaeval subsistence
regime. Moreover, this disaster will have been entirely created by the collective, accumulated greed,
folly and blinkered thinking of those people who are supposed to be our financial and government
leaders, and whom people trust to have better insights and higher moral principals.
I am not an advocate of returning to the Gold Standard, but since the USA finally severed that link
in 1971, most developed economies that cross-trade have been built upon fiat currency systems
backed by the creation of debt.
The problem with this is that the assets that act as collateral for the debt are themselves unstable and
of variable value. Already obvious from previous recessions, where for example, the value of
housing stock or certain equity classes have plummeted after a bubble has developed in their
pricing, we have recently multiplied this particular problem many fold by the unwise creation of
complex debt-backed securities that have turned out to be anything but secure.
An economy driven purely by debt, which is pretty much what we have today, requires three things
to continue operating:
• Reasonably consistent growth of productive output in the economy.
• Moderate inflation, which reduces the value of the debt as prices for goods and services rise.
• Forbearance on paying down significant fractions of the debt.
The last comes about because there is not enough liquidity (money) in the conventional economy to
pay down the debt, as conventional accounting demands. It was bad enough when the norm for
fractional reserve ratios at banks was regarded as 10:1. With figures recently as high as 60:1 in
some cases, this was a disaster waiting to happen as soon as the economic music stopped, and fear
made someone start to call in the debt. Remember that even bank customers drawing out money
from their accounts are calling in debt (“a run on the bank”).
In a situation of forced liquidation, the assets backing the debt have been at best difficult to value,
and at worst, nearly worthless. This cycle of money created out of debt, and subsequent value
destruction, which has repeated many times in man’s history, is what I call the “Money Mirage”.
So what do we do about this?
The first thing is to remember that the economic and monetary systems are governed by rules that
humans have created, modified and tampered with – unlike the Laws of Nature, they are not
immutable. So it is within our power to rewrite the rules substantially, although that clearly requires
global agreement. This step requires humans to get out of their current state of denial.
The next thing to accept is that to recover from this mess of our own creation, there will inevitably
be some inequities. But those inequities need to avoid, as far as possible, the usurping of assets
from the prudent to bail out the profligate. This could easily lead to social unrest, revolution and
even war, as the mass of population seeks to curb the unfair privileges of the “elite”. In the short
term, the necessary medicine will result in significant, though manageable, inflation. Deflation
would be a far worse outcome for economies mired in debt.
Finally, we need to bring people not money back to the heart of the economic system. After all, we
do not generally have a lack of people who are willing and able – with the right education – to carry
out the work that needs to be done. What we have are self-imposed limits, largely governed by

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monetary budgets, on what work can be carried out, even when such work has potentially critical
benefits to the long term well-being and functioning of society. The problem is that tools for
measuring, modelling and valuing these benefits have never been part of conventional economic
thinking. Our academic economists need to develop them urgently.
A good example is in the development of societal infrastructure – transport, communication, energy
and health systems. In the pursuit of growth, short term profit and efficiency, the conventional
economic system will sweat these assets until they break. The problem here is that they cannot be
replaced quickly. Moreover, they are frequently funded by taxation on the productive economy,
which further raises the incentive to minimise repairs, replacement and renewal.
Health and social services provide another interesting area of focus. Much of the service side is
treated as a drain on the economy, yet people want to find ways to look after the elderly, to provide
better childcare in broken families, to improve education, and generally to try to stop these
deprivation-induced cycles from repeating. Again, doing these things well has a benefit for the
productive economy that in conventional terms is not being adequately measured.
In summary, we need to look carefully at how we want the global economy to work in future. There
are huge disparities between the developed economies and those that are still developing. Emerging
economies are still huge potential markets for the goods and services that the developed economies
have come to rely on and take for granted. But people in developed economies do not need to
purchase that many household goods, except at the replacement and consumable level. We cannot
expect to run a sustainable economy on a premise that people will buy ever increasing numbers of
trinkets and discretionary items for which they have no real need. Our “western” society has largely
outgrown, and needs to find ways to evolve beyond, this particular stage of its development.
What we do need is the development and renewal of infrastructure and the provision of socially
beneficial services that help society function, while making less demand on the environment and the
earth’s natural resources – another economic cost that is only just starting to get taken into account.
A new economic system will put direct quantifiable, monetary value on human skills capital and
will create new ways of modelling and measuring that monetary value and benefit to the economy
of activities that society wants, but that were previously treated as a taxation burden. Monetary
capital can then be created against this new asset class.
Today, we have all the technology, know-how and PEOPLE required to do this – all we are missing
is the political and economic will. Our leaders in both government and the financial world must put
aside petty egotistical foibles, and work together boldly to set out in clear and compelling terms a
new economic system that will better and more equitably serve the needs of both the developed and
developing economies into the 21st century. The stakes could not be higher, and it is sheer folly to
assume we build a sustainable economic future by “tinkering around the edges” and attempting to
resuscitate the old paradigm, which is where much of current policy is aimed.
The question is how to create the groundswell of public opinion and activism that will encourage
political and economic thought leaders to set the past aside, and grasp the opportunity created by the
current crisis to move forward into a radical new future.
My fear is that most such initiatives get shunted, along with many other ideas that would rock the
status quo, into the arms of worthy but ineffectual think-tanks, charitable foundations and fringe
organisations of the “intellectual left” where they will fester harmlessly.

Please apply to the author for permission to reproduce all or part of the above material, which will
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Further information from:
Martin H. George, Tel: 07879 488771, e-mail: martin@camtech.co.uk

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