Prologue: I have been meaning to write this since a long time. What with all the news-flow about the global economies being in tatters often mentioning heavy-sounding phrases such as 'quantitative easing', I really wanted to get a perspective of what's the real problem. I mean, I work in finance - can't not know about all the big deal in the financial world right? So, I began reading. And after enough reading, this is the parallel I drew. Its not a boring theory seriously - read on!
Ever played that brilliant game of strategy called the 'Age of Empires' or AoE? It used to be very famous back in IITD, where my fellow hostelers spent countless hours playing the game over the LAN. I did not play it that much I confess. But whenever I did, I personally found it to be amazing.
There were various 'modes' or ways in which this game could be played. Among them, the most detested mode among the pro-gamers was the 'cheat mode'. This is because, in a game with 'cheat mode', one could obtain infinite money (gold) and resources (wood, stone, food) by just typing in some words. This obviously means that none of the players need to worry about anything - everything is possible and the one who builds everything the fastest and amasses the biggest and most advanced army the quickest, stands to win. Utopia, ain't it?
Now what's this got to do with the Global Economic situation today?
Here goes. I ask you, Dear Reader, what cannot be created out of thin air in the real world? Its a simple answer really. Resources - the same as in AoE. You can't create food (agricultural commodities), stone and wood (basic materials needed for building - such as - metals and such commodities). What else can't be created out of thin air? Oil - or any depleting energy source for that matter. What else? Gold and Silver, the precious metals. There are loads of other things but for now, this will suffice.
On the other hand, what can be created out of thin air (or without much effort) in real world. Think think. Very easy. The answer is Bank-notes like the US Dollar or the European Euro. All the governments need to do is - press a button, and print more! This, Dear Reader, is called 'Quantitative Easing'.
What this essentially means is - Bank-notes which are common perception of wealth (please note that I have refrained from saying real wealth***) can be obtained in abundance. This, is the cheat code in the real world. It would have been fine had it been a complete cheat code. Everyone would have been happy and this world would have been a Utopia. But, it isn't a complete cheat code - for you can print bank-notes and thus, create a perception of more wealth where in effect, you haven't created any real resource. Resources are what constitute real wealth - Gold, Oil, Metals, Food. Not Bank-notes! This is where one of the two key problems lies.
The second key problem is of course very ably put into words by one of the famous Indian poets. What he said roughly translates to - 'one should stretch legs only to the extent of the length of the bed-sheet'. This is what consumers across the developed nations haven't done. They have borrowed and spent and borrowed more. Eventually, the wealth has to evaporate right? But what to do then? Can't change lifestyles so simply print more bank-notes, return your debtors these new bank-notes and whoosh - all the debt is gone! Or is it? This, Dear Reader, is the biggest issue the global economies are dealing with. How to cut the debt REALLY? The way ahead is what the fancy word means - 'austerity'. Easier said than done.
Time will tell what will really happen. So lets wait.. and watch.
*** To understand what I mean, just pull out a INR note from your wallet and read what's written on it. You'd notice that a INR100 note reads - 'I promise to pay the bearer the sum of one hundred rupees'. This makes the bank-note some sort of a deed or promise - not the real hundred rupees. But the question is, what are really those hundred rupees if not the bank-note?
Disclaimer: The above are my views and mine only. Acknowledgement due to the author while quoting the above will be appreciated.
Ever played that brilliant game of strategy called the 'Age of Empires' or AoE? It used to be very famous back in IITD, where my fellow hostelers spent countless hours playing the game over the LAN. I did not play it that much I confess. But whenever I did, I personally found it to be amazing.
There were various 'modes' or ways in which this game could be played. Among them, the most detested mode among the pro-gamers was the 'cheat mode'. This is because, in a game with 'cheat mode', one could obtain infinite money (gold) and resources (wood, stone, food) by just typing in some words. This obviously means that none of the players need to worry about anything - everything is possible and the one who builds everything the fastest and amasses the biggest and most advanced army the quickest, stands to win. Utopia, ain't it?
Now what's this got to do with the Global Economic situation today?
Here goes. I ask you, Dear Reader, what cannot be created out of thin air in the real world? Its a simple answer really. Resources - the same as in AoE. You can't create food (agricultural commodities), stone and wood (basic materials needed for building - such as - metals and such commodities). What else can't be created out of thin air? Oil - or any depleting energy source for that matter. What else? Gold and Silver, the precious metals. There are loads of other things but for now, this will suffice.
On the other hand, what can be created out of thin air (or without much effort) in real world. Think think. Very easy. The answer is Bank-notes like the US Dollar or the European Euro. All the governments need to do is - press a button, and print more! This, Dear Reader, is called 'Quantitative Easing'.
What this essentially means is - Bank-notes which are common perception of wealth (please note that I have refrained from saying real wealth***) can be obtained in abundance. This, is the cheat code in the real world. It would have been fine had it been a complete cheat code. Everyone would have been happy and this world would have been a Utopia. But, it isn't a complete cheat code - for you can print bank-notes and thus, create a perception of more wealth where in effect, you haven't created any real resource. Resources are what constitute real wealth - Gold, Oil, Metals, Food. Not Bank-notes! This is where one of the two key problems lies.
The second key problem is of course very ably put into words by one of the famous Indian poets. What he said roughly translates to - 'one should stretch legs only to the extent of the length of the bed-sheet'. This is what consumers across the developed nations haven't done. They have borrowed and spent and borrowed more. Eventually, the wealth has to evaporate right? But what to do then? Can't change lifestyles so simply print more bank-notes, return your debtors these new bank-notes and whoosh - all the debt is gone! Or is it? This, Dear Reader, is the biggest issue the global economies are dealing with. How to cut the debt REALLY? The way ahead is what the fancy word means - 'austerity'. Easier said than done.
Time will tell what will really happen. So lets wait.. and watch.
*** To understand what I mean, just pull out a INR note from your wallet and read what's written on it. You'd notice that a INR100 note reads - 'I promise to pay the bearer the sum of one hundred rupees'. This makes the bank-note some sort of a deed or promise - not the real hundred rupees. But the question is, what are really those hundred rupees if not the bank-note?
Disclaimer: The above are my views and mine only. Acknowledgement due to the author while quoting the above will be appreciated.
The analogy to cheat mode in AoE is good, but I liked the easy explanation of QE better. Good work.
ReplyDeleteYeah, took me some time and reading to understand what the heck was happening :P Thanks for the positive feedback
ReplyDelete