{"id":1701,"date":"2013-03-21T14:10:47","date_gmt":"2013-03-21T08:40:47","guid":{"rendered":"http:\/\/teekhapan.wordpress.com\/?p=1701"},"modified":"2013-03-21T14:10:47","modified_gmt":"2013-03-21T08:40:47","slug":"what-the-humble-electric-toaster-tells-us-about-the-global-financial-system","status":"publish","type":"post","link":"https:\/\/vivekkaul.com\/2013\/03\/21\/what-the-humble-electric-toaster-tells-us-about-the-global-financial-system\/","title":{"rendered":"What the humble electric toaster tells us about the global financial system"},"content":{"rendered":"

\"kitchenaid-kmtt200-toaster\"<\/a>
\nVivek Kaul<\/span><\/span><\/strong>
\nTim Harford writer of such excellent books like\u00a0The Undercover Economist<\/i>,\u00a0The Logic of Life<\/i>\u00a0and\u00a0Adapt<\/i>, once wrote\u00a0a blog discussing<\/a>\u00a0the perils of a design student trying to make an electric toaster from scratch.
\nHarford discusses the experience of Thomsan Thwaites, a postgraduate design student, who decided to embark on what he called \u201cThe Toaster Project\u201d. \u201c<\/span><\/span>Quite simply, Thwaites wanted to build a toaster from scratch,\u201d writes Harford.
\nThe toaster was first invented in 1893 and is a household good in Great Britain and almost all other parts of the developed world. It costs a few pounds and is very reliable and efficient. But building it from scratch was still not a joke. \u201cTo obtain the iron ore, Thwaites had to travel to a former mine in Wales that now serves as a museum. His first attempt to smelt the iron using 15th-century technology failed dismally. His second attempt was something of a cheat, using a recently patented smelting method and a microwave oven \u2013 the microwave oven was a casualty of the process \u2013 to produce a coin-size lump of iron,\u201d writes Harford.
\nNext Thwaites needed plastic. Plastic is made from oil. But Thwaites never made it to an oil rig. He finally settled at scavenging plastic from a local dump, which he melted and then moulded into a toaster casing.
\nMore short cuts followed. As Harford writes \u201cCopper he obtained via electrolysis from the polluted water of an old mine… Nickel was even harder; he cheated and bought some commemorative coins, melting them with an oxyacetylene torch. These compromises were inevitable.\u201d
\nA simple toaster has nearly 400 components and sub components which is made from nearly 100 different materials. So imagine the difficulty if everything had to be procured and made from scratch. As Thwaites told Harford \u201cI realised that if you started absolutely from scratch, you could easily spend your life making a toaster.<\/span><\/span><\/span>\u201d <\/i><\/span><\/span><\/span>
\nThwaites finally did manage to make an electric toaster, but it was nowhere as good as the ones easily available in the market. As Harford writes \u201cThwaites\u2019s home-made toaster is a simpler affair, using just iron, copper, plastic, nickel and mica, a ceramic. It looks more like a toaster-shaped birthday cake than a real toaster, its coating dripping and oozing like icing gone wrong. \u201cIt warms bread when I plug it into a battery,\u201d he says, brightly. \u201cBut I\u2019m not sure what will happen if I plug it into the mains.\u201d\u201d
\nSo dear reader, you might be reading this piece sitting in the air-conditioned comforts of your office on an ergonomically designed chair (hopefully). Or you might be sitting at home reading this on your laptop. Or you must be travelling in a bus\/metro\/local train hanging onto your life and reading this on your android smartphone. Or you must be waiting for your aircraft to take off and must be quickly glancing through this on your iPad.
\nThe question that crops up here is that how many of the things mentioned in the last paragraph, would you dear reader, be able to make on your own? The answer is none. So then where did all these things that make life so comfortable come from?
\nDylan Grice answers this question in the latest issue<\/a> (dated March 11, 2013) of the <\/span><\/span><\/span>Edelweiss Journal<\/i><\/span><\/span><\/span>. \u201c<\/span><\/span><\/span>So where did it all come from? Strangers, basically. You don\u2019t know them and they don\u2019t know you. In fact virtually none of us know each other. Nevertheless, strangers somehow pooled their skills, their experience and their expertise so as to conceive, design, manufacture and distribute whatever you are looking at right now so that it could be right there right now.\u201d
\n<\/span><\/span>Estimates suggest that cities like London and New York offer ten billion distinct kinds of products. So what makes this possible? \u201c<\/span><\/span>Exchange. To be able to consume the skills of these strangers, you must sell yours,\u201d writes Grice. I<\/span><\/span>t is impossible for a single human being to even make something as simple as a toaster from scratch. But when many people specialise in their respective areas and develop certain skills, only then does a product as simple as a toaster become possible.
\n<\/span><\/span><\/span>Let me take my example. I sell my writing skills. With the compensation that I get I buy goods and services that I need for my existence. From something as basic as food, water and electricity, which I need to survive or comforts like buying a washing machine to wash clothes, a refrigerator so that I don\u2019t need to cook on a day to day basis, hiring a taxi to travel in or catching the latest movie at the local multiplex.
\nAt the heart of any exchange is trust. As Grice puts it \u201cwe must also understand that exchange is only possible to the extent that people trust each other: when eating in a restaurant we trust the chef not to put things in our food; when hiring a builder we trust him to build a wall which won\u2019t fall down; when we book a flight we entrust our lives and the lives of our families to complete strangers.\u201d
\nSo for any exchange to happen, there needs to be trust. But trust is not the only thing that facilitates exchange. There is another important ingredient. And that is money.
\nMoney has been thoroughly abused all over the world in the aftermath of the financial crisis which broke out officially in September 2008. Central banks egged on by governments all over the world have printed money, in an effort to revive their respective economies. The idea being that with more money in the financial system, banks will lend more which will lead to people spending more and that will help revive the economy.
\nBut all this comes with a cost. \u201c<\/span><\/span><\/span>So when central banks play the <\/span><\/span><\/span>games with money of which they are so fond, we wonder if they realize that they are also playing games with social bonding. Do they realize that by devaluing money they are devaluing society?\u201d asks Grice.
\nAllow me to explain. In the aftermath of the financial crisis, government expenditure all over the world has shot up dramatically. This expenditure could have been met by raising taxes. But when economies are slowing down this isn’t the most prudent thing to do. The next option was to borrow money. But there was only so much money that could be borrowed. So the governments utilised the third possible option. They got their central banks to print money. Central banks used this printed money to buy government bonds. Thus the governments could meet their increased expenditure.
\nWhen a government increases tax to meet its expenditure, everyone knows who is paying for it. It’s the taxpayer. But the answer is not so simple when the government meets its expenditure by printing money. As Grice puts it \u201c<\/span><\/span>When the government raises revenue by selling <\/span><\/span><\/span>bonds to the central bank, which has financed its purchases with printed money, no one knows who <\/span><\/span>ultimately <\/i><\/span><\/span>pays.\u201d
\nBut then that doesn’t mean that nobody pays.
\nWith the central bank printing money, the money supply in the financial system goes up. And this benefits those who are closest to the \u201cnew\u201d money. Richard Cantillon, a contemporary of Adam Smith, explained this in the context of gold and silver <\/span><\/span>coming into Spain from what was then called the New World (now South America).
\nAs he wrote: \u201c<\/span><\/span><\/span>If the increase of actual money comes from mines of gold or silver\u2026 the owner of these mines, the adventurers, the smelters, refiners, and all the other workers will increase their expenditures in proportion to their gains.\u201d T<\/span><\/span>hese individuals would end up with a greater amount of gold and silver, which was used as money, back then. This money they would spend and thus drive up the prices of meat, wine, wool, wheat etc. This rise in prices would impact even people not associated with the mining industry even though they wouldn\u2019t have seen a rise in their incomes like the people associated with the mining industry had.
\nSo is this applicable in the present day context? <\/span><\/span><\/span>The money printing that has happened in recent years has benefited those who are closest to the money creation. This basically means the financial sector and anyone who has access to cheap credit. Institutional investors have been able to raise money at close to zero percent interest rates and invest them in all kinds of assets all over the world. As Ruchir Sharma<\/span><\/span><\/span> writes in <\/span><\/span><\/span>Breakout Nations \u2013 In Pursuit of the Next Economic Miracles<\/i><\/span><\/span><\/span>:
\n\u201c<\/span><\/span><\/span>What is apparent that central banks can print all the money they want, they can\u2019t dictate where it goes. This time around, much of that money has flown into speculative oil futures, luxury real estate in major financial capitals, and other non productive investments\u2026The hype has created a new industry that turns commodities into financial products that can be traded like stocks. Oil, wheat, and platinum used to be sold primarily as raw materials, and now they are sold largely as speculative investments.\u201d
\nWhile financial investors benefit, the common man ends up paying more for the goods and services that he buys, something that is not always captured in the inflation number. As Grice puts it: \u201c<\/span><\/span><\/span>So now we know we have a slightly better understanding <\/span><\/span><\/span>of who pays: whoever is furthest away from the newly created money. And we have a better understanding of how they pay: through a reduction in their own spending power. <\/span><\/span>The problem is that while they will be acutely aware of the reduction in their own spending power, they will be less aware of <\/span><\/span>why <\/i><\/span><\/span>their spending power has declined. So if they find groceries becoming more expensive they blame the retailers for raising prices; if they find petrol unaffordable, they blame the oil companies; if they find rents too expensive they blame landlords, and so on. So now we see the mechanism by which debasing money debases trust. The unaware victims of this accidental redistribution don\u2019t know who the enemy is, so they create an enemy.\u201d
\nAnd people all over the world are doing a thoroughly good job of creating \u201cenemies\u201d. \u201cThe 99% blame the 1%; the 1% blame the 47%. In the aftermath of the Eurozone\u2019s own credit bubbles, the Germans blame the Greeks. The Greeks round on the foreigners. The Catalans blame the Castilians. And as 25% of the Italian electorate vote for a professional comedian whose party slogan \u201c<\/span><\/span>vaffa<\/i><\/span><\/span>\u201d means roughly \u201cf**k off \u201d (to everything it seems, including the common currency), the Germans are repatriating their gold from New York and Paris. Meanwhile in China, that centrally planned mother of all credit inflations, popular anger is being directed at Japan.\u201d
\nThis is only going to increase in the days and years to come. As Grice writes in a report titled <\/span><\/span>Memo to Central Banks: You’re debasing more than our currency<\/i><\/span><\/span> (October 12, 2012)<\/span><\/span> \u201c<\/span><\/span>History is replete with Great Disorders in which social cohesion has been undermined by currency debasements…Yet central banks continue down the same route. The writing is on the wall. Further debasement of money will cause further debasement of society. I fear a Great Disorder<\/span><\/span><\/span>.\u201d
\n<\/i>The article <\/a>originally appeared on www.firstpost.com on March 21, 2013\u00a0<\/span><\/span><\/span>
\nVivek Kaul is a writer. He tweets @kaul_vivek\u00a0<\/b><\/span><\/span>
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Vivek Kaul Tim Harford writer of such excellent books like\u00a0The Undercover Economist,\u00a0The Logic of Life\u00a0and\u00a0Adapt, once wrote\u00a0a blog discussing\u00a0the perils of a design student trying to make an electric toaster from scratch. Harford discusses the experience of Thomsan Thwaites, a postgraduate design student, who decided to embark on what he called \u201cThe Toaster Project\u201d. \u201cQuite … <\/p>\n

Read more<\/a><\/p>\n","protected":false},"author":2,"featured_media":0,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"qubely_global_settings":"","qubely_interactions":"","_monsterinsights_skip_tracking":false,"_monsterinsights_sitenote_active":false,"_monsterinsights_sitenote_note":"","_monsterinsights_sitenote_category":0,"jetpack_post_was_ever_published":false,"_jetpack_newsletter_access":"","_jetpack_dont_email_post_to_subs":false,"_jetpack_newsletter_tier_id":0,"_jetpack_memberships_contains_paywalled_content":false,"_jetpack_memberships_contains_paid_content":false,"footnotes":""},"categories":[2,31,33],"tags":[531,641,1060,1115,1135,2348,2355,3094,3162,3768,3772,3812],"qubely_featured_image_url":null,"qubely_author":{"display_name":"Vivek Kaul","author_link":"https:\/\/vivekkaul.com\/author\/vivekkaul\/"},"qubely_comment":0,"qubely_category":"Analysis<\/a> Financial Crisis<\/a> Firstpost<\/a>","qubely_excerpt":"Vivek Kaul Tim Harford writer of such excellent books like\u00a0The Undercover Economist,\u00a0The Logic of Life\u00a0and\u00a0Adapt, once wrote\u00a0a blog discussing\u00a0the perils of a design student trying to make an electric toaster from scratch. Harford discusses the experience of Thomsan Thwaites, a postgraduate design student, who decided to embark on what he called \u201cThe Toaster Project\u201d. \u201cQuite…","jetpack_sharing_enabled":true,"jetpack_featured_media_url":"","_links":{"self":[{"href":"https:\/\/vivekkaul.com\/wp-json\/wp\/v2\/posts\/1701"}],"collection":[{"href":"https:\/\/vivekkaul.com\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/vivekkaul.com\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/vivekkaul.com\/wp-json\/wp\/v2\/users\/2"}],"replies":[{"embeddable":true,"href":"https:\/\/vivekkaul.com\/wp-json\/wp\/v2\/comments?post=1701"}],"version-history":[{"count":0,"href":"https:\/\/vivekkaul.com\/wp-json\/wp\/v2\/posts\/1701\/revisions"}],"wp:attachment":[{"href":"https:\/\/vivekkaul.com\/wp-json\/wp\/v2\/media?parent=1701"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/vivekkaul.com\/wp-json\/wp\/v2\/categories?post=1701"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/vivekkaul.com\/wp-json\/wp\/v2\/tags?post=1701"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}