to not understand capitalism

[IceBeing]

Some people work hard (say 60 hours a week all year) and get paid about £20000 a year...and some people work hard and get paid 10 or even 100 times as much a year.

How can 60 hours a week of work from 1 person be worth 100 times as much as 60 hours a week of work from another person?

I think I'm worth my pay, Kim - it's a very interesting question!

I work in International Student Support/Admin and enjoy my job a great deal (well, I've only been doing it a few weeks but it's great so far!). To many people, what I earn would seem paltry, especially considering I have a PhD. When I was funded for my research, I sometimes felt guilty, like that money could have been used elsewhere. But I do feel my current job is useful and love working to support international students.

People have told me that doing the job I do is a waste, but I feel like any more academic research might have done for me. I certainly would have got paid more had I continued down that route, but I would have paid out more in mental well being. It's interesting how values are attributed to jobs and salaries.

kim - my job was to move commodities from where they were in surplus and hence relatively cheap to where they were in short supply and hence more expensive. My job was to get commodities to places where people needed them most.

So yes I did help people who needed the commodities but we could not help people who were obviously so poor they had no money. Our role overall was to reduce prices in places where there was a shortage and raise it where there was a surplus. We only stored commodities between seasons to balance periods of over supply and under supply.

Overall we made prices economically efficient - reflecting overall supply and demand. That is what we did to 'help'.

I want a futures trader in the way Mitchell & Webb video describes. I only traded futures to hedge the risks. I had upwards of 10 million barrels of oil under my control at any one time. At todays prices that is worth $ 1 billion. A 1% change in price is $10 million. Our trading desk had the potential to wipe out the firm in one afternoon if we didn't manage our risks we would have been bankrupt.

want = wasn't

kim - there is far too much uncontrolled and poorly managed risk being taken in the City. Yes it makes crashes worse. Yes it caused the Financial Crisis. Yes the risk taking in the City is out of control in some areas.

The solution is to force those people and firms that take the uncontrolled risk to suffer the consequences - not bail them out when it goes wrong. That is where the Govt and Central Banks (eg Bank of England) went wrong. They bailed out people who should have lost their jobs who took stupid risks. That really annoys me.

They bailed out people who should have lost their jobs who took stupid risks. That really annoys me.

I thought they were bailing out the banks because the money used by the people taking stupid risks wasn't their money - it was our money.

Whether or not the people involved kept their jobs is another matter.

"What we did was buy commodities in one place and move them around the planet to where they were in demand and hence more expensive. Sometimes we bought a commodity and transformed it into a more valuable one (e.g crude oil to be turned into petrol). Other times we bought a commodity this month, stored it and sold it next month when demand is higher."

Can't help picturing MoreBeta travelling the world on a huge oil tanker.

Or maybe just travelling from petrol station to petrol station.

To be fair, when I worked for an engineering company that used large amounts of oil, we would buy oil at a certain price to protect ourselves from risk - we weren't in the business of oil speculation. I imagine that the kind of work MoreBeta did made this possible.

Equally, I would assume that this kind of market enables you to fix your fuel bill.

I am sure the whole Mitchell and Webb thing is also true though.

we would buy oil at a fixed price to protect ourselves from risk

merry - the truth is I have never been near an oil tanker in my life.

It was just numbers on a screen and lots of documents and occasional random people ringing up in the middle of the night asking for instructions to load and unload.

"it would have exposed how much smoke and mirrors the whole financial system is! "

or because without a working banking system the payroll doesn't get processed. Take your pick.

Governments and Central Banks would have been right to rescue and preserve the basic banking system during the Financial Crisis as we all and indeed the World economy needs the services of basic banking.

What they were not right to do was bail out the enormous losses that the banks had accrued by making bad loans and then trading trillions of dollars worth of derivative securities (i.e credit default swaps) on the back of those to take bets on the default rates on sub prime mortgages.

That trading of credit defaults swaps multiplied the normal risk of people defaulting on loans by a factor of a hundred or perhaps a thousand times.

The basic function of banking and the people that work in that part of the bank business are not at fault. The small but highly complex trading functions trading risk that the senior managers of banks did not understand or care to understand is where the fault is.

The bailing out of banks essentially by direct infusions of tax payer cash and Central Banks printing vast sums of money and lending them it to banks at very low rates has merely covered up the problem. It also allowed bankers to go on earning huge bonuses.

The Financial Crisis is still with us, hidden on bank balance sheets, but bankers are making hay while the sun shines and when it all goes wrong again (which it will) then bankers may lose their jobs buy they will still have taken a huge amount risk with taxpayer money, collected huge pay offs on the back of short term profits they made and will ultimately impose all the inevitably losses on savers and taxpayers throughout the financial system.

"the reason the cost of living rises higher than wages rise is also because of interest and debt."

Erm... no.

Some wages increase less than inflation. Others don't. In either case, it has nothing to do with personal indebtedness.

"you pointed out cote that economic activity is because of low interest rates => more spending because of more borrowing => higher inflation"

Not quite. Economic activity will happen in any case.

When a country enters a period of slow growth (or recession) one of the tools available to counter this is to lower interest rates, which leads to:

Low interest rates > companies borrow to invest > more investments > more employment > more economic activity

Low interest rates > people borrowing for personal reasons (buying a piano, building an extension to their home, and yes, stupidly shopping for stuff they can't afford) > more economic activity

... all of which is a good thing, as long as people borrow responsibly, with a view to how much they can realistically pay back. Companies are better at this but stupid people less so.

Another tool is to increase the amount of money available (printing money, purchasing government bonds from the market etc) which, incidentally, decreases the state's indebtedness. I assume that is a good thing in your book.

Another tool is to increase government spending. Again, investments increase > more employment > more economic activity.

During a period of low interest rates and higher liquidity (lots of money in the market), it is all a balance act between boosting economic growth and keeping inflation low. Expect interest rates to start rising as soon as economic growth shows an upturn, so that we will not also see significantly higher inflation.

"so increasingly, over time, people need to borrow even more just to stay even, and stay in debt"

Not at all. In periods of economic downturn, people have the option to downsize their expenses and not borrow to live a lifestyle they no longer earn the money for.

"because cost of housing, utilities, food, consumer goods is too expensive to be able to buy outright or save for"

No. You have misunderstood. Economic downturn (because of which interest rates are lowered in the first place) means by definition that prices of things don't increase much. Low economic activity > uncertainty about the future > lower consumption > stagnant prices.

UK inflation rate is 1.9% (annual) as of January 2014. That is very low and is below Bank of England's target of 2%. It is most certainly not high or even moderate.

"the government would have revealed how ignorant its regulators were in keeping track of all the gambling banks partook in the trade in derivatives."

Are you talking about the US?

"that even when a bank makes a loan, it just creates new money electronically by crediting the borrowers bank account. not by using the money of savers as most economics textbooks would explain it"

When borrower's account is credited, borrower takes that money out (in cash) to pay whoever he needs to pay. That is the money of the savers (depositors). Where else do you think the cash you withdraw comes from?

"and to me thats even more diabolical, they dont even print it. the banks can almost magic up the money they lend out"

Banks can't print money. The Bank of England (Central Bank of your country) is the only one that can print money.

When your account is credited and you take that money out from a cash machine, do you really believe that money is "magicked up" by the bank, conjured out of thin air?

"A lot of "money" is majicked up - how much money is physical money and how much money is just a promise in electronic form, a promise to pay in the future, money that people have brought in debt form?"

If you actually knew some financial terms, that sentence might actually say something but it doesn't in its current form.

"Promise in electronic form"?

"From what I've heard from some financial people in the news, many people couldn't explain what their products were."

Can TV salespeople explain how TVs work?

Can car salesmen explain in detail how a car works?

Can phone salesmen explain how a phone conversation is "magicked up" into their iPhones?

Some financial products are very complex and it is very normal that salespeople don't understand how exactly they work.