Saturday, November 21, 2009

The Thirsty Economy

Why is money so important? Why does it matter that the financial system, and with it, people’s ability to use money, is breaking down?

This may be easiest to see with a metaphor taken from biology. Any living organism needs water to carry materials into and out of cells. The cells are where the action takes place in an organism, so if there is less water, the action slows down.

This is why, if you have an illness, water may be the first recommendation you hear (along with rest). Recovery and healing are a body’s natural responses to illness, but when you are thirsty, these processes slow down. If you have enough water at the cellular level, you recover faster.

When money is scarce or uncertain, or impaired in some other way, it is as if the economy is thirsty. The action in the economy is the action of individuals, but money makes it easy to transfer work and its results from person to person and from place to place. When there is a problem with money, the result is less action, and the whole economy slows down.

There are quite a few problems with money right now. Bank deposits and other ways of storing money are not as safe as they were two years ago. The credit card transaction network is under assault from criminal organizations, along with their collaborators inside more than a few banks. Many consumers have become wary of using their debit cards because of the risk of hidden transaction fees. The exchange rates between currencies have gone through awkward adjustments this year, and that will continue into next year, and perhaps beyond, as there is a huge risk of inflation in some currencies, but only a slight risk in others.

The result of all these problems with money is a shift in the way people work. You see this in its most stark form in the boom in subsistence farming. Growing your own food might be hard work, but one thing you can say for it is that it is one thing you can do, assuming you have land to do it on, when your access to money becomes uncertain. In many other smaller ways, people are on their own, having to solve their own problems because they are unable to buy a solution.

When money isn’t working, the people responsible for economic policy do what they think they can to get money working again. The rest of us have two other angles we can look into to alleviate the problem. One of these, which I alluded to already, is self-reliance — getting better at solving our own problems. The other, though, is as modern as self-reliance is ancient. This is the use of technology to get better information on the things we’re trying to do. Most of the Internet didn’t exist yet during the last recession, so this is basically new. Money ultimately acts a form of information anyway, so it isn’t so strange to see information being used as a substitute for money.