Thursday, 26 October 2006

Is it possible to live without money (an income)?

At the moment I am in the same situation as 99% of the other adults in the modern world today - I work in a job for an employer in order to earn money so that I can buy the various necessities of life. I could qualify this further by saying that I work in order to earn enough money to buy what I need. As I look forward in my life I see that I will be earning less over time - both as a result of changes in the world (more people contending for fewer jobs, and competing with younger, cheaper people) and as a result of moving towards retirement (initially via part time work, and eventually living only on pension income). So I can see that I will need to adjust the balance between my income and my outgoings at various points in time, so that my outgoing expenditure is always less than my total income. As I said, this is pretty much the same for 99% of everyone else in the western, industrialised world (unless you are so super rich, you don't care about needing to reduce your outgoing expenditure).

Also, for some time I have realised that money is ultimately a trap in the modern world. We are tricked one way or another to constantly raise our goals and expectations to a better lifestyle. And to achieve this better lifestyle we have to spend more money on material goods and extra services. Which makes living more expensive, so we have to seek out better paid jobs, or work longer hours, or even get another job. Or, god forbid, go into debt by getting credit loans.

Realising this I have deliberately decided to not try and achieve more and more out of life, but instead to be content, satisfied and happy with what I have. There will always be more out there that you don't have at the moment, but could have. Living with the attitude of 'more and more' is bound to lead to a constant feeling of underachievement and not being satisfied. No matter how hard you work to earn more and more money. But by being content with what I have and not constantly wanting more and more I am relatively happy. In essence I only buy what I need, or genuinely want. Not what all the others are telling me to buy.

This gives me a level of optimism for the future. As I am in control of how much I spend, and am satisfied with the quality of life I can lead, I should be able to control my outgoings one way or another. In other words, to live more frugally over time. In principle I can live with only the necessities of life - food, shelter, clothing and heat. And maybe some other things, such as some good books to read.

Also, in principle, I might be able to get some of this for free, one way or another e.g. grow your own food, or forage for some when in season. This started me thinking about how little money you could get away with in order to meet your essential living needs. Specifically, your living needs in the United Kingdom, which is where I have always lived. Can you live without needing to spend any money at all? If not, how low can you go? And how can you achieve this? Is it a case of going without something, in order to avoid the cost of it? Or can you find alternatives to money, such as bartering and direct exchange, or doing some work in exchange for goods?

As I have said, I was initially optimistic about this, believing that I could reduce my needs to being very simple and minimal. I could do various things to minimise my annual and monthly expenditure, such as selling my car and cancelling various subscriptions. But then I realised that a reasonable amount of my monthly expenditure goes on things I cannot avoid. Which, if true, means that there is a minimum amount of money I must have as income, until I die. I can never have less than this coming in every month, otherwise I cannot meet the mandatory bills, and ultimately will end up homeless.

I considered this further - were these unavoidable costs really unavoidable? Could they be minimised in some way? What were truly mandatory, and what were essential yet not strictly mandatory? To put this another way, I would like to be in the position later in my life where I control where my money goes. If I choose to go without something then I can save that money, or I can choose to spend on some one-off indulgence. But are there outgoings that I cannot control? Are there legally binding obligations that I must make every month or year, regardless?

So I looked at my regular outgoings from my bank account, and realised a scary thing. In the UK you are basically taxed for being alive - technically you are taxed for residing in a dwelling in the country. But where else can you 'live', realistically? The UK has something called the 'Council Tax', which is supposed to be a form of local tax at the county level (equivalent to the US state level). But this is not a tax on income. It is a tax based on the size and desirability of the property you live in. The better the property, the higher the Council Tax bill you must pay. Which means at least 2 things:

1. Presuming you always live in a recognised property or dwelling, then you will always have to pay Council Tax. Throughout your whole adult life. It turns out this is true whether you own the property, or whether you rent from someone else. Generally, the landlord's terms and conditions will state that you must meet the cost of the Council Tax on the property yourself directly. Which means that virtually every adult over the age of 18 is being taxed for being alive in the United Kingdom! Unless you still live with your parents, or stay at other people's houses. This tax is regardless of what you do for a living. So it is clearly a tax on the living, for being alive in the UK.

2. You are actually being taxed for having managed your income and savings well enough previously in your life, and not having spent it all one way or another. The fact that you have saved some money and can afford to own and live in a decent property that is not a hovel, is used against you to tax you at a higher level. Those who squander their money and have no savings left, will get state support (the UK has various Social Services) to both provide them with adequate accommodation and minimal living standards. And as a result they will pay no Council Tax.

The Council Tax is set each year by the local council, and as you can imagine it goes up each year. Which means that my income also needs to increase each year when I eventually retire. But the real killer is that Council Tax has risen at well above the rate of inflation over the past 10 years. My Council Tax has doubled in the past 10 years, while annual inflation in the UK has offically been under 3% each of these years. (Also see data from National Statistics Office). A quick calculation shows that for my Council Tax to double in 10 years, it has been increasing at over 7% each year. This is ridiculous.

So where am I? My current opinion is leaning towards the fact that I will need an enormous pension fund in order to retire in the UK, just to pay off all the taxes impossed by the UK government in one form or another. Even if I earn nothing, I will still be taxed just for being alive. I don't want to work like a slave as an employee to earn what I can and save it for many years, with only a slim hope that I might be able to retire and live comfortably at some point in the future. The alternatives then seem to be either to give up hope, and not bother working like a slave. To enjoy life now while I can, and come what may in the future. Or to emigrate to another country. Personally this seems a reasonable thing to do, given the state of the UK, its allegiance to the USA, and its membership of the EU allowing ever more poor foreigners to come in to the country and swell the population. Now I just need to find somewhere relatively undeveloped, lots of open space and a low population, and no punative tax system.

By the way, the UK taxes you not only when you earn your money, but also taxes you multiple times when you use the money you have earnt. You pay income tax when you earn the money originally. If you save it you pay tax on the interest earnt on those savings. If you spend it on anything other than food, clothes and books you pay VAT (Value Added Tax). And if you die with all your total assets worth more than a limit, the government taxes you again. Even though you have already paid income tax, and paid VAT when purchasing those assets. Assets include everything you own, such as your house, car, all items, and your savings. The current inheritance tax limit is about £250,000, which is less than the value of most houses in the south of England. So they get you when you live, and they get you when you die.

Wednesday, 11 October 2006

Too much money in the world

Two key questions I have: Where does all the money in the world from from? And, why is there so much of it? If these questions cannot be answered, then something is wrong somewhere and we are all being fooled. Like some kind of "Emperor's New Economy".

Several years ago I realised just how well off we all were in the western world. Affluent even. I saw that everyone had incredible standards of living, with many things that were unimaginable 50 years ago (everyone owning a car or two, colour television, 100's of channels, video tapes, DVDs, CDs, telephones in every house and office, mobile or cell phones, almost free calls including international, a 747 jumbo jet, cheap long distance travel, and so on and so on). So we should all be happy with the modern world? Right? Ecstatic even. But of course we aren't. And various studies continue to report that we are no more satisfied in our lives than people were 50 years ago, in spite of everything we have.

I considered this situation a bit more and realised that the source of this increase in everyone's lifestyle was actually the increase in the amount of money flowing around. It was money that was enabling the development, production and purchase of all of these goods and services. People were earning more money, and were in turn spending it on all of these advanced things (advanced in the sense of being beyond the basic needs of living).

This money amounts to a phenomenal quantity of money being spent on these things all the time. Which also means that the same amount of money is being paid out by companies to their employees, which in turn means that these companies were earning even more money in revenue (allowing for profit).

And then I realised that as well as measuring monetary value in terms of revenue or actual flow of money, you could also measure it in terms of value of assets. And we had just come to the end of a long run of incredible, almost continuous stock market and house price growth. Even after the dot-com crash, many people were still rich and enjoying all of the benefits they had before. There were still massive corporations with sky high valuations. And Bill Gates was still the richest person on the planet. The message very much was that the 'wealth' of the western world had increased over the years, and as a result everyone now had more money at their disposal.

And that's when it hit me! Where does all this money come from? Seriously. Where does it actually come from in the first place?

The amount of money in circulation should reflect the value of goods and services being produced. It is the production of goods that gives rise to the IOUs of money for those goods, equal to the value of those goods.

But we don't use personal IOUs, we use recognised currency. So before I can buy goods I need to have some of that currency as money in my possession. Then I can spend it in exchange for goods and services, and it flows around the economy. Eventually some of it comes back to me in the form of wages from my employer. So the money I use must exist before it comes into my possession, so that I can use it to purchase goods.

As far as I understand it, money, as denominated amounts of a recognised currency, is issued by the government of a country in the first place. This recognised currency is then used by people to buy and sell goods and services.

But money can leave the system too without being exchanged for goods. We can save money, whether under the mattress or in a bank saving account or a pension plan untouched for many years. Companies make a profit, and keep most of this money in their cash account, for future uses. (I used to work for Sun Microsystems, and at one point they boasted of having $5 billion cash in the bank that they could use for any purpose they wanted).

So if countries are not just printing money all the time, where does all the money in circulation come from? And so much of it? Increasing over time, in spite of people saving it etc. It cannot be from governments, because if they continued to print and circulate more money all the time it would become worthless and devalued on the currency markets.

So we have an apparent contradiction - no more physical money should be coming into circulation from the governments of the western world, yet the amount of money being circulated has increased drastically, as has the monetary value of all the assets owned by people and corporation.

Which leads me to the conclusion that there is just way too much money in the world! Again, I am serious about this. Assuming some kind of law of conservation - that money out must equal money in - then there seems to be much more money in circulation that could ever have been created in the first place.

Which leads back to the original question of "where does all this money come from then?"

My presumption has always been that new money can only enter the system when new goods enter the system, and are sold for their market value. To put it another way, money flows down the chain of production from the final retailers through suppliers and distributors to the original producer of the physical item or service. This money then re-enters the system when this producer spends it for some reason or another.

Put another way, money is only an intermediary for goods and services. So if the total value of all the money in the economy has increased, then so must the total quantity of goods and services. Yet I don't eat anymore food, or drive more than one car, or have more holidays, or anything else. Yes I have holidays abroad, and eat out every so often, and go out to the cinema, and buy books and DVDs. But there is a limit to how much I can consume. And as money is a stand in for goods, there is a limit to how many goods I can consume, and so a limit to how much money I can spend in the economy.

If the same quantity of goods is always being produced and entering the system in a given period of time, then it can only increase in value at the rate of inflation. If the size of the economy (amount of money being transacted) increases at beyond the rate of inflation, then my model of reality says that more goods must have entered the system equal to this increase. Yet that does not seem to be the case. In real terms many goods are cheaper than they were before, such as mass produced food and electronics. So where does all this extra monetary value in the economy come from, if not from an increase in goods entering the system?

It seems to be that, contrary to my original beliefs, money can magically enter the system (the economy) from nowhere, and increase the total value of the economy and the amount of money being circulated. And it is this constant increase that makes everyone else feel warm, comfortable, safe and secure.

For me, however, in spite of all of the reported size of the economy, the value of transactions taking place, the value of companies and the value of all physical assets, none of it is real. There is nothing to back up or secure this quantity of money against. It is some kind of virtual money being made up on paper, but not really existing. We are now living in some kind of economic bubble or virtual economy, where there is more and more money being circulated, but no greater quantity of goods associated with this increase. Which also means that all of these companies and their assets are extremely overvalued. Look at Enron for goodness sake.

At the moment this state of affairs gives everyone else a warm fuzzy feeling - that their employer is a successful company, that their shares based saving plan has increased over the years, as has their pension plan. But beware. All of this measured value is artificial. Having been created so quickly and easily from nothing tangible, it can disappear just as quickly too. Remember the first dot-com bubble bursting in 2001, and the effect on technology stocks? And Enron. All of that could be mild compared to anything yet to come.

Am I the only one seeing the lack of tangible clothes on the Emperor's New Economy? The whole thing stinks of being so unnatural and abnormal, yet everyone carries on as if it nothing were wrong in any way.