Monday, December 15, 2008

The Rise of Illusions: A New Economy

The wane of the power of Truth as discussed earlier corresponds with the rise to power of Illusions. To first understand the meaning of Illusions, let’s see how it is defined in the

Illusion is defined, inter-alia as ‘something that deceives by producing a false or misleading impression of reality’.

Reality is defined, inter-alia as ‘something that exists independently of all other things and from which all other things derive’.

So, looking at these two definitions, one could argue that anything that is not reality is an illusion. Something which is real, is something of intrinsic value that is not dependent on the subjective opinions or perceptions of people around them. In this epoch, the rise of the power of Illusions has consumed our time and robbed us of the meaning of life. Perhaps the most depressing part of it all, is that we are all too willing to participate in it.

I am sure MONEY is a topic that is close to everyone’s heart. Upon reaching adulthood, most of us spend our entire life pursuing it. Yet, what is money really? In the simplest sense, it is a SYMBOL that we use to allow us exchange goods and services with other people and replace the barter system.

Bartering with people is a difficult process, as there are two primary difficulties:

1. Valuation issue: Without a common agreed standard to value all goods and services, the exchange of goods and services may face delays. E.g. how many apples in exchange for a loaf of bread?
2. Transaction issue: A barter system would also require someone in possession of bread looking for apples and vice versa. This causes difficulties in real life.

MONEY as a symbol allows this process to be carried out easily. A loaf of bread could be worth RM2 whereas an apple is worth RM0.40. So, 5 apples are worth a loaf of bread. Further, someone that needs a loaf of bread doesn’t need apples to buy it. He could exchange the loaf of bread for MONEY worth RM2. The bread seller can then use this RM2 to purchase the apples from someone else. Simple isn’t it?

An Illusion?
Now let’s step back for a minute and ask ourselves: Is there anything wrong with this picture?

1. What should be symbolic representation of MONEY? [Illusion]
2. How does the IDEA of money be used to value ALL goods and services? [Coercion & Manipulation]
3. Does the producer of the bread ever meet the producer of the apples? [Disembodiment]
4. Can money by itself distort reality? [Debt]
5. Can money by itself acquire a sense of identity and become a common reality? [Interest]

As we have seen earlier, the power of money lies not within the form but as an IDEA. Money as an IDEA, is something outside the realm of reality altogether. Money whether be it Treasury Bills, Paper Money or even gold coins is that can exists outside of humanity. If you were Will Smith in ‘I am Legend’, would money have any meaning? Can money conjure up food on the table, furnish you a house to live in, provide entertainment etc.? No! Anything could be used to represent money, so long as portable, scarce and difficult to counterfeit.

Coercion and Manipulation
The phrase ‘No man is an island’ is apt here. For truly, all human beings need a community to survive. We are so specialized now that we would not survive if we had to live alone in a jungle for a month, even if we were given all necessary tools. If you knew how to cook, do you know how to catch food in the wild? If you could take care of your food problems, would you know how to build a shelter for yourself? And so on…

From time immemorial, society values the goods and services a person produces via coercion. Depending on the age we live in, certain skills are valued more highly than others. A barbaric society may value fighting skills more than scholarly ventures whereas the opposite may be true in a civilized society. Although monetary value is an ILLUSION, it works because society COERCES each and every individual to accept it as an infallible truth. If you produced a great science fiction novel worth millions such as Philip K. Dick, it would still be deemed worthless [then] because of the coercive nature of society.

The problem with the coercive powers of society lies in the ease in which it can be manipulated in present times. The vast majority of humanity is now fed on a steady stream of marketing and advertisements. Propaganda fills the airwaves attempting to manipulate and shift public opinions to suit the machinations of the elite class. What could be more laughable than to see advertisements succeeding in encouraging people to smoke?

Whilst the concept of money solved the Transaction Issue, i.e. obviating the need for the actual producers to meet each other to exchange their products, it gives rise to Disembodiment. This Disembodiment permeates extensively throughout our economy today. What do I mean by this? Simply put, Disembodiment creates an illusion that the consequences of your action do not have an impact on society or yourself.

Let’s go back to our example of the bread maker and apple farmer. Since the bread maker never meets his customers, he feels that so long as the bread looks the same or even better, it doesn’t really matter whether he skimps on certain ingredients. Who cares whether the bread is as nutritious as before? Whereas it used to cost him RM1.50 to make a loaf of bread, it now costs him a mere RM1. Why should he care? He will probably never meet his customers. So long as he can get away with it, he’ll do so.

Of course, others in the society will start getting the same ideas. The apple farmer will start using pesticides instead of natural fertilizers to grow his apples. He doesn’t care whether the apples aren’t as nutritious as before. He has another batch of crops of premium apples that he grows for his own use.

So, this vicious cycle permeates the entire society. Every person begins to lie to one another to gain an unfair advantage. Since almost everyone does so, no one gains an advantage over the other. Instead they all poison each other. The lawyer cheats on his client and is cheated by the mechanic at the car workshop. The Corporations cheats on its’ consumers by producing sub-standard products whilst the Board of Directors cheats on the shareholders (owners) by paying themselves exorbitant salaries and bonuses.

Ah… my favorite subject! How can something be created out of nothing? Let’s look at the simple example of a loaf of bread. Now, to actually produce a loaf of bread to eat, one has to put in the effort to procure flour from the granary, mix the flour with yeast and water into dough and bake it in the oven before it is ready for consumption. Assume that you do not have the money to buy a loaf of bread. You borrow RM2 from a friend to buy the bread and consume it. Do you realize what you have just done?

This is difficult to envisage but in reality, you have obtained the loaf of bread by promising to do something for your friend in the FUTURE. And is this promise a REALITY or an ILLUSION? In the present, it is an ILLUSION since it exists outside the realm of reality. What has really happened is that your friend is the one that has invested his time and effort to produce the bread [via the monetary system] which you now enjoy. You, on the other hand, have done nothing to earn that loaf of bread.

Now, if we put this into a present day situations, most debts are on big-ticket items such as houses and cars. What has occurred is that these debtors have promised to do something in the FUTURE to obtain something NOW which they have not earned. The great irony here is that such a phenomenon cannot exist in reality. How can something in the future be converted into reality here and now?

Now, this brings us to another fascinating concept, Interest! From the lenders’ point of view, the promise by the debtor to do something for me in the future is not a reality. Yet, it is a probability. If I had 1 million people borrowing from me, a certain percentage may decide to breach their promise; others may die early or face some mishaps in life. Yet, a large percentage, say 90% would make good on their promise. That’s where the concept of interest appears. I would need to charge an additional amount on the debt that I lent out to cover for such risks. So, if I charged a 10% interest, I would be able to cover for the risk of default by some debtors. So far, everything seems to make sense as these pool of borrowers have to pay extra to cover for the risk of their brethren not paying up.

Now, what if I, as a financial institution were to take this concept further?

Raise the interest rates in excess of the default rates. I would begin to make more money from these debtors. In essence, I would have the ability to coerce them to act in the manner I desire. They assumed the debt in exchange for promising to do something for me. Depending on their earning ability, this could take several years of their life. For instance, they may spend 15 years of their life to build their own house. However, in exchange for obtaining a house immediately, they need to spend 20 years of their life to repay the loan. They will spend those 5 years serving me instead.

Most modern monetary systems (including Malaysia, I believe) operate a system known as a Fractional Reserve System. Simply put, financial institutions need only to set aside a certain % as reserve requirements. This is usually 10%. What does this mean? This means that if you placed a deposit of RM100,000 with a bank, it can lend out RM1,000,000 out to customers as loans and charge interest on them. The RM1,000,000 created out of thin air, when re-deposited with the banks are considered deposits which can then be used to create more money.

Unless the real economy (production of goods and services) matches the increase in the money supply, inflation will occur. To put in simply, when the giant pool of money increases and yet, the supply of goods and services remains the same, the value of money will lessen. This is inflation.

It is my hope that this little article has made you stop for a moment and think about the nature of those pieces of paper that you use to trade for goods and services everyday. Feel free to share your opinion.

This series of posts labeled the ‘Age of Illusions’ are subjective, introspective in nature and based on my observations in life. My aim is merely to put to words the niggling sense of unease that all is not right with this world. It is an attempt to make sense of the NONsense that is this world.


Damien Tan

The concept of value perception allows "value" to be shifted from goods to symbol under certain rules. We use this intermediation to solve a sticky problem but in the process, we've created a hundred new ones. My dad used to say if you solve one problem by creating 3 others, you're not solving anything at all.

I can relate very well to disembodiment. When you trade in currency and commodities, you never actually get your hands on paper money or whatever commodity you trade in. You can do a contra trade to get credit (1st level illusion) to buy a thousand barrels of crude oil on paper (2nd level illusion) from a broker who has a stock of a million barrels of crude on paper (3rd level illusion). Your seller, probably halfway across the world, does not see you or the thing he sells. You go through many levels of intermediaries such as banks, all via promissory notes, all taking a cut from the transaction. And this transaction is traditionally done by wire, which I consider to be the 4th level illusion (illusion because its so easy to defraud via electronic blips).

After all that, when you cash out your profits, it can disappear if your currency devalues. When I dabbled in commodities at one time, I felt like I was playing a game on my PS3. ^_^

I learnt 2 things in all this. One, that reality is in the mind. Everything we see and touch, including money, comes from inside the head. Reality is personal (what's real to you may not be real to me). The good news is, because its personal, we get to determine what out reality is. If I choose to see money as an encumbrance, which happens when it brings me more suffering than satisfaction, then that's what it is. Therefore a clear and healthy mind, to me, enjoys a higher priority than a fat bank account.

Two, this is a big lesson in impermanence. Some people contemplate on candles and flowers to understand this. I contemplate on the market. Currencies appreciate and devalue. Markets soar and tumble to winds that come from nowhere. Likewise happiness is not forever, and neither is unhappiness.

Probably one last thing is the question: is there anything that's ever really ours. If it is ours, then why don't we ever get to keep it. We lose stuff to speculation, devaluation or worst case, when life stops. They way I see it, ownership itself is an illusion.

If you can stand with a cool head in the midst of a hundred illusions and see them for what they are without being blown about in the wind like everyone else, then I think you've taken one step towards freeing yourself. Your post would suggest you're heading in that direction. ^_^

Damien Tan

Btw, the British pound drops below the euro yesterday. Hahahaha.


Dear Damien,

Great insights! Ownership is just another legal concept that has no basis whatsoever in reality. It's just a common illusion amongst humanity due to societal enforcement. However, I don't think many people are able to internalize it (including me).

My main concern with the current economic crisis is that when these bubble economies get pricked, it's the people on the street that have to pick up the pieces. As they are part of the monetary system, the value they create (stored in the money they hold) is diminished due to expansionary policies prescribed by the Government. Whilst this may cushion the impact of recession, its' resultant impact will be additional inflation in the long run! The more I think about it, the more loonier these world seems :(



Avatar : Dude, cheer up. The world has ALWAYS been LOONY (from your Buddhist point of view). I'm just waitin' to give hell to those who's landed yours truly in present state of madness.


Dear YT,

I always thought that the world was a bit loony. But it seems that things are getting LOONIER by the day. And the people who created this mess... sigh, I don't even want to go there. Well, what goes around comes around, so I just wish they get their just desserts.


Damien Tan

Personally I see getting caught up in the bubble as a consequence of choice. We choose to become part of the bubble - or not. Consider the alternative. If I am fortunate enough to have a piece of land, perhaps something my dad left me where there's a little house and I can grow my own food, and I have no money stashed in speculative ventures, then I am completely self-sufficient. The economy would have no meaning to me and I would not be affected by inflation or deflation as there is nothing that I want or need from the system.

While the average consumer in so-called market centers is devastated by the crisis, the people of Bhutan and Iceland are living happily without a care in the world. So are the people who live off the land, untouched by the worldwide economic "grid" that is now short-circuiting everywhere.

As I see it, as long as we are unable to let go of our wants which may include wealth by any means, we ARE part of the bubble. Who are our role models, we might ask. Are they simple people with few needs or iconic celebrities of Wall Street, the people who are behind the very creation of the bubble. Do we admire people who cleverly profit from the bubble or do we admire those who free themselves from it.

There is no right or wrong in my view, only consequences. As they say, you live by the sword, you die by the sword.

So if we do not wish to pick up the pieces when the bubble burst, we will limit our exposure to the bubble so we can smile when it does. The only thing is whether what we've learnt can give us enough courage to do that.


Dear Damien,

I understand your views on this. Granted, this is a tough wake-up call that we have not been willing to think hard about.

I just a general fear of hyper-inflation when the government in US starts printing billions of dollars to pump-prime the economy. If the rest of the world cannot decouple from the recession in the US, this may lead to destabilizing effects such as riots and increase in crime. This would hurt everybody, even one that intends to live off the land.


Yours Truly

Damien : methinks I'll be movin' to Bhutan or Iceland soon. Thanks for the suggestions. Freakin' below 0 temperatures, no internet access. Hell, no problem. S'long as yours truly leaves this country of semi - literate freaks. Betcha ANY country is better than this LOONY place where RELIGION seems even more important than job creation, sound fiscal policies, & RESPECT for those who are of a different creed.

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