Spent (Game Review)

Thank you to the person who sent me this game originally. As promised, I sat down and played it a few times, but still have to strongly disagree with you on its premise of poverty (at least in the west) being completely outside of an individual's control.

Every time I play this game, I end up in profit.

If the point of this game is to highlight how difficult it is for an individual in low paid work to survive (or even save money), then it fails spectacularly. In fact, to me it only emphasises the effects of an individual's bad choices. Sorry, not sorry.

Some of the scenarios it includes just forgo any basic common sense:


"Your family pet is sick and won’t get better without treatment. What do you want to do?"

Who on earth has pets while on low paid, insecure work? Especially when you already have a child to take care of (also a stupid decision to make if you can't afford to look after them). I didn't think of getting another cat or dog until I was on a decent salary, with enough savings to cover long term unemployment, had secure housing, and knew I could afford to take care of said animal even if my financial situation dramatically changed for the worse. I certainly couldn't have afforded to raise a child. You plan ahead for these things or simply don't do them. Having a pet or a child is not a necessity in life. You may really reeeeeally want one (I would have loved to come home to a cute, furry creature after a hard day at work), but adults are supposed to have this thing called self control that stops them acting like self entitled brats after puberty ends! If you can barely afford to take care of yourself, you have no right to be demanding that another living creature be dependent on you.

"Your child’s sneakers are falling apart and it’s time to buy new ones. Name brands are important, but they don’t come cheap."

Why the hell are "name brands" important? Even if I was a super rich parent, I would refuse to waste money on fashion labels. I have money to waste on fashion labels now and still don't. You teach your child how advertising works, how and why so many things are over-priced junk, and why they should save their money for more important things in life than impressing shallow idiots.

"Your credit card kept you afloat while you were trying to hold onto your home. But even though the house is gone, the balance isn’t."

If you over-leveraged yourself on a house purchase (a stupid thing to do in the first place), you should have downsized the moment you realised you were struggling to pay the bills rather than dragging it out and using credit cards to continue living a lifestyle above your means.

"Your payment of $500 for your car loan is due..."

Why on earth do you have a car loan that is a third of your take home pay? Why on earth do you have a car loan at all? If you're broke, you either get up earlier in the morning and take the bus/train (yeah it's rubbish to do, but most of us had to at some point) and/or save up cash for a low end second hand car. And even if you do earn enough money to easily cover a $500 a month car loan, it's far more sensible to just pay in cash so you don't have a debt hanging over you if your situation changes. You certainly don't waste money that's not even yours just to get something 'nicer'. "Oh my god, the stupid, it burns!"

"Everyone is pitching in for a lottery pool. What do you want to do?"

Point out the odds of ever winning a significant amount on the lottery are even less than the odds of becoming a movie star or death by falling out of bed. Basically, too low to worry about.

"A bunch of friends are going to a free concert tonight, and you want to go – but you’ve got a kid to worry about."

Yeah, it's not fun being a parent when you didn't bother to consider if you could actually afford to raise a child. Maybe avoid doing that again and make sure you teach your son/daughter to think about the long term impact of their behaviour.

"Your stress level is through the roof these days. A friend who hears you venting offers you a cigarette to take the edge off. What do you want to do?"

(facepalm)

"Your new apartment is too small for your stuff. Do you want to spend $45 to rent a storage unit?"

Yeah, why the hell not. Fill it with those $100 shoes, lottery tickets, cigarettes and cute outfits for your dog (because you probably waste money on those too)!


For anyone who wants to try for themselves, the game is at: www.playspent.org

Winter's Coming!

This will only be a quick update, as I've taken on extra work to build up a bigger and faster nest egg. I'm also spending a lot of my free time pouring over old economic data for patterns.

However, I've started to pull some of my european investments and switch for cash in preparation for the coming big R. I remember the previous recession incredibly well. In fact, it has scarred me for life - thankfully! In my case, having very clear memories of the year or two leading up to it means that I notice those same patterns when they repeat themselves. When one or two repeat, it gets my attention but the issue normally resolves itself. But right now, all of the economic data is pointing towards a nearing cliff edge. So I'm getting myself ready.

I'll freely admit, I can't predict how quickly each domino will fall. Every recession behaves a bit differently. 2008 was fairly quick to happen and slow to recover. In fact, those of us who started our careers in 2008 still haven't recovered. But we are also hyper aware of changes in the economy, which is to our benefit.

There are multiple signals that I look out for, but the main ones are:

The Housing Market

Property prices have stagnated this year. In most places, they haven't started to decline yet. But London tends to be a catalyst for changes elsewhere and the London market isn't looking great right now. Outside of London, new buyers (the GenY/Millennial/Gen Z crowd) are too strapped down with student debt, low wages and high rents to consider house purchases. So as the older owners are starting to downsize or die off, fewer young customers are queuing up to buy from them. This problem isn't unique to the UK. Australia, Canada, America and elsewhere appear to be suffering the fallout from the same generational divide in wealth. Their housing markets are starting to feel similar pressure. In fact, many are predicting a downright crash and advising clients to stay away for now. Foreign investors in the UK market have started to pull away, leaving only 5% of housing stock owned by overseas buyers rather than 12% in 2010. It could be argued that a decline in house prices is a good thing, as those in their 30s waiting to buy a home and start a family will finally be able to. However, when viewed in conjunction with other economic signs, it suggests a not-so-rosy near future.

Debt Levels

Debt is always something I pay attention to, regardless of how the economy is doing. I have an abnormally old fashioned view of debt compared to most people (all debt is bad), which I don't expect the rest of society to follow. But while I assume there will always be some state, business and personal debt, there is a scale from 'bad' to 'worse' to 'unmanageable'. At present, the Eurozone is nearing the 'unmanageable' end once again. Several debt figures should get people's attention. Individuals already have more debt, credit companies are lending out more debt and state spending is up (and a growing population means that spending will only increase further).

Unemployment Figures

These are interesting, as the data currently shows generally low unemployment. However, the total figures hide the fact that wage growth has flat-lined (as an example, I haven't had a pay rise in real terms in almost 20 years) and 'employed' includes underemployment (forced part time or unskilled jobs), zero hours, temporary contracts, those who have stopped looking for work or claiming job seeker benefits, those classed as self employed (even if not earning), and anyone else who may have simply fallen into the gap. I would be far more interested to know how many people are in full time, living wage or above jobs. And by 'living wage' I mean a salary that can cover basic rent, travel costs, food, pension savings, healthcare, other everyday bills, money to save for a house deposit within 5-10 years and repayment of the average student debt. I don't think those numbers would be so high!

Stock Market Drive

Last year saw big gains for those who were lucky enough to have timed the market correctly. Both the UK and US markets crashed and bounced back up following Brexit and Trump's win and they have continued to soar upwards ever since. The S&P 500 has broken multiple highs and is currently on its way to 2500, and the FTSE 100 has been bumping around the 7500 mark following a similar pattern. There was a market boom just like this before the 2008 crash. Markets were reaching new highs amid cheers from investors, lenders relaxed their standards for lending to buyers (oh, hang on),  the housing market began to cool off, panic set in as the number of mortgage defaults increased, then the problem spread outwards to other parts of the economy.

Today, we have the added problem of massive student loans (small mortgages in their own right), Brexit, the myriad problems in the EU (which has only very recently come out of the 2008 recession), China acknowledging their own debt problems (albeit a different situation) and a new creature in the form of subprime car loans in the US. This all feels like déjà vu to me. With the added fun of already non-existent interest rates, backing the BoE into a corner.

Good luck everyone and see you on the other side!


* EDIT: Shout out to the owner of Spicer Lemonade Stand at the Lovebox Festival and her parents for encouraging early entrepreneurial skills! I started my working life selling home-grown tomatoes along our street with my brother and sister and it was an excellent way to learn the basics of business. I hope to see you on Dragon's Den in the not too distant future!

Debt Based Slavery

Modern society is obsessed with debt. Our current economic system runs on the creation and movement of debt across the globe. It’s a modern form of slavery that is propped up by the myth that credit cards, loans and mortgages are an absolute necessity in life; unavoidable and even beneficial to the average person, company and government. We now send our children out into the world chained to £40k+ of student debt before they even start working! I personally find this immoral and pretty disgusting. It’s one thing for an adult (who understands the reality of having to work hard for money) to agree to take out a loan. But for parents, teachers, employers and the government to encourage young people who don’t yet understand the world to get into debt just to get a job is sickening to me. You have basically just sold that child to the loan company for however many years. And the actual return on most degrees is now minimal, so they aren’t even getting a decent rate for their life! Well done, society. Well done.

The Interest Snowball

As a collective, we love to perpetuate the lie that debt is a clever tool that savvy people can use to progress. Despite the risk that it brings relative to its potential leverage. Despite countless examples of people, companies and governments being crushed under the weight of spiralling interest. Despite all the historical evidence to the contrary. Despite all of this, we still pretend that taking on debt is absolutely fine. We grab that 0% car loan and jump on that shiny new credit card like a tramp on chips! We’ll pay it off later. Everyone else is doing it, aren’t they? Even kids! So debt must be okay. If debt was so bad then it wouldn’t be allowed, right?

So you sell your future time, energy and freedom for instant gratification. Your future self can deal with it! Screw them! Present You needs a brand new car. Present You needs a holiday. Present You wants a bunch of letters after their name to feel smarter than other people!

That arrangement would be bad enough, even if you managed to pay off the loan on time. Knowing you HAVE to keep working 40+ hours a week in a job you hate isn’t a nice feeling. Bonus FML Points if you’ve also got an expensive house to pay off miles away from where the better jobs are! Debt chains are invisible, but you still feel their weight.

But in many cases the original debt isn’t paid off in time. Humans on the whole aren’t great at planning ahead (or we wouldn’t need debt in the first place). One bump in the road and they miss a payment. More interest is added. The debt has grown. They miss another payment. A bit more interest is added. And the debt starts to snowball, picking up more interest as it rolls downhill. Lenders rely on this happening and humans rarely let them down.

The Cliff Edge Consequences

Once the debt has grown so big that the debtor is unable to keep up with even the interest payments, then you have reached the cliff edge. The snowball will keep falling straight down out of reach and you’ll never catch up. We used to reserve bankruptcy for this scenario - which was much nicer than the former solution of debtor’s prison, whereby debtors would be forced to pay back debts via hard labour (possibly a cheap kinetic energy solution in today’s world?). In bankruptcy the individual was blacklisted and prevented from taking on any more debts in future (for the good of both themselves and others). That was the idea anyway. For a company who reached the cliff edge, it would mean insolvency and the company being dismantled and sold off by administrators. Whatever value was left over in stock or anything else would be used to pay back staff, customers and anyone out of pocket due to the company’s financial mismanagement. Sounds fair.

In today’s debt-fetish society, the government has taken the approach of propping up certain companies, organisations and even themselves to avoid debtors having to experience any of the negative effects of their bad decisions. This doesn’t get rid of the debt. It simply passes it on to the rest of society via inflation. Innocent people are then punished for the stupid behaviour of others. Not so fair.

With young humans (and dogs), we tend to develop good versus bad behaviour patterns through the understanding of cause and effect. As an example, you learn fairly quickly in life that if you touch a hot flame then you will feel pain. That feeling of pain is generated to make you stop whatever you are doing to avoid damage to your body. Humans generally dislike feeling pain. So you modify your behaviour in future and avoid touching hot flames. You’ve learned a new behavioural pattern due to experiencing cause and effect. That behavioural pattern will prevent you damaging your body.

This is one of those universal laws that can be scaled up or down and used in other areas of life, other places and other eras of history. If you swap the human body for society and swap the flame for debt, then the process works the same way. Debt damages society. A nation will eventually collapse under the weight of debt if it is allowed to get out of control. Bankruptcy, debtor’s prison, business insolvency and other forms of pain used to act as a deterrent to other potential debtors. Everyone understood the cause and effect. In societies where debt has consequences, there is a strong desire to stay far far away from loans! If you want something, then you either save up or just don’t buy it. If it’s an absolute life or death necessity, then you ask family, friends or charity to help you out (and generally someone will, as most humans aren’t totally evil and prefer to keep the streets clear of dead bodies). This has the added effect of motivating people to not go around trashing their community, committing crimes and acting like general numpties, since they may need to ask for help one day.

Reversing Our Debt-Based Economy

Avoiding debt benefits everyone in society. It keeps inflation to healthy levels, since the government isn’t constantly flooding the economy with extra printed money or basing so called ‘growth’ on increased debt interest. That stability enables people, companies and governments to plan ahead more effectively and grow as individuals and as a nation. If you aren’t chasing a snowball of debt all the time then you have the freedom to focus on other things and enjoy life. Everyone's happy!

Dogs are always happy because they don't have debt.
This dog is also carrying a potential asset.
See my previous post to learn how assets can make you happy!

A lot of people are starting to wake up to the fact that our economy (and that of nations across the globe) are in serious trouble and nearing that cliff edge at full speed. There is a lot of noise and debate over what national governments should do to fix the problem. I personally don’t think there is much they can do bar all agreeing to wipe eachother’s debt or everyone selling the global debt to one country and letting that country tank. But individuals can focus on getting themselves out of debt and companies can do the same. That will make anything that happens at government level much easier to deal with.

In the past I’ve been involved with think tanks in organisations that did just that. The same principles apply to individuals. It is hard work and requires a complete and permanent change in behaviour. But it can be done. And removing debt is the first step to building wealth. If ran the UK, I would introduce laws to gradually outlaw personal debt and then work my way up the hierarchy. I’m sure people would hate me and I’d be on at least 50 hit lists within a week! Addicts never react well to having their drug taken away. So the word ‘gradual’ is key here.

Scale Up Method

There are various debt-clearing methods out there. I’m for anything that gets people out of financial slavery and back in the black, so I’d support them all. But I personally like the Scale Up or Snowball method, since it deals with the psychological aspects of debt. Essentially, this method involves lining up all of your loans in order of size and then tackling the smallest one first. You aim to keep the other debts ‘frozen’ by just paying off the minimum monthly interest and begin chipping away at the core of the smallest debt until it’s completely wiped out.

Mathematically, it would make sense to deal with the largest one, but getting and staying out of debt is emotionally hard and the aim is to make the journey as psychologically easy as possible. If you view each loan/credit card/mortgage as a metal chain around your neck, then watching the first small chain fall off is a nice image. It boosts your self confidence. You’ve successfully broken the first chain, so you feel more motivated to start chipping away at a slightly bigger one.

Once the first loan is gone, you take the amount you were paying in interest plus the ‘chipping away’ amount from the first loan and start paying that to the second loan until that’s gone. Then keep going until all the debts are cleared. If you need help in getting the minimum interest payments down to an amount you can afford, then speak to a debt advisor for more detailed advice (National Debtline or Debt Advice Foundation in the UK are both good).

It may take several years and will mean making sacrifices, but the feeling when you get rid of that last £1 owed is amazing. I did this myself while on minimum wage and it was horrible at times, but I know from personal experience that it works and your future self will love you for it! If it helps, make a big colourful poster to stick on your wall and tick off or colour in a box for every £1k that you pay off. It’s a nice visual reminder to keep you focused. If you know anyone else in a similar situation, then team up and cheer each other on. If you have to live like a hermit, walk miles every day, take three jobs, plan every single expense to the last 1p, skip meals, sell everything that isn’t nailed down and shun society for a year or so, then that’s what you do! This is war!

Finally being in a position where you have all of your take home pay to work with each month changes everything! It’s worth the temporary pain! The sense of freedom will be euphoric! Once the debt is gone, you can start doing fun things like saving, investing or starting a business and that snowball begins to roll in the opposite direction collecting money! So throw yourself into this part. The more effort you put in now, the easier the rest of the process will be! DO IT, DO IT, DO IT!!!


n.b. One extra thing that helped me was to read Charles Dickens novels and pretend that I was a character living in one of his Victorian era stories. I also wrote my own mini-novels about people in the 1800s fighting their way out of poverty. Yeah, I’m weird like that. But I have no debt, so ha ha ha!

Dirty Bankers and Their Enormous Assets

Welcome to 2017!

First of all, I haven't added any new posts in a while as I've been busily jumping through hoops to stay employed (such is the new 'gig economy' we have now). Although my 'jumping' has contributed in many ways to the advancement of my financial knowledge, so I now feel as though I have some useful tidbits to add here. Especially to the younger generation, who I feel have been treated incredibly unfairly by pretty much everyone. If any of them accidentally stumble into this blog whilst exploring the deep dark depths of the internet and happen to pick up just a tiny speck of helpful information, then I will feel as if my ramblings have done a bit of good. The education system fails miserably at teaching its charges the basics of money, and today's young people are the ones who will need these skills more than anyone!

So... without going into the boring details, since we last met I've had a big career change, graduated, completed a vocational course at break-neck speed, and I'm now employed to do very geeky things by a nice team of fellow geeks (who I'll avoid naming here in case they throw Lego at me). During my detour I spent some more time within the banking industry (the 'eye of the storm' is always an interesting place) and expanded my understanding of assets vs liabilities, which I will now attempt to explain using the medium of colourful pictures and witty yet informative prose. I apologise in advance for the lack of artistic skill.

Say hello to Ben and Eric...

Ben and Eric are exactly the same age (25), have exactly the same education and student debt (£30,000), began life with exactly the same amount of money (£0) and earn exactly the same wage (£20,000 per year) in the exact same job. Because sometimes life is just crazy like that!

Both Ben and Eric are dating a girl named Jennifer, but we'll avoid that awkward conversation for now.

Both Ben and Eric work hard and are pretty sensible with money. They both decide they want to have as much money in the bank as possible by the time they are 35, so they can afford to buy a house. A small starter home in the local area costs £150,000 and the bank wants a minimum deposit of £25,000. Both Ben and Eric plan to save up the £25,000 over ten years so they can buy the house (they are both equally deluded, but we can admire their optimism for the sake of this story).

Here's a picture of the house: average sized two-bed semi, small garden with patio area, lovely south-facing views from the main bedroom. If you follow me upstairs you'll notice the additional storage space to your left and over there is the entrance to the 2 by 2 square foot attic conversion the owners had installed. Because everyone loves an attic conversion, right? Every self respecting home owner needs somewhere to keep their important-junk-that-will-be-boxed-up-and-undisturbed-until-the-year-2875!

 (I'm aware that it looks like a dolls house - don't judge me!)

Ben and Eric both have £2,000 disposable income left each year after paying tax, rent, commuting costs, bills, food and presents for their always slightly distant girlfriend. Both Ben and Eric are careful to avoid wasting money on any expensive purchases like flashy new cars, holidays abroad, high end gadgets or weekends clubbing. They live like hermits, remaining totally focused and dedicated to the cause. Constantly having landlords sell up and having to move flat gets pricey, so they both decide to live in an abandoned warehouse during the summer months to save a bit extra. Both Ben and Eric know that anything worthwhile in life takes hard work, patience and the odd stint living on the streets. 

For the first three years, both Ben and Eric save £6,000 in a savings account. The interests rates are very low and their savings don't grow all that much. But they keep going, determind to get that house!

However, one cold and frosty winter evening Ben accidentally flicks past a business channel on TV whilst searching for the latest episode of X Factor. The reporter mentions 'assets' and Ben wonders what they mean. He decides to look up that word on a completely nondescript search engine.

'That's interesting', he thinks. After a bit more reading he discovers another useful term: 'liabilities'.

'Maybe I should start buying assets instead of presents for Jennifer?' Ben thinks to himself. 'That way I will still be earning money from my salary, but my money will also be earning money at the same time.'

Ben does a bit more research into the different types of assets he can buy. Many of them are too expensive, but there are some that Ben decides he can afford with money he has saved. Ben leaves £2,000 in his savings account and splits the remaining £4,000 into a £2,000 index fund and £2,000 into a peer-to-peer property investment platform he finds (because he reads that keeping his money diversified is always a good idea). Both assets earn him an average of 7% a month. Instead of adding £100 to his savings account each month, he adds £50 to each of his assets and only £50 to his original savings account.

At the end of year four, Eric has the original £6,000 plus another £2,000 he has saved. So £8,000 in total.

Ben has £2,000 still in his savings account plus another £600 he has added that year. So £2,600 in savings. However, the intitial £4,000 in assets, plus compound interest, plus the £100 a month he has regularly added now total £5,535.65. So altogether Ben has £8,135.65.

Jennifer is no longer talking to Ben. Eric is very smug, but Ben doesn't care. Ben now has a small but growing passive income stream and has entered the matrix of asset growth.

For the next four years Eric continues to add to his savings account. At the end of eight years, he has a total of £16,000. 

For the next four years, Ben continues to add to both his savings account and both assets. At the end of eight years he has £5,000 in his savings account plus his assets are now worth £12,871.55. He has a total of £17,871.55.

After a bit more research, Ben finds two different assets that will earn him a higher interest rate at 8.5% He sells both of his original assets and puts £6,435.78 into each new asset.

Two years later Ben and Eric meet up in the pub one afternoon to celebrate their 35th birthday. Eric is sad because Jennifer has run off with a man she met on holiday named Pedro. Over the last ten years he has saved a total of £20,000. Not enough for a house.

 
Ben is happy because he has saved £6,200 in his savings account and has two assets worth a total of £17,872.07. Altogether he has £24,072.07. Not exactly £25,000, but pretty darn close!

Unfortunately, during this time house prices have risen another 5000%. So neither Ben or Eric can afford to buy a home.

But at least Ben has an extra £4,072.07 to spend on whatever he wants! Or he can leave all of his money in assets to keep growing by themselves while he pays off his student loan. The sensible option.

Ben decides to move to the Greek island of Symi, open up a bar and spend the rest of his days surfing instead.

The morals of this story are all over the place, but the assets part is very useful to know. Whatever you decide to do with your life, if you can make your money make more money while you go off and do other things then you will always be in a better situation financially. At the same time, keep your liabilities to an absolute minimum. Consider if a purchase is going to either depreciate in value or keep costing you more money in the long run. Like many people my age, I was made redundant several times during the recession and learned very quickly that I could never rely on a constant salary. These days I only care about how much I earn while I sleep. Anything else is a nice bonus.

A Quick(ish) Lesson On Finance

I've wanted to do this for a while, as I know a few of my family now read this blog and many of them have little understanding of what finance is or how money works. There are several brilliant in-depth essays out there that explain the process in far more detail than I can in my five minute posts. But I'm also aware that the individuals with the least understanding are also the ones least likely to sit and read through a long essay with lots of technical language and numbers (don't beat me).

So here's the bite-size version with pictures!

- Currency -

Traditionally, 'currency' consisted of gold, coins, shells, buttons... more or less anything that could be used as an I.O.U when two or more people agreed to exchange goods or services at different times. It was essentially a store of value that could be redeemed in another place and time and from any other person that agreed to accept the currency.

It didn't really matter what was used as long as it was difficult to replicate and easy to store (for example, apples would be a terrible currency to use as they rot very quickly). Salt was apparently a favourite in the Sahara and East Africa during the Middle Ages. The word 'salary' actually comes from the Latin word 'salarium' (the root word 'sal' means 'salt') which, according to the Oxford dictionary, was the money paid to Roman soldiers to buy salt (my English degree is totally relevant to finance, dad)! People also liked gold and it's still considered valuable today since it's in fairly limited supply and (so far) impossible to create from scratch. 

- Banks -

Banks were initially invented as a way for wealthy people to store and protect their gold, buttons, or whatever currency they used. Smaug's lair in J.R Tolkien's The Hobbit is the image I always have when I think of old-school banks. A giant creature defending a huge stash of treasure from people wanting to steal it! A small fee was paid in return for the bank's service and a receipt was given out listing the amount deposited.

- Money -

Physical currency is only a fraction of the money supply today. Eventually, people started trading the receipts instead of the currency itself, and as a result the banks decided they could earn more by issuing loans backed by the currency they held in deposits. The loans were essentially I.O.Us for I.O.Us of real value.

(This is the point where I like to quote Lewis Caroll's Alice In Wonderland: "You used to be much more...'muchier.' You've lost your muchness.” I think that just about explains finance from this point onwards.)

- Interest -

Things got a bit boring for a while and then the people cottoned on to the fact that banks were making money out of the currency they had entrusted to them. So 'interest' was invented: an I.O.U to pay an I.O.U based on the I.O.U the bank was earning from the original I.O.U in their vaults. Simples. The interest paid to depositors was less than the interest paid by borrowers, so the bank was still earning a living even though the amount of currency they were storing hadn't really increased.

- Inflation -

Considering there were now more I.O.Us in the system than actual goods/services (look up 1931 gold standard for more info), the value of the I.O.Us dropped in real terms as more I.O.Us were printed on the I.O.Us. I found a nice graph for the UK to illustrate my point (everyone likes a good graph):

To clarify; if tomorrow everyone took their money to the bank to reclaim the promised currency at the same time, there would be many many disappointed customers. Money follows the very basic economic rule of supply and demand - if we've got more, it's worth less. That £5 note that bought you 10 loaves of bread in 2001 now only buys you 3. The amount of currency you need to purchase the same value in goods has now inflated. In 1920's Germany during hyperinflation, Reich Marks were literally worthless as currency and there are various reports of people burning money to keep warm as the paper it was printed on held more value as fuel. Inflation is also affected by how difficult the items are to grow, make, find, etc. More I.O.Us or less items mean inflation goes up.

- The 'credit crunch' -

Unfortunately, this system of borrowing on borrowing on borrowing value has expanded even further due to the continued threat of economic system collapse if it ever stops working. When an entire global population is reliant on a system to work, then it is in everyone's interest to keep it from falling apart (regardless of how ridiculous it seems). Runs on individual banks have happened in the past - Northern Rock comes to mind as a recent example of what happens when too many people panic at once and try to reclaim the value of their I.O.Us.

The same thing occurred on a global scale during the so-called 'credit crunch' a few years back. Governments and companies lend I.O.Us to each other as well as the banks, and if too many players ask to exchange the I.O.Us at once then it causes a knock on effect. Everyone suddenly panics that there isn't enough to go around and starts to demand their share of the value. I personally don't believe the issue was ever a lack of I.O.Us, as the banks have the ability to create an almost infinite amount of digital currency these days. It was likely mass confusion over the redeemable value of the currency, causing all the major players to halt production of any more I.O.Us of I.O.Us. Which, if you think about it, is very silly considering all the original I.O.Us no longer hold the same value they did to begin with! If that didn't make a lot of sense, don't feel bad. Most economics undergrads struggle with the concept. Fortunately, the very clever people in charge printed a lot more I.O.Us, which will TOTALLY fix everything (lucky us).

- Value vs Population -

Most of the money in circulation today is a giant ocean of I.O.Us with a few tiny islands of actual value (land, food, water, materials, workforce, etc) dotted around. I imagine it looks a bit like the universe, with lots of dark matter and a few clusters of stars and planets gradually drifting apart. Oh yeah, pretty deep stuff for a Saturday afternoon! Here's a nice picture of part of the universe:

In the UK, the average debt per household is around £13,000 and the average in savings about £3,300 (www.aviva.com/media/upload/Family_Finances_Report_July_2013.pdf). This doesn't include mortgage or car loans. That's a lot of I.O.U-ness (sorry, I said there wouldn't be lots of numbers). According to mainstream media, we are now recovering from the recession and well on our way to sustained growth. The stock market is thriving once again, unemployment is falling, business is growing. Yet the amount of real value redeemable per person is shrinking due to inflation.

There are various ways of calculating wealth. I'm old-fashioned so I tend to consider mainly those things that a human needs to survive on this planet - shelter, food, heat, etc. Anything else is of secondary importance and useful only as a store of value to trade for the really valuable items that keep us alive and healthy (basically, more I.O.Us).

So let's start with land. Land is quite useful for growing food, providing materials and space for shelter. Or it can even be used as shelter itself. Ask any military bod. In the UK, there are 260+ people per square kilometre of land (going by the World Bank figures). This is increasing by the year. Less land to go around, and that's assuming the land is shared out equally to begin with - it isn't. In fact, you're not even allowed to fight people over it like they did in Medieval times, for... reasons (which I think is completely unfair)! I'm not going to discuss house prices in any detail here, as I believe they are artificially inflated right now due to government intervention. But I would expect the natural costs to be on the increase regardless.

Food is another important one. Intensive farming methods have kept prices lower than they would otherwise be. However there has still been continual inflation in this area (if you're not used to graphs, bear in mind this one shows the percentage increase in price, not the price itself):

Fuel - again, your I.O.Us buy less fuel today than they did last year or the year before that. I mentioned rising utility bills in a previous post:

So... the I.O.Us are worth less and less actual value. The best way around the issue for the average person, as far as I can see, is to focus on obtaining value first and foremost. Collecting I.O.Us only benefits you when the potential redeemable value is increasing (when I started this blog I was just seeing how much money I could save up for the sheer hell of it, but these days I want to own a house/land outright and plan to put that money into something of value when I have enough). I'm not a Marx groupie, but he was right when he pointed out that the ruling class own the means of production. Everyone needs to eat continuously during their lifetime and there's a good reason that the richest people own the most land (and for the record, a mortgage does not constitute land ownership - until you pay it off, the bank is technically the owner). Sort out the basics like land, shelter, food production, textiles for clothing, fuel, tools, and then worry about flashy cars, swimming pools, and the latest fashion.


n.b. Alice In Wonderland is a brilliant novel full of amazing advice that everyone should be forced to read at gun point. How can you argue with wisdom such as 'if I had a world of my own, everything would be nonsense. Nothing would be what it is, because everything would be what it isn't. And contrary wise, what is, it wouldn't be. And what it wouldn't be, it would'? Very sensible words!

Also n.b. This is all just personal opinion. I quit my Economics degree in year 2 because I thought a lot of it was very clever-sounding b*llocks that further complicated an already over-complicated system. I get paid a pittance to organise other people's money now, but still find economics and finance interesting. By the time I reach 30, I hope to have discovered the world's largest chocolate coin.