Monetary System

One of the worse times in the history of the economic world was back before the thirties when North America, Europe, and other industrialized areas of the world experienced the deepest and longest lasting economic collapse. This phenomenon was called the Great Depression, which began after the stock market crash of October 1929 and lasted until the late 1930s. More than a century after, the world economy faced its most dangerous crisis for a second time. By the year of 2007, when sky high home prices in the United States went down, spread quickly to the entire country financial sector and then to the financial markets overseas, the called Global crisis of 2008 had born. Anyhow, the economic world has had many other financial crisis of different types at different levels of impact over the world. For this reason, it is really important the study of the main cause of all these financial crisis that bring chaos, create poverty, and widen the gap between rich and poor; the monetary system and the money it produces. In order to make evident the deficiencies of the monetary system and answer the following question: Do we really need money? I proposed three sub question that would clarify and support the main answer. These questions are: In what the monetary system depends on?
How a financial crisis is created and how it affects the economy? Has the monetary system created poverty? Will the monetary system balance the difference between poverty and wealth one day?

In what the monetary system depends on?
Money rules the economy of countries. As we all know, money is not only a medium of exchange, but also a standard of value for future payments. According with the table presented, we note that the economies in the long-ago past were very different from our economy of today and that the main factor of this difference is the growing world population throughout the years. Back in the agrarian age, improvements in productivity and technology showed up in the long run not as increases in average standards of living but as increases in population levels at a roughly constant standard of living.

As I mentioned before, the economy depends on Seasonal and No Seasonal factors, but the human factor make these two function as dependent variables. Every time the human population grows, the necessity to acquire goods and services increases, as well as trading activity and monetary exchange.
The table 1 above shows the growth of the population throughout the years and the GDP produced globally and individually by workers translated in amount of money. GDP is the total market value of all final goods and services produced by a country in one year. It is a measure of economic activity, or how much is produced in a country. These No Seasonal Factors are divided into primary activities, secondary activities, and tertiary activities. Primary activities are those that directly remove resources from the earth. Generally they include agriculture, mining, fishing, and lumbering. Secondary activities involve converting resources into finished products. These are the manufacturing activities. Tertiary activities comprise the service sector of the economy. The tertiary activities include retailing, transportation, education, banking, etc.
As countries develop the occupational structure of the labor force changes. In high income countries like the United States most people are involved with the tertiary sector.
Now in terms of Seasonal Factors, as the population increases, the GDP increases as well, and it is predictable that in 35 years the GDP will be almost 3 times the one in 2015, which is 35 times higher than the one calculated in 1900.

How a financial crisis is created and how it affects the economy?
The financial crisis in the world is the clearest example of the unsustainability of the monetary system. At its core, finance does just two simple things. It can act as an economic time machine, helping savers transport today’s surplus income into the future, or giving borrowers access to future earnings now. It can also act as a safety net, insuring against floods, fires or illness. In addition, as investors seek out people and companies with the best ideas, finance acts as an engine of growth. On the other hand, financial crises can stem from problems of private or public sectors’ balance sheets and have domestic or external origins. Irrespective of its origins, a financial crisis is often an amalgam of events, including substantial changes in credit volume and asset prices, severe disruptions in financial intermediation, notably a reduction in the supply of external financing, large-scale balance-sheet problems, and often a need for substantial government and international support. While there are many common causes for the financial crises, the literature has also identified specific theoretical factors and empirical determinants of each type of crisis. It has sometimes been difficult to transform the predictions of theories into empirical applications, including into practical ways to identify crises. While it is easy for example to design quantitative methods to identify currency crises and sudden stops, the identification of debt and banking crises remains typically based on qualitative and judgmental methods. While there are issues with dating, it is clear that financial crises are quite common and tend to cluster over time

The following graph shows the different financial crises of the last 30 years. Having a closer look, from one crises to another, the time in between is not grater of five years. As a consequence, it has a negative impact for the global economy on the long run because the economies in the world depends on each other. Further, the financial crisis of 2007–08 was considered by many economists to have been the worst financial crisis since the Great Depression of the 1930s. It threatened the collapse of large financial institutions, which was prevented by the bailout of banks by national governments, but stock markets still dropped worldwide. In many areas, the housing market also suffered, resulting in evictions, foreclosures and prolonged unemployment. The crisis played a significant role in the failure of key businesses, declines in consumer wealth estimated in trillions of U.S. dollars, and a downturn in economic activity leading to the 2008–2012 global recession and contributing to the European sovereign-debt crisis.

When the financial crises did hit the economy, different countries suffered its effects; recession would be the worst since the early 1980s recession with negative 2009 growth for the U.S., Eurozone, UK; very limited recovery in 2010; but not as bad as the Great Depression. Some developing countries experimented major slowdowns in their growing economies, taking them back where they were before improving their economies. Clearly, financial crises demonstrate the lack of functionality and sustainability of the monetary system.

Has the monetary system created poverty?
Monetary system and poverty. Governments routinely measure poverty, but finding the most appropriate standard is difficult and controversial. Some nations gauge relative poverty compared to other people or the median income. Individually, most people do all they can to better their lives. In fact, some of the poorest people manage their money better than anyone else, because their lives depend on it. But with the ups and downs of the economy, this task appears to be unachievable. As presented in table 3, in 2005 a lot of people lived on less than $2.50 a day.

As you can see in Table 4, the number of people living in extreme poverty ($1.25 a day) is shrinking. The world population grew from 4.5 billion people in 1981, to 6.9 billion in 2010, a 60% increase. The percentage of people living in extreme poverty in developing nations dropped from over 50% to 21%. (From about 1.95 billion to 1.2 billion - and estimates are now well below 1 billion in 2015.)

It is true that the number of people living in extreme poverty has improved, but now this reduced number of people live on less than $1.25 a day. However, for those who have been able to move out of poverty, progress is often temporary: economic shocks, food insecurity and climate change threaten to take their hard-won gains away and force them back into poverty. It will be critical to find ways to tackle these issues as we make progress toward 2030. Indeed, poverty is the result of a complex but weak monetary system.

Will the monetary system balance the difference between poverty and wealth one day?
The gap between poverty and wealth. There are many reasons for economic inequality within societies. These causes are often inter-related. Acknowledged factors that impact economic inequality include: mainly financial crisis, the labor market, innate ability, education, race, gender, culture, wealth condensation, development patterns and personal preference for work, leisure and risk. Further, economic differences between rich and poor countries are considerable. According to the United Nations Human Development Report 2004, the GDP per capita in countries with high, medium and low human development (a classification based on the UN Human Development Index) was 24806, 4269 and 1184 PPP$ respectively (PPP$ = purchasing power parity measured in United States dollars). The richest 1% of adults alone owned 40% of global assets in the year 2000, and that the richest 10% of adults accounted for 85% of the world total. The bottom half of the world adult population owned barely 1% of global wealth. An American having the average income of the bottom US decile is better-off than 2/3 of world population. Switzerland, one of the world’s richest nations in GDP per capita terms, now has over 400 times the per capita income of Ethiopia, one of the world’s poorest countries. Japan’s GDP per capita, at $ 34,715, is 53 times higher than Pakistan’s, at $ 650. Adjusted for purchasing power parity, or what a dollar will buy in the respective economies, Japan’s GDP per capita, at $ 23,480, is still 15 times higher than Pakistanis, at $ 1,570. Moreover, the gap between rich and poor nations has been progressively widening. In 1939, the average American factory worker’s income was 16 times higher than the average Indian factory worker’s income. By 1969, it was 40 times higher. Today, it is 78 times higher. This trend is clear when analyzing the data of a geographically diverse sample of seven of the largest developed markets and eight of the largest emerging markets, which together account for 66 percent of the global economy and about 59 percent of the global population (see Table 5). Given the concurrent nature of these trends and their common drivers, the two diverging developments are likely related.

Some places around the world do see increasing rates of growth in a positive sense. But globally, there is also a negative change in income distribution. The reality unfortunately is that the gap between the rich and poor is quite wide in most places. For instance:
•About 0.13% of the world’s population controlled 25% of the world’s assets.
•The wealthiest 20% of the world’s population consumes 76.6% of the world’s goods while 80% of humanity gets the remainder.

As of February 2014, Forbes reported last year, the world hosted 1,645 billionaires, over double the 793 billionaires Forbes counted in 2009, at the depth of the Great Recession. These 1,645 billionaires together hold $6.4 trillion in wealth. The 3.3 billion adults in the world with less than $10,000 to their name, Credit Suisse noted in October 2014, together hold $7.6 trillion in net worth as you can see it below.

It is a fact that inequality within nations is increasing, but inequality worldwide has been decreasing as middle classes emerge in China and India and the incomes of typical families in the United States and other rich countries stagnate and even, after inflation, decrease. Even though the monetary system has suffered many changes in the past and has caused huge loses to economies in the world, it still plays a determinant role in the global economy, having Wall Street and the Banking system as counterparts that define the path for the economy to follow. Although this path keeps feeding the gap between the poor and the rich.

The majority of people think that the monetary system depends only in the workforce of the citizens of a country and the way its economy is connected to the rest of the world. This is not far from reality, when activities such as agriculture, mining, manufacturing, retailing, transportation, and many others generate earnings, time is an important factor that defines the success or the failure of the economic model that rules the country. Nowadays, the total market value of all final goods and services produced by a country is increasing year to year, because of the growing number of new citizens in every country around the world that work, produce, and consume goods in a period of time. Definitely, the more people there is in the world, the more value goods and services will get. Unfortunately, since the creation of banking systems, trade market, and another institutions that have shaped the way the economy is known today, all the economies in the world have been exposed to the consequences of financial crises. When a financial crises strikes the economy, it brings with it another crises such as banking crisis, currency crises, and debt crises. As a result of this, inflation, recession and another factors take over damaging economies. A good example of this was the financial crises of 2008 where US and the rest of the world experienced big losses at all levels in their economies. As a consequence, poverty is a constant figure that is difficult to get rid of. Poverty as it is has been affecting millions of people around the globe, the number of people living in poverty decreases once in a while but then increases again. For now, the minimum amount of money to survive every day per person is the lowest of the century, but globally the number of persons living in poverty has decreased. Furthermore, the rest of the non-rich people around the world live on the limit of their possibilities in order to avoid to fall in deep poverty. On the contrary, according with Forbes magazine, the number of billionaires in the world has doubled since 2009 at the depth of the global financial crisis.