Wednesday 19 March 2008

The end of capitalism?

Before dabbling in theology, the Amateur did a degree, in Philosophy, Politics and Economics. Recent events on the markets have provoked me to actually use the tools acquired.
Essentially the issue is, is there enough cash out there to keep the economy operating?
Banks need cash to meet the demands of their savers.
Companies need cash advanced to invest.
Financial institutions in general need cash to invest and earn interest.
Of course, money then multiplies through the wonders of the system: so M0, the measure of notes and coins, is tiny compared to a money supply figure such as M4.
But if there's not enough liquid cash out there to meet demands for "my money back", it all falls apart.
Now what would happen if the wheels came off? Despite yesterday's good day, what if a series of financial institutions, and therefore the entire supply of credit (which is fake money - we loan it even though it belongs to other people and the cash is elsewhere - that's the multipliers for you) falls apart?
Is it the end of world capitalism?
No - look at the prices of raw materials, both minerals and oil. Sovereign wealth funds have piles of cash just waiting. So what would happen if share prices fell? These funds could move in a buy swathes of the Western capitalist system at a knock down price.
That would be the most dramatic shift of economic power ever. Suddenly economic power would no longer be mainly in the hands of western, liberal, Judaeo-Christian-influenced societies. It would be in the hands of states often supportive of political and religious philosophies inimical to such societies, such as Saudi Arabia.
I have no problem with the dictatorship of the proletariat at home. It's the possibility that capitalism might be rescued by other forces abroad that worries me.
Let's pray that recent jitters were just that.

1 comment:

Anonymous said...

Here we are resolved to hold tight on the roller coaster in the hope that shares recover before we need to cash in our retirement plans, and you posit a third way (other than 1. the roller coaster safely arrives 2. the end of capitalism).

I don't think I like option 3 either.