- Table of contents.
- Chapter 1. Something about myself to start with.
- Chapter 20. A cheque. How I became a criminal, nearly.
- Chapter 31. An exchange of opinions. Open market.
- A small accounting programme. for Our Household with a budget for 2008
From the Author ..................................................................................................................
Something about myself to start with ..................................................................................
IN THE BEGINNING
Receipts aid memory ..........................................................................................................
RECORDING YOUR EXPENSES
When I have, I don't; when I don't have, I do ......................................................................
THE PRINCIPLE OF DOUBLE-ENTRY BOOKKEEPING
Fund management ..............................................................................................................
THE BANK ACCOUNT
The grand finale .................................................................................................................
A mental block ....................................................................................................................
BANK AND CASH REPORTS. THE PRINCIPLE OF THE CONTINUITY OF RECORDS
How to transfer or order ......................................................................................................
BANK TRANSFERS AND MONEY ORDERS
A sausage in the folder .......................................................................................................
THE PRINCIPLE OF INTEGRITY. AN ACCOUNTING DOCUMENT
Dividing accounts into pieces .............................................................................................
CONTROL AND DETAILED ACCOUNTS
Finally I know when I have and when I don't have ............................................................
THE PRINCIPLE OF ACCRUAL AND CASH ACCOUNTING
New loos instead of computers ..........................................................................................
A CHART OF ACCOUNTS
Baking a gateau .................................................................................................................
THE PRINCIPLE OF REPEATED DOUBLE-ENTRY
Entry of a chicken ...............................................................................................................
THE PRINCIPLE OF CHRONOLOGY AND TRUSTWORTHINESS
The gallows and dividing the shopping ..............................................................................
Is medicine food? ...............................................................................................................
A DESCRIPTION OF THE CHART OF ACCOUNTS
A woman's duty ...................................................................................................................
TIDYING UP MY KNOWLEDGE OF ACCOUNTING
A manual for "My household 2008" spreadsheet .................................................................
FOR THOSE WITH THE TENACITY AND STAMINA TO CODE
The ruined flat ....................................................................................................................
Dad's breakdown ................................................................................................................
How I became a criminal, nearly ........................................................................................
What women want ..............................................................................................................
How Dad showed me up .....................................................................................................
A BILL OF EXCHANGE
Three references .................................................................................................................
Strange money ...................................................................................................................
THE HISTORY OF SECURITIES
A decision to start up a business .........................................................................................
THE SAFETY OF INCURRING LIABILITIES AND A JOINT PROPERTY
Dad's unfortunate accident and a new super-diet ...............................................................
My first separation ...............................................................................................................
ANALYSIS AND PLANNING
How my Dad became an alcoholic, thanks to me ...............................................................
Blue steps ...........................................................................................................................
ECONOMY AND MARKETING
The metamorphosis of my brain .........................................................................................
An exchange of opinions ....................................................................................................
An epilogue ........................................................................................................................
My dictionary of the words in bold ...........................................................................................
(I DON'T HAVE TO KNOW THEM OFF BY HEART, I JUST NEED TO KNOW THEY'RE HERE)
My accounting principles .......................................................................................................(I HAVE TO KNOW THEM OFF BY HEART)
Something about myself to start with.
In the beginning.
In the beginning of this story I was an average teenager, nothing singling me out from my mates. The school was a necessary evil and my marks were just simply securing my ticket to freedom: the better they were the higher the pocket money I got and my parents were asking me less questions. Then suddenly, as a result of a series of complicated events, my Dad and I were left alone. My Dad had found himself not to be entertaining enough for my Mum. She decided to replace him with another model. I do not think she was right. My Dad is very funny, but.in a different way. You can judge it for yourselves.
I remember it well when he asked me a question.
"Will you help me with running our home or do I have to do it myself? Think carefully about it, it's a serious decision. If you are in, I'll support you."
When I considered that there might be a mean tart invading our snug and quiet home, I was prepared to do anything. After all, if I could clean my own room, I could clean the flat as well. Dad not only could cook but he also liked it, so that was sorted, I knew I could learn from him. Laundry was not an issue with a good washing machine. So, what was left. shopping, that was a pleasure, wasn't it? Having mulled it over, I felt like an adult and set out some conditions.
"Will I get money for running the house?"
"Yes, you will. However, you'll have to account for every penny."
"What do you mean?"
"I need to know how much you spend and what you spend it on", Dad explained. "I have to control the spending and know what our monthly and yearly outgoings are. They all have to fit with my income. I also need to plan future expenses like a new car or renovating the flat. I don't want to get into any debt. If you help me, you can learn how to run the house well and manage your finances. You'll find it very useful in future, either at work or even if you want to set up your own company later on."
"Anyone would like to learn this," I thought. "But it must be very complicated to set up a small business, isn't it?" I expressed my doubts.
Dad just simply smiled.
"Setting up a small company is not too complicated, although you have to approach many different offices to collect all the necessary documents," he explained. "When it comes to small companies, the most difficult thing is the fact that you need to know a bit of everything: a bit about accounting, documents, data analysis, planning, taxes, marketing, securities and banking."
"You call that "a bit"?!" I was gobsmacked.
"In the beginning some of the work can be done by outside companies that specialize in e.g. accounting or taxation," he said to calm me down. "The most important thing for you to have is some basic knowledge and understanding of what you commission and expect from them. However, first of all, you must have an idea of what you want to do and assess if it is profitable," he explained. "Nevertheless, that's not the main problem. When you look after the house you will either record your spending or not. When you run a small company, systematic recording of income and expenditure is of the utter importance. If you don't record them regularly, you have no costs and you pay higher taxes. You may also have trouble with the revenue office if they inspect you," he added. "You'd better start practising your diligence straight away!"
"Haven't you said that the older I got, the more systematic I would become? Why should I bother now?"
"Do you want to start your own business when you are a pensioner or a bit sooner?" Dad was teasing me.
I made a funny face.
"Reliability is the second most important factor. If you have an appointment, appear 5 minutes early. If you have a debt to pay off, do it before the deadline. If you are not able to pay it off, inform your creditors about it well in advance and ask them for an extension of your repayment period. If you say you are going to ring someone back, do it even if the issue is no longer relevant. Someone may be wasting their time waiting for your phone call."
"Dad, you don't understand life", I said surprised. "Do you know what a guy would think about me if I turned up five minutes early for a date? I have to be at least half an hour late not to appear to be too eager! Of course, the weather and the place of the meeting must also be considered."
"Oh sweetheart, you have confused the instinct of survival of the species and a mating ritual with business. You need your creditor's money, not affection," Dad was shaking his head.
I pulled a funny face again; I think I had missed the point.
"Diligence in record keeping and reliability don't cost anything. Being systematic gives you control over the finances of the company and reliability allows access to the loans. It takes years to build both of these skills, but they would become your greatest assets."
"What about money?" I asked.
"That's one of the myths," he waved his hand. "To run a small company you need to have a good idea of what you want to do, some basic knowledge and a well thought out business plan. Then you'll find money for that."
"How will I get it?" I asked with disbelief.
"You can put aside some of your income when you start working," Dad continued his explanations. "Some of it you can borrow from your family. You could also take a special loan from a bank. You could issue your own securities. There are many options. It depends on how much funding you need to raise in order to get your business going. If you are interested in it and would like to be independent in the future, start by investing in yourself now. Start gaining general knowledge; that doesn't clash with your schoolwork."
"Of course I am interested! Where shall I start?" I asked eagerly.
"We could run our house on the same rules as a small company," he suggested. "Of course it won't be exactly the same, because you will not pay any taxes and accounting will be of a different kind. You will find it easier to broaden your knowledge in the future by reading specialist books and learning from others. You can also choose a specific course to study when you go to a college".
"That's a deal then. I agree," I declared strongly.
"Do remember that I'm treating you like an adult and all your commitments are serious," Dad highlighted. "I'll give you 200 złoty to start with. Buy whatever you consider necessary, please."
I went shopping, thinking hard what to get. I thought about making a nice dinner and I also knew I needed some toiletries for myself. When I got back home, I unpacked the shopping and checked the change. I had an impression something was not adding up. I could not have spent so much money. I either had lost some of it or had not been given the right change at the shops. "Great start!" I thought, "I've been cheated!"
I started writing down the prices that were on the products, yet not everything was labelled. Dad walked in.
"I see you have a problem, some money seems to be missing," he stated rather than asked.
"How do you know?" I was surprised.
"Most people feel that way when they get back home after shopping. When the money is short, it then ends up in an argument. You bought too much. We'll be eating it for a week. Some of these things will go off and we'll have to bin them. You need to do some more sensible shopping," he ticked me off.
I had a row with my Dad; it's not important what it was about. I announced I was moving out.
"Ever since you were 13 years old you have been threatening to leave. I am accustomed to it by now. In my calculations, you'll be off when you are 22, but you won't be alone. Judging by your behaviour, you'll have a child, and, if you are lucky, a husband."
I was speechless. Instead of trying to stop me, he was just taking mickey out of me.
"I know, it's no longer my business," Dad stated, "but if you don't mind satisfying my curiosity, where will you get the money to sustain yourself from?"
"Grandpa will help me."
"I hope you are right. You know he is quite old-fashioned. You'd better check it with him first. I guess I won't be able to rely on you when I'm old then." Dad hung his chin down.
"You will. I know my duties. I will give you a glass of water on your death-bed," I said pompously, using a metaphor.
"Could I have a pint of cold beer instead, please?" replied Dad contemplatively.
Tell me straight, is it possible to take such a man seriously? After assessing the situation I decided not to move out just yet.
How I became a criminal, nearly.
Dad says that it takes one silliness to cause a mess. It takes more than one, and in succession, to have a disaster.
It was the last day of the month. My monthly house-keeping allowance had run out. Dad's usual money transfer would have been on the following day.
Without any intention to do so, I went to the old town centre and came across a boutique in one of the side streets. I had never noticed it before. And there it was - a top, I will spare you the details of it. Needless to say, it had to be mine. I fretted whether my size was available. I tried it on and it fitted perfectly. I knew my friends would turn green with envy. Then I realised I did not have enough cash on me. There was no point in going to a hole-in-the-wall as my bank account was almost empty. I could have phoned Dad at work, but I knew what he would say about it all. Even if he agreed, I would have had to go over to get the money and I was certain that meanwhile the top would have been sold. I could not let that happen. While I was standing in the fitting room, frantically thinking what to do, it suddenly occurred to me that I had my cheque book on me. I could pay by cheque if the shop-keeper agreed to it. I knew the boutique was open till 6 p.m. and so was the bank. The cheque would have to be cashed the following day, and that was also the day when the funds would be in my account. I was relieved.
"I'm sorry, but I have a small dilemma. I like this top very much but unfortunately, I don't have enough cash on me. Will you accept payment by cheque?"
I asked without any qualms. "Yes, I will," she agreed.
I bought some accessories and wrote the cheque out.
When I got back home, I prepared dinner. Dad came home late as he was delayed at work. While he was eating, I showed him my new outfit and asked him for
the money transfer. "Could you transfer the money tonight or tomorrow before you go to work, at the latest, please?"
"Are you already completely out of pocket?" He was surprised. "What's happened?"
I told him in detail my ingenious idea of buying the top and paying by cheque. I suddenly became aware that Dad was changing colour, I mean his face
was, he threw the fork on the table and exploded. "Do you realise what you have done? You have committed a criminal offence by signing a document, confirming you had enough money in your account to
cover the cheque, although you knew there wasn't any!" He sprang out of the chair and rushed to the computer. It turned out later that he transferred money into my account then. Afterwards he went to the
drinks cabinet, shoving me out of the way, and served himself a full glass of cognac, which he drank in one gulp. I knew the situation was very bad. I was standing petrified with my eyes full of tears.
"Dad, I don't really know why what I've done is wrong."
"Sit down," he said. "Let me explain it. I've already said you get a mental block when you see clothes. Unfortunately your brain wasn't working at a
crucial point today; at the point of solidity and reliability." "Dad, I thought it through. I even put tomorrow's date and the shop-keeper hasn't noticed it. I know that's a fraud, but I'd rather confess it all now."
"You did not commit any fraud," Dad gave a deep sigh. "I have to explain this to you. The law regarding cheques is that they must be payable at the time
of signing. It means that when a bearer receives a cheque from you, you need to have enough money in your account to cover that cheque. If you don't, then it is a criminal offence. A bank will cash the cheque up to 10 days from the date it was written out on. If you predict that a bearer will
not manage to cash the cheque in this time, then you put down a later date when writing it out. Such a cheque is called post-dated. It is an old legal rule, which is no longer in use. This untruth is sanctioned by law. This law came into existence a very long time ago and is based on a proverb.
Do you know an old Polish saying "a good joke is worth a tynf"? This saying has a historical origin; it is based on the same legal rule. Look it up in an encyclopedia."
I started my search online, quite pleased that the atmosphere was lifting and Dad was getting back to his normal self and finishing the meal. Here is
what I found: TYNF is a Polish silver one zloty coin, with a nominal value of 30 groszy , and the real value of 12 groszy (counted by an actual amount of silver in it)
. It was issued from 1664 to 1667, in the reign of King Jan II Kazimierz, in order to pay off the State debt. This conscious forgery of the tynf was sanctioned by the Mint Commission and was reflected in its Latin verse stamped on the coin's reverse: 'The real value of this coin is in saving our
homeland, which is worth more than any metal'. Despite good intentions, issuing the tynf caused a significant increase in prices and ruined the economy. By 1766 these coins were bought back by the state's exchequer on the order of King Stanisław August Poniatowski, at first costing 36, and later
27 copper groszy. The coin was called after the name of its designer, A. Tynf, the leaseholder of mints in Kraków, Bydgoszcz and Lwów. "Nice joke, it ruined the economy," I said with a sneer.
"They can be excused somehow. They tried to save the country but weren't aware that issuing fiat money would cause inflation," Dad explained. "They
didn't know such a notion. It was defined much later." "Nowadays the politicians want to save our country in the same way. They mean well but it turns into the usual disaster."
"I think you've watched too much telly recently, though your reasoning is correct. What we learn from history is that we really never learn from it."
"Dad, I don't think this is entirely only my fault," I tried to justify myself. "If the shopkeeper had had a card reader the idea with the cheque would
not have come to my mind. A cheque is an anachronism and in the future will be replaced by cards completely." "What are you talking about?" Dad was visibly animated. "These are two different payment methods. Their functions are similar; however a cheque will
never be replaced by a card. Cheques can be used to pay for anything, anywhere, at any time. I can use card only when the shops are open or when I find a cash machine. I will tell you something and please remember it. Cheques will always be used by educated people. Cards will be for everyone. To
sum up, you have committed a criminal offence; however you have not committed fraud despite intending to." "But thanks to you we have a happy ending," I was trying to pander to him.
"Not necessarily. If the shopkeeper had sent someone to the bank with the cheque before 6 pm, then the bank would have refused the payment and it would
have bounced. The account would be fined and your name would appear in the records among all banks as an unreliable customer. You would have messed up your credit score. You could be declined any loans. Even your future business is now in question."
"Dad, please tell me it isn't true. She couldn't have managed to get to the bank. When will I know what has happened?"
"If the bank charges your account with the cheque value within ten days from tomorrow's date, as this is the date you put on the cheque, then you got
away with it."
I hardly slept, tossing and turning all night long. I dreamt that the police were arresting me, putting handcuffs with long, long chains on. The next
day I could no longer wait. I withdrew the money at the cash machine and I went to the boutique. I opened the door with my heart in my mouth. The lady recognised me straight away.
"Do you want to return yesterday's purchase?" She asked.
"Oh no; I like it a lot. I was passing by and just dropped in to ask if you had any problems with the cheque. I sometimes have problems with my
signature," I lied. "I could pay you in cash today."
"It won't be necessary. I went to our accounting office and left the cheque with them. They normally cash any cheques at the end of the week. It should
all be fine. You may leave your phone number just in case. It's so nice when a person your age is so solid and reliable, it's so uncommon."
What an irony. It was a weight off of my mind. I was glad to have my Dad. I phoned him straight away. He was pleased to hear the news, but said we would
discuss the details in the evening. He raised the subject after supper.
"I know you got away with it, but you have to draw conclusions from this event. There was an offence, and a fraud attempt, there was a confession of
guilt as well. Now there has to be an inevitable punishment. Here are the rules and regulations regarding cheques. You'll read them very slowly three times. I want you to note down anything you don't understand so I can explain it to you later."
I did not say anything; I did not make funny faces either. I had expected to be punished more severely. Although everything turned out well, there was
one problem left. I had my new top but the money for it was still in my account. How and when should I enter it into my own accounting system? "Dad, how should I account for all this?" I wanted to know.
"You have to start a new account, "Cheques". You also need a new general ledger "Securities and deposits". Now what is left is the question of when to
record the items. You can do it when you know what a cheque actually is. It has some specific features and each of them has a legal effect which you now know about:
- A cheque is a security, which means that the bank is obliged by the issuer to pay a particular amount of money to the legal bearer. The legal bearer
has all the rights arising from this document. He or she may demand for the cheque to be paid or sell it to another person. - The issuer must have enough money in his/her account to cover the cheque from the moment of handing it over.
- The date of issue of the cheque may be later than the date the cheque is written out.
- The issuer must have enough money to cover the cheque up to 10 days from the date the cheque was issued.
- After 10 days from the date the cheque was issued the bank will refuse payment, despite money being available to cover the cheque. The bank will only
accept the cheque after 10 days if the issuer gives his/her written consent. - The cheque is a legal tender provided that both the issuer and bearer agree to this kind of payment. If so, handing in the cheque is a payment.
- The cheque is money in determined currency."
"Is it really?" I was surprised. "I thought money is coins and notes."
"You thought about cash. Money is a broader term. I'll explain it at another time. Now we have to determine what the payment exactly is and when it took
place. We also have to establish an accounting title or a reference of your expenditure. The way of entering it depends on that. Let's keep track of the whole event, one thing at a time," he suggested. "You wrote out a cheque. What does it mean?"
"I issued a security on the basis of and according to the strict rules of the cheque law. I had a right to do so."
"That's correct. Could you pay for the goods with it?"
"Yes, I could."
"No, you couldn't. The cheque is not cash. Therefore, it is not legal currency. Cash is the only type of payment when the consent of both sides isn't
needed." "I see. Only when the shopkeeper agreed that I could pay by cheque did it became legal tender."
"That's right. Now you know what form of payment you made. However, what was your item of expenditure?"
"I bought a top. The title of expenditure will be a purchase of clothes, so I'll record it in Maintenance."
"What if it were a high-visibility jacket, the same as police have?"
"The title of the expenditure would have changed and I would record it under Car costs."
"When was the payment made then?"
"That was when the bank took money out of my account to buy the cheque back."
"That's not correct. The payment takes place at the moment the legal tender is handed to the bearer or his/her representative."
"That's so logical," I slapped myself on the head. "Otherwise I would have two obligations for one item, payment for the top and for the cheque."
"Now you understand everything you need to record this purchase. Tell me how you'll do it; I'm all ears," Dad said eagerly.
"I'll record the title of the expenditure "Top purchase" on the day of handing in the cheque; Maintenance (Dr), Cheques (Cr). When the bank pays for the
cheque, then my title of expenditure will be "Cheque payment"; Bank (Cr), Cheques (Dr) and the Cheques account will be zero." "There is also one more issue. When you pay by cheque, none of your funds is blocked in your account, contrary to the card payments. You'll have
"I'll have to subtract the balance of my Cheques account from the balance of the Bank account."
"Are you sure? What if your small business receives a bigger amount in cheques than the cheques you've made out?"
"I'll have illusory money again," I admitted. "I know! I need to subtract a half, debit side of the Cheques account only; these are my obligations."
"We got there, at last," Dad gave a sigh of relief.
I have learnt a lot from that experience with the cheque; however it raised some more questions. What were securities and how did they come into use?
What was the difference between money and cash? How did the banknote come to existence? Who could issue securities and what kinds were there? I asked Dad about it all. His response was that it was too much for one day already and that he would explain everything at another time. I hope he did
not mean my next slip-up. I decided to thoroughly establish what I was taught.
Christmas Eve arrived. It is the most important day of the year for my Dad. We spend it with our family; my grandparents, aunts and uncles, and my
cousins. We always wait to start supper together when the first star appears in the sky. My father always puts a bank statement and one grosz inside an envelope and places it under the tablecloth. There is one extra place setting on the table for a lost wanderer. Even my rabbit has his small bowl with grain inside and sits by the table with the whole family because he is very precious to me. There is a Christmas tree with lots of presents under it. We have many dishes prepared for supper. The most important is żurek with mushrooms and mashed potatoes, with fried butter poured over it. My father says that even if we could not afford anything else but żurek, Christmas Eve supper would still be valid. This soup is the most significant course and we start our supper with it. Once supper is finished, my father rings a small bell, and we rush towards a pile of colourful boxes with our names on them. Naturally, I did not stand a chance against the youngest; the only thing I could do was to help them find their presents. Then I passed the presents to the older members of our family. The only presents left under the Christmas tree belonged to me. A small red box drew my attention. When I opened it, there was an old coin set in silver, made into a pendant. I knew straight away what the coin was.
"Dad, is that a tynf?"
"It is. I hope it will be your talisman, which will help you correctly discern other people's intentions towards you. Good intentions do not always turn
for good, as the history of this coin teaches us. May it protect you from making bad choices," he wished me with a smile.
I held my gift and was gazing at it. A penny dropped in my heart. I understood that Christmas is about the closeness of those dear to us, not just a
date in a calendar and decorations at a supermarket. I realised that my Dad, who had just left the room, Grandpa smoking a pipe next door, Grandma cleaning the table after the meal, the envelope under the cloth, my room with my bed and a warm quilt are all my safety.
Sitting at the Christmas Eve table with those close to us, set dishes, conversation about those who are no longer with us, though we wish they were, are
tradition. Żurek, Christmas tree, the bell and the presents are a custom.
Making Dad buy me a laptop because others have one is greed, not necessity. I understood the difference between the words "I love you" said by a real
man and by a bloke. The man creates safety for those around him and in marriage is also good at doing what a bloke does in the bedroom. Sometimes a woman is made to become a real man in that meaning, especially if the bloke leaves her with three children to look after. My Dad is the first real man
in my life. It does not matter that sometimes he says something unpleasant or painfully honest, but he is always there for me. In life sweet talk and flattery turn into trouble.
I clenched the gift in my hand. It seemed that it started working its charm straight away. I have been wearing it to all my exams ever since that day.
Naturally, I immediately showed my new acquisition to everybody. It was praised for its beauty, but only Grandpa guessed its true meaning.
"I see your Dad gave you a talisman against foolishness. You've pulled a fast one with that cheque," he said with a sneer.
"Grandpa, although I didn't know what I was doing, my intentions were noble," I said with an innocent tone.
In order to emphasize my truthful intentions and honesty I sat on his lap. Grandpa moaned under my weight. I was not a little girl anymore.
"Having seen you in this top, I don't condemn you," he hugged me and kissed my forehead. "However, you must know that there are different systems in
this world." "What do you mean? Could I repeat my silliness somewhere else?"
"There are two law systems regarding Bills of Exchange," Grandpa said seriously. "In Poland we use a conventional one and there is also a British one.
The average citizen wouldn't know the difference. However, they vary greatly regarding the cheques." "Wait a minute! Does it mean I wouldn't have had such a slip-up in the UK?" I was quite animated.
"No, you wouldn't," Grandpa stated after giving it some thought. "Although you wrote the cheque out and handed it over on a day you didn't have enough
funds to cover it, but the funds were available on the date stated on the cheque." "So what you are saying is," I thought for a moment. "No, I don't get it. Please tell me, would I have committed a crime in the UK or not?"
"No, it wouldn't have been a crime in Britain. Cheques aren't payable at the moment of being handed over as it is in Poland. They are payable during a
six months period from the date they were made out on." "I think I understand it now," I said confidently. "In Poland I need to have enough funds to cover the cheque right at the moment of handing the cheque
over to somebody, plus additional ten days from the date it was made out on. However in Britain I am required to have enough funds from the date stated on the cheque up to six months thereafter, unless the cheque is cashed earlier. Which system is better?" I asked Grandpa.
"There is little choice, it has to be the system we function in; you have to know and understand it. We have to abide by the laws of the country we live
in. And as to the cheques, it's always the law of the country our bank is based in."
An exchange of opinions. Open market.
Dad was rummaging through his books when he came across a receipt from a supermarket. He had used it as a bookmark some time ago. It was one of the
receipts from my early learning of running the house, which meant buying without any sense. The receipt was long and the total on it was quite high. Dad passed it on to me with a smile.
"Look at the metamorphosis you've undergone. You no longer buy like that."
I looked at the receipt and wondered how I had managed to stuff it all into the fridge and the cupboards. The prices looked more interesting. I noticed
they were currently higher, but to a varying degree. "Dad, have a look at the prices."
"I know, they've gone up since then. I wonder how much. I've got an idea. We haven't been shopping together for a while. I would like to check if
inflation is at the level shown by the official statistics."
"What is inflation? It is constantly talked about on TV. Is it a price increase?" I asked.
"In a nutshell you may say so. That is how an average citizen experiences inflation. It is one of the indicators showing the state of economy.
Inflation is a rise in the level of prices of the same basket of goods, expressed in percentages, and measured over comparable periods of time," Dad defined it.
"What is this basket of goods?" I asked again.
"You can count inflation based on one product or a group of products, or even a sector or the whole economy. That group of goods is called a basket."
"I know what we'll do! We can count inflation on our supermarket basket, when we add all the prices on this receipt. Hence the basket," I made a
discovery. "If I add up food items only then I'll know the inflation on food."
"That's correct. It is very important that the basket stays exactly the same, otherwise the data won't be comparable."
I became really interested in the matter. I was keen to find out how prices rose in the groups which related to my accounts divisions. Food,
maintenance, alcohol. I decided to copy the receipt onto a spreadsheet in Excel and do the calculations the easy way by coding the cells. Excel is an
amazing invention, much better than a simple calculator. I had a nice outing with Dad. I was checking the prices while Dad was standing in the cameras' section, trying out different models without buying any for half an hour. Checking clothes was the worst for me. I wanted to find exactly the
same items, but it was not possible, since the fashion had changed. I took longer than Dad with the cameras, so he finally joined me. "Dad, it's unachievable," I was gutted. "There aren't exactly the same products today."
"It's just because you're trying to find identical items," Dad was not surprised. "Find comparable ones. When you manage home finances, you use
concrete data. When you run a business you have to use, to some extent, average numbers. When dealing with a country's economy you have average data only. It's difficult to comprehend for an ordinary person. If you want to understand our country's economy, and later on the global economy, you have to start thinking in terms of calculus of probability rather than hard data."
"I've had a few lessons on the calculus of probability, but honestly speaking it didn't agree with me," I confessed. "It goes against my nature. It's
some kind of fiction." "You're mistaken, the whole world hangs on this calculation. The more information you have, the more reliable it becomes. You have to think about
running the house, with little and concrete data, in a different way to running the country's economy, with an avalanche of averaged numbers. When you started learning it was ok to compare our household to running a company or even a country, however you have to bear in mind that it was an extremely simplified comparison."
"I still don't get it," I said stubbornly.
"Let me give you an example. I play Lotto. I treat money spent on it as a tax on my hope, and that's why I buy only one ticket but regularly. I give
God a chance. If I didn't buy the ticket even He wouldn't be able to do anything about it. The probability of winning is very little, one to fourteen million. It's as if you placed poppy seeds one next to the other over a fourteen kilometre line and was supposed to choose only one as a prize.
" "I'd never win," I stated with a strong conviction but also a hint of regret.
"That's not true!" Dad opposed. "There are people who win. The probability is small, but it's bigger than zero. Things look different for the Lotto
company. If they divide the total number of tickets played by fourteen million every year, then the amount they get matches closely, with only a minimal difference, the actual number of winnings. Using this data they can set the amount of prizes so that the business makes a huge profit. The
calculus of probability also proves that the data repeats itself in similar periods. You can predict global economy processes when you have at your disposal information from previous periods by simply comparing it."
"I see it now. When thinking of our country's economy I shouldn't think about "me" but rather "all of us". I take it, this is the reason why some
people who didn't make it say that our country's economic data is fictitious."
When we got back home I calculated the inflation on my account baskets. It was higher than official statistics. Dad commented that it was because my
baskets were too small, and these were only basic products. Their prices normally go up quicker because they are bought by the largest number of people.
"What is the reason for inflation?" I was curious.
"Inflation takes place when there is a difference between the larger supply of money than the availability of goods on the market. If you have more
money you are more willing to pay a higher price for the same product. That way you personally cause inflation," Dad was explaining. "There is also another problem. Inflation doesn't grow steadily. It rises in leaps and bounds and is difficult to predict, which causes problems with taking remedial
steps." "I don't understand why inflation rises in leaps. Could you give me an example, please?"
"Do you know where earthquakes come from?" Dad was expecting my answer.
"I do. Two tectonic plates move over each over. Their surfaces aren't smooth, so they catch on each other and stop. Tensions rise up to the moment when
those barriers are broken. All energy is released at the same time and the plates move rapidly over a marked distance. That's when there is an earthquake and it's strength is greater if the energy was being accumulated over a longer period of time."
"Now I know how you got the best marks in Geography. The process of inflation is similar. One of the plates is the cost of manufacturing a product, the
other is the price that is restrained by the market. Tensions are margins which different companies make on sales of their goods. Let's take the example where competition between some companies doesn't allow them to raise their products' prices however their costs grow, constantly, but steadily."
"This competition is like this uneven surface between the plates," I guessed. "If it is so, the margins and company's profitability start to plummet
and so will the taxes and investments as a result. Such a situation cannot last forever and leads to a sudden liberation of prices." "The competition between companies is no longer important when this process takes place," Dad continued. "It's because everybody rapidly raises prices,
much more than the costs of production might indicate. The unevenness of the plates has been eroded." "So we get a sudden earthquake in prices, a big jump in inflation. Now I know why you said that some inflation is beneficial for the economy. A steady
small increase in prices covers an escalation of costs. It stabilises the market and allows planning for investments. What is the impulse that causes this earthquake, I mean this sudden liberation of prices?" I asked, as nothing else making sense came to my mind.
"Any reason is good," Dad shrugged his arms. "For example, raising taxes by one percent causes four percent rise in inflation. Speculation on strategic
goods increases inflation on staple products. There are also natural disasters and crop failures in farming. An Arab Spring in Northern Africa. Even totally absurd gossip or a campaign for votes."
"Time and again the sensible and thrifty pay for the profiteers' and politicians' show."
"It might be so, but you just narrowed it down again to specific events, just like reporters do. It's their job though. They play on emotions, which
gives them popularity. I'm trying to explain to you the different relationships which are between global and national economies. One shouldn't be driven by emotions in such a case. You'd better think what can be done by the government to keep inflation low and stable."
I had to calm down and come to my senses.
"Now I understand that example of the money given away by the government for the increase of salaries without any reason. You told me about it when
explaining deposits. There is only extra money on the market but there isn't any production taking place. The market balances itself out by raising the prices, which is inflation. In order to stop the increase in inflation, more taxes should be raised for these salary increases. Am I right?" I
asked Dad. "It isn't too clever a solution", he stated. "The Treasury would act like Robin Hood, robbing those who are still manufacturing goods and give it to
those who no longer would have been doing anything. As a result, any production would become unprofitable. Some people would start hiding their income, they would become part of a black economy, while the rest would face bankruptcy."
"You're right, it's a stupid idea," I admitted. "Why don't we lower the taxes then? There would be more money for investments, production would grow
and the treasury would get the same or even greater funds." "That sounds more reasonable. However, the income from investments will decrease at first, as they will pay out only at a later date."
"It is this economic tail again, delayed results," I remembered. "Where would the government get the money for pay rises then?"
"The best way is to save on its own expenses, which is public spending."
"Everybody talks about it when there are elections coming up. Every party promises to cut back on spending, but after they're elected their spending
continues to grow." "It isn't that simple. One needs decisiveness, perseverance and a lot of skill. You draw me into politics again," Dad snapped.
"Ok, I'll stop now. If the government isn't able to save, where are they supposed to get money for the increases without any good reason?" I kept
"The state contracts a debt with us by increasing public debt. The Treasury issues securities such as bonds."
"Don't bonds cost money? One has to pay interest on them and pay them back at some point. If there isn't any money in the state's coffers, this
interest will have to be paid for by our taxes," I observed.
"Yes, it will. Not only your taxes but also the taxes of your children and grandchildren will have to pay for it. You have the economic tail of delayed
results again. Future generations are thrown into debt in order to plug a budget hole today." "That's not on!" I shook my head. "It takes some silly decisions on spending money today to make my future grandchildren pay for them!"
"It looks like it," Dad confirmed. "The only thing you can do about it is to think hard who you are going to vote for in the next election."
"I've already decided. I'm not going to be swayed by flowery speeches and promises of miracles. I prefer an honest professional assessment of reality.
That was what you wished for me when you presented me with the tynf amulet", I reminded him. "What about this inflation then? Everybody loses by it."
"Not everybody, only the most sensible and thrifty. In order to counteract inflation the state raises the price of acquiring money, the interest rates.
Any loans become more expensive. Less people take them and there is less money on the market. However, the cost is greater for those who already have any loans. The real value of any savings falls down. It is like a hidden tax that is paid for a government's poor stewardship. This is how the
sensible and thrifty pay for the spendthrifts." "Dad, you get on my nerves on purpose. You take it to the extremes of absurdity; it's your favourite method."
"You might be right," Dad agreed. "However, in any extreme you see everything standing out boldly as if in bright light. Once these issues draw your
interest you'll form your own opinions on them." "That's what I'm trying to do, but my knowledge is very limited. I was thinking, raising those interest rates slows down inflation, which is good, but
it also increases costs. That in turn lowers companies' profitability and income from taxes. The state causes inflation by stupid spending and failure to cut its spending. It strips people of their savings and as a consequence, its own income from taxes. The state then has to incur debt to be
paid off by future generations." "The situation is even worse," Dad was very sombre. "Fighting escalating inflation generates expenses and limits money supply on the market. This in
turn cools down the economy, slowing it down. Production starts to fall. This is called recession." "I've heard this word often used, but I don't really know what it means."
"Recession is more difficult to define. An average person doesn't experience it as tangibly as inflation. It is a contraction of the amount of similar
finance operations in comparable time periods. Recession is more dangerous than inflation and is much more difficult to overcome. It is measured by a slowdown in economic growth. If the economic growth is lower year by year, we have a recession."
"And what are the examples?" I was inquisitive.
"If you start selling your book and you sell more books in the first year than in the following one, you have recession in your company."
"I get it. If the sales continue to fall, my profitability will also decrease and as a result, because of my fixed costs, I'll have to close my business
. I'll sign on the dole as unemployed instead of paying taxes and giving work to others." "If this happens to just one company, it doesn't really count. It might be that somebody else writes better books than you do. However, if that problem
touches the whole economy, recession brings serious and long-term troubles. It spreads like a plague from one company to another, then to entire branches of the economy and then, unless it's vigorously opposed, it takes over the whole economy."
"And there we are," I gave a sigh, "it starts innocently. The government spends money from taxes willy-nilly and doesn't create any reserves. It causes
inflation and when the state fights it, it creates recession in its wake." "This time you go to extremes. A recession isn't caused by the state only. It can be influenced by any institution that releases easily accessible money
. The result hangs on the scale of such actions. If the banking system gives mortgages without proper caution and guarantees, it will initially cause a sudden boom in the building industry, but soon after inflation will follow," Dad clarified.
"I start to understand it now." My thoughts drifted. "If banks lower the criteria for acquiring mortgages, a greater number of unwise people will be
convinced they are able to pay for buying their own home. That way there is a greater demand for housing and prices shoot up. Inflation is just around the corner. If the state starts to counteract inflation by raising the interest rates, banks will make loans more costly. Some people won't be
able to shoulder that extra cost and will stop paying their commitments. That in turn will cause them to lose what they purchased." "You've made the same mistake I pointed out to you earlier," Dad corrected me. "You think of individual examples rather than applying the calculus of
probability. When you think on the scale of our country, only a small percentage of people will find themselves in such a situation. They'll have to bear the consequences of a lack of planning skills. On a large scale, the rising cost of getting a mortgage will cause falling numbers of house
buyers. And that's recession. The prices start to fall, so even those who could afford a mortgage will stand back and the situation will spiral downwards."
"What about the banks that caused all of this?" I asked, guessing that somebody has to foot the bill again.
"It all depends on the scale of events. If any of the banks crosses the line, it will have to account for the unpaid loans and mortgages as its loss.
It will lose financial liquidity, which usually ends up in insolvency. The state will have to react again in order to prevent the general public from losing their deposits and it will give vast amounts of money in low-interest loans to the banks."
"So I was right, wasn't I? Once again the sensible and thrifty will pay for the spendthrifts," I said shaking my head.
"You simplify everything. Start thinking on a global scale," Dad scolded me again. "The state isn't your own household. It has to lower the interest
rates with the view to overcome the recession and boost the economy." "And so there will be inflation again soon and so on and so on. It reminds me of a see-saw in a playground. When one end is at the bottom, the other is
at the top. It would be best to keep such a see-saw in balance," I remarked. "You're right. Stabilization is what an economy needs the most. Any changes should be introduced gradually and with plenty of warning beforehand. The
market will have a chance to adjust. A low level of inflation is beneficial for the economy, especially when it's stable. You have to know that the see-saw isn't only between inflation and recession, that would be too simple. Once a recession starts, problems multiply. In order to save the
financial system the state pumps vast amounts of money into it in the form of privileged loans. Add the uncertainty of any investments and deposits on top of that. The currency of such a country rapidly loses its value. Any imports become expensive, while exports are cheaper and become more competitive
. Exports stimulate economy as more is manufactured than is used on home market. The recession starts to decrease." "Wait a minute," I said, getting to grips with the rules of this game. "That situation will be reversed in another country, whose economy is connected
to that particular one. Exports will become unprofitable and imports will stop part of its own production. The recession from one country will spread to another one."
"That is the ugly face of globalization. There isn't any country in the world that would be self-sufficient and able to cut itself off from the world
economy." "Can't we be safe in our own home?" I held my head in my hands. "It means that if one country messes up, another country will have to pay for it."
"Maybe not for everything, but definitely some of it," Dad partially agreed. "It all depends on how strongly those economies are interconnected," he explained.
"Once again the sensible pay for the spendthrifts."
"They do. However, the benefits of international cooperation are much higher than costs."
I started thinking about it all. I knew that stabilization was most favourable but I was not sure what causes destabilization. I thought that problem
was interesting enough to continue to pester Dad a bit longer. "Tell me Dad, who's got an interest in stirring this all up?"
"Nobody, really. All the stirring up is done by the flow of capital. Money has to flow to the places where it will bring the best returns. You know the
parable from Matthew's gospel now. Money should neither be buried nor put under the mattress. It would bring loss. If capital flows from one part of the economy to another one where it brings more profit, it causes recession in the first one and development in the other one. It all depends on the
speed of this flow. If it's moderate and stable, then outdated sectors disappear slowly and new ones develop." "It's quite positive, isn't it?" My face showed surprise.
"It normally is. However, if the flow is too rapid, the economy doesn't have any opportunity to adjust itself by shutting down outdated technologies
and production. There will be many companies failing, while any company in newly developing sectors will have an exaggerated value as prices hike up. Even more, there isn't enough time for employees to change their qualifications, so unemployment goes up too."
"It means that when the capital flows steadily, we reap double benefits, and when it flows rapidly, it doubles the disaster. It's the "double" rule
again," I discovered. "And there is also that see-saw between different sectors of the economy. Does the state have any control over it?" "It does, quite a significant one. The most important thing is to keep the balance between investment and speculative capitals."
"You'll have to explain it by an example, as I don't have a clue what you're talking about," I said.
"Fine," Dad was deep in thought. "We are all putting money aside for our pensions; you'll start doing it as well soon. This money is located in Pension
Funds. Some of our money we decided to spend on buying Investment Fund units. A vast number of people do that as well. Money in such funds accumulates, but it can't just sit there."
"I know," I butted in. "Any fund has its costs, so if the money isn't invested quickly it will start bringing losses."
"You're right. Let's take the simplest example, a share fund. If the state creates conditions for many companies to float, the fund will buy their
shares on a primary market. They in turn will get money to buy more equipment, buildings, exports, etc." "It's simple afterwards," I interrupted. "Employment will go up and so will income from taxes. Even more so, a company's value and profit will rise up
too. The fund will receive money back from that profit as its dividend and will be able to invest that money again. So the capital has been earthed, as in electricity, and won't be making any trouble. It will be working honestly instead."
"That's absolutely right when you put it this way," Dad was laughing.
"What will happen if the government decides that it won't be focusing on those issues as it has other things to do?"
"Then problems will start appearing," declared Dad. "There won't be enough companies floating their stock. The fund will start buying shares from other
owners, pushing their prices up. The relationship between share prices and the profit of the company will go up. The fund will cause a boom on the Stock Exchange. Others will start buying as well, pushing prices up even higher."
"I know how it will all end up," I stated. "At some point the fund will decide that these shares are overpriced and will start gradually withdrawing,
by selling the stock. Then somebody will start to panic and this speculative bubble will burst. But it will be too late. We'll have a collapse and minor investors will get the short end of the stick."
"Not all of them, only those who are unaware," Dad made my prophetic insight more precise. "Some people invest on the Stock Exchange out of pure greed
or they sheepishly follow the crowd. They don't even try to understand what rules govern this institution. So they then have to pay for it." "Just as I suspected. What about the fund then? It's back to square one as it has more capital than at the beginning."
"It might transfer its interest to another Exchange and start buying gold, food or oil, bumping up their prices on its way," Dad replied in a matter-of-
fact manner. "It transfers very easily, that's one of its qualities. Such cycles repeat themselves in different sectors of the economy every few years. Capital, which isn't invested, or as you put it, not earthed, is called speculative capital. If there is too much of it, it will cause trouble,
and not only for one particular country. However, if it stays in balance with invested capital, it has as positive an influence as low inflation. It's a bit like in our body we need both good and bad cholesterol. Everything is okay when they're in balance. Then again, if the bad one takes over,
one can expect a heart attack in the near future. One should take medicine to prevent it. It's all poison, yet taken in small wisely administrated dozes, it brings health back."
"If speculative capital is so bad for our country's body, is there any way to curb its influence?"
"There is, still I doubt if any government would ever go to the lengths of applying it. One would have to turn the scale of fees and taxes that are
charged for any financial operation at the Exchange markets on its head." "You've totally lost me on this one." My head was spinning.
"Small operations shouldn't be charged for and then the charges should gradually increase with the amount of money involved. Any charges on strategic
products like oil should reach high double-figure percentage values of transaction. Those who trade just for speculation should pay a much higher price for it."
"I get it now. If any large capital is speculated on, the Treasury will have high profit from it, while small capital can flow without any obstruction,
encouraging the work of small businesses. I know that such businesses are the quickest to react to changes and give the highest employment." I started wondering what the actual difference between speculative and investment capital was. It still was not clear to me.
"Dad, please tell me why one kind of capital is good and the other bad, however they have to coexist? What is the difference between them?" I asked.
"In all honesty, there's only one capital. It is exactly the same money, which is used differently at various times. On the one hand, when the capital
is invested, it gives people jobs, lowers unemployment and, as a consequence, increases consumption, which then sparks economic growth. On the other hand, if it's taken out of the economy just for speculation, it works in the opposite direction. It enriches only a few people."
"Now I get it. Investment capital is used for the good of many, speculative, only for the good of the few."
"You could put it that way if you over-simplify it. Still, you have to remember that you do need some speculative capital, otherwise investment capital
wouldn't be able to flow between different sectors of the economy." "Yet again the whole point is to keep the balance between different capitals and their steady flow," I noted. "I'm not the brightest, you know, but I
understand it all. It isn't rocket science. I suspect, and am almost certain of it, that there are people trying to complicate things on purpose. They cloud this over by creating new and more complex financial products, which are understandable only to their inventors. Such people are trusted
with vast amounts of money by those who are lured to believe in the supernatural returns they could have. Hmm. I'm missing something here. This money would have to change owners somehow."
"One has to play for both teams." Dad seemed to be bored.
"Isn't it wrong and doesn't it go against banker's ethics?!" I was fuming.
"Let me tell you what happened to me once," Dad scratched his head. "I had an inspection in our company. The inspector running it was very cocky. I
think he was making up for a lack of experience. He asked me directly, hoping to catch me unawares, "Tell me as it is, do you take bribes?" After some thought I replied that I did. "Tell me then how much and from whom you receive them," his face had a glow of victory. I told him I didn't take
anything as they weren't offering enough." It suddenly became very obvious to me. Ethics and loyalty have their price as well. That excludes my Dad, obviously.
"Who's then responsible for this crisis?" I asked.
"Mostly the government and the lack of proper regulations it could put in place. The loopholes in law are used by dishonest people. Economic freedom
doesn't mean that everything is allowed. Democracy is for the good of the majority, not the individuals." "If you put democracy in such a context," the penny suddenly dropped, "paying taxes is a civil duty and a way of sharing with the less fortunate. It
isn't as I thought earlier, the state robbing me. Any person who on purpose or by stupidity wastes his money, or even worse tries to steal it, is simply a scumbag. I've changed my mind and I'm not ashamed of it. You've taught me that only leopards don't change their spots. Intelligent people do,
when they realize they are wrong." "That's a radical change for you," Dad's eyes were wide open with surprise. "I've always made sure you didn't mix up patriotism with business, however
I'm not going to do this in this instance. You're simply right. Yet I think you'll grow out of it." "Never! You don't know me yet," I stated with a deep conviction.
"You see, I used to be just like you. Today I feel a bit guilty of betraying my youth's ideals," Dad's voice was full of sadness. "Once you have a
family to feed. Only rich men can afford to be proud, the poor cannot afford it, though they should always be honest." I then realized that I can have my own opinion and live in harmony with it only because of my Dad's, Grandpa's and Grandma's hard work and sacrifice. I
held my Dad's hands and squeezed them tightly. "Dad, I love you," I told him. For the first time in my life I had full awareness of what those words meant.
Dad was speechless. He did not anticipate such a confession in the middle of finance discussions. He held me close in his arms and kissed my head.
I broke the silence by continuing our conversation.
"How does the state influence all these processes then?"
"In many ways, it's the main player on the market. It can set up and change the rules of this game by bringing in new legislation. It can direct the
flow of production by setting up customs charges and excise duty. It can draw investment capital by simplifying regulations and applying tax allowances. The greatest weapon to fight recession with is unobstructed flow of investment capital. Large and small capital shouldn't be treated with
the same brush stroke. Contrary to people's assumption, there is a lot of small capital, however it's spread around. Private loans in our country should be free from additional charges and inspections. Some people are unaware that they are in conflict with the law because of them. The circulation
of bills of exchange and promissory notes should be made easier and more popular. Issuing these bills and notes destroys recession without causing inflation, unlike issuing extra cash. The state should promote export and tourism. Tourism is a bit like an internal export, where the buyers
come to you, rather than a product coming to them. This gives an increase in the sales of services which cannot be exported otherwise. The expansion of tourism in any country causes the flow of investment capital from economically stronger to weaker regions. I'm also of the opinion that
food should be treated like a strategic weapon, where free market rules shouldn't be fully applied. This isn't an exhaustive list. I do believe that the role of the state is a bit like that of a Guardian Angel, standing at your side with all its strength. It should watch the market and make
tiny adjustments well ahead of time in order not to allow for any imbalance. When the market is in balance, it will regulate itself. That's why we call it a free market."
"What are the tell-tale signs of coming recession, so that the state can make small swift corrections?
"A recession destroys the branches of the economy that the producers can easily sacrifice."
"These will be luxury goods," I concluded.
"Not really. We are talking about businessmen, not rich people. These two groups don't always mean the same. The state should make a list of such parts
of the economy that are first to react to recession." "These would become early warning signs of the state of the economy. If such a list was public, people could prepare for the change. What branches
should be listed there?" I was curious. "There are a lot. One should decide which are the most sensitive in each economic area."
"Okay, but give me some specifics."
"I'll give you an example from my life. You were part of it. Let's have a look at training days and lectures."
Ever since I knew how to use a computer and my writing was up to scratch Dad would take me along to his exams and training days. I recorded marks on
registers and lists, while Dad was only signing them. I was also in charge of the overheads at his lectures. I was very proud of it and I also got a large cut of the profit. There was also another thing Dad was not aware of. Handsome students, especially those unprepared for an exam, went to
lengths to please me and it was very nice. However, my conscience is clear. I never allowed any corruption.
"What have you noted right before the crisis?" Dad asked expectantly.
I started thinking. At some point lunches, coffee and biscuits disappeared altogether. There were only bottled water and pretzels left. The training
stopped running over two days, with accommodation included, and became one day only. "That's obvious, this sensor was catering," I discovered. "Why doesn't the state compile such a list then?"
"Nobody, and even more so, politicians, likes to admit that the economy has contracted a shameful disease, recession. They would lose votes and opinion
polls." "Yeah, great. They're going to keep it quiet till the diseased parts have to be amputated." I was deep in thought. "Dad, could you tell me how this
crisis, where people lose their homes and jobs and are left in debt happens, please?" "How do you want me to explain it? Scientifically or by taking it to the extremes of absurdity?"
I started thinking about it. If he put it scientifically, I would not understand it. If I chose the other one, there was a risk that Dad would be right
again. He made a face, anticipating my reply. I knew I might lose, but my curiosity took the better of me. I made a poker face. "Yours," I played it straight.
"Fine," he replied as if he were dealing cards, looking me in the eye. "Let's take a bank for example, the bigger the better. Such a bank receives
people's deposits for minimal interest, which barely makes up for inflation. It's called bank's retail in deposits. Then the bank transfers all these funds into its second department, investment banking. That's where the high-fliers, new yuppies, pristinely and fashionably dressed, invest into
financial instruments with a very high risk, e.g. hedge funds, currency and index options, Foreign Exchange market leveraged a hundred times over and so on and on. They make lots of money for their clients. They also get a very good salary for it plus an even bigger bonus."
"I don't see anything strange in it, especially as they have vast knowledge, great skills and experience," I noted.
"I believe this opinion is based on watching all those soaps on TV, where the twenty-three-year-old handsome bloke marries a different woman to the one
he has a child with, and he is coincidentally also the chairman of a huge oil company." "You're starting again! You were supposed to explain the crisis, not talk about the soaps."
"No problem, I'm back on the subject. At some point it is found that those handsome, great-looking heartbreakers were completely mistaken."
"What's so strange in that?" I tried to fight my corner. "We have a free market, everybody risks their own money as they wish to."
"Not necessarily their own." Dad was giving me clues, expecting me to get his cynical smile.
"Oh fu..!" I said not able to restrain myself. I felt as if an anvil had fallen on my head. Such actions suck huge amounts of finance out of the
economy, slow it down and cause a recession.
"Well put!" Dad was laughing.
"This was the money of some simple honest people, not theirs! It might have been somebody's life-savings. And worst of all, it was used for a bad cause.
" Dad sat back in his armchair like an emperor.
"Could you pour me a glass of cognac, please?" He asked.
I did it for him, spilling some of the drink with my shaky hands. Dad was sitting in the chair, savouring every sip. My thoughts were racing.
"Those guys never risked anything. When everything was going well, they were paid huge salaries and bonuses, they were like celebrities. When they made
mistakes, the state, which is actually us, had to quickly guarantee people's deposits, in order to prevent panic and keep deposit banks afloat." "You're right, but that's not the end of it. The financial system cracked. The banks lost confidence in one another and stopped lending money between
them. That was the worst thing that could happen. The flow of capital was blocked. That is this crisis in a nutshell," Dad summed up his argument. "Flow, the flow. let me think. You've explained it to me using an example of small, spread around capital. But that was when the economy was stable."
"This is the most important financial parameter. Your celebrities managed to achieve something nobody dreamed of, the very height of absurdity. They
made the whole Global Economy go haywire." "I think I get it. If the banks weren't able to cooperate with one another and no economy can function without loans, it was only natural that each
bank had to receive vast unimaginable funds to prevent the collapse of the economy." "And so it turned out that old Keynes was right and the liberals had to eat their hats. There is a danger though. As we gradually recover from this
crisis, those individuals dream of returning to "business as usual". They didn't learn anything from it." "I'm not surprised. If I were in their shoes I would also object when faced with changing my belief system, which I had been convinced was right, as
well as losing an enormous income together with it." "However, the picture is totally different when you look from the perspective of those who have to pay for it."
Suddenly those I admired turned out to be simple, irresponsible and, let's put it without additional details, young people. I then understood the
reason they objected so strongly when governments of various global economies tried to curb their practice. I am wholeheartedly for these governments now and keep my fingers crossed so that they succeed.
"That would make this crisis, which in truth fell on simple people, a product of vast speculative capital and mortgages given without proper thought,"
I summed up. "You've over-simplified it all and narrowed it down to the absurd. Are the speculators and loan-givers the only ones who were at fault?"
"You're right," I replied after giving it some thought. "Those who were taking loans and those who were lured by prospects of illusory wealth without
the correct assessment of their financial abilities are equally guilty. They should all read this book. It is a kind of stupidity vaccine." "With your knowledge you drew simplified, but logical, conclusions. You haven't mentioned the one most at fault though. Let's call it a regulator," Dad
was looking at me expectantly. "I'm baffled," I was thinking hard what or who Dad was talking about. Then I was enlightened. "It was the state who didn't react to the symptoms of
recession and didn't adjust the rules of the game." "We have the global economy, so you should have used the plural form."
"True. There are all those politicians meeting in luxury spas and debating how to repair what they spoiled by their omission, and stuffing themselves
with caviar while doing so." "You're mistaken," Dad was serious.
"What do you mean?" I was surprised.
"As we are in the middle of a crisis, caviar is no longer on the menu. You are right about the rest though."
"I'm going to have a heart attack with you acting this way."
"You don't stand a chance. It's a privilege of men my age. I'll give you a piece of good advice. According to Darwin's theory, the survivors are those
who adjust to a changing environment. Those who aren't able or don't do it in time die. You have a small business. You are like a worm in a dinosaurs' world. When crisis ruins giants like the fall of an asteroid did, you can hide in a small cranny and lie down to await better times, gaining
experience and gathering crumbs." "You see, I know it now. However, I'm at a loss why the politicians don't get it. All these small companies give the greatest combined gross national
product. They are also the fastest to adjust to changing conditions, create the greatest consumer demand as well as giving employment. You call it middle class. Any country which gives them good conditions for development and curbs the black economy by simplifying regulations will achieve great
success." "You're right on all these points. However, those small companies have one flaw. They aren't able to pay huge amounts under-the-table or apply nepotism.
That's why they aren't attractive to politicians. Make your own political opinions and put them into practice when you vote, yet use your common sense and your abilities when running your own company."
"What would an ideal country be like then?" I asked.
"First of all, it should be citizen-friendly, without terrorizing it with the Inland Revenue, when the regulations aren't easily understandable, with
so many thousands of words that you need a PhD in economics to decipher them. Criminals and cheats should be chased mercilessly and punished fiercely. Everybody should contribute to National Insurance, including the unemployed, as medicine costs a lot. If they don't have money to pay for it,
they should approach the social services and get benefits. In my opinion that would permit a distinction between swindlers and those truly in need. Let's stop being ashamed of acknowledging one is poor, if one really is. Anybody who wants to earn a little money for their needs should be able to
just inform the Revenue office about it. VAT should be paid only after reaching a high level of turnover, or if somebody chooses to do so earlier. Income tax should be paid after somebody exceeds a set large amount of money that is tax-free. When somebody earns more than that amount, they will be
financially stronger to share with others by paying taxes. The black market would disappear overnight, as people would choose to do things legally. Naturally except for the criminals. Ninety-nine percent of the population is honest and would abide by laws they can understand. The state, with its
vast law-enforcement unit should then concentrate on that one percent of cheats and thieves and punish them severely. The state shouldn't make young people pay their contribution to a pension if they haven't achieved anything yet. Once they start their business and reach a certain turnover or
employ others, then it could take place. I'm certain they would quickly make up for the lost time." "Dad, am I getting it right? If I were able to publish my book without setting up my own company, but only informing the Inland Revenue, then whatever
little I earned, the state would still benefit from it. I would invest that small income into the next larger print. I might buy some fashionable clothes with some of it, but even then the state will get VAT on everything I buy, as I won't be able to deduct it. When I become famous and my book is
printed in high volumes, I will set up my own company, employ some people and start paying taxes. I would also be able to contribute to my pension. However, I have another option open as well. I've read that more and more people choose it. We are a part of the EU. I can set up my business in
another country, where the rules are clear and simple, and the state is friendly towards entrepreneurship. How long do we have to wait for a miracle that will change the status quo here? If we continue on this road we will see not only people but also small companies emigrating from our country.
With our current silly regulations I might be left in debt without any ability to contribute to the economy if anything goes wrong with my venture." "You understand it very well. Shame you are one of few," there was sadness in my Dad's voice.
"So what about the VAT? I wish there were only two rates: zero and basic. A zero rate should be on any export goods as well as staple products, which
would help the least fortunate. If the state wants to help, it should help in a meaningful way, not with allowances that the poorest don't have anything to deduct from. The basic rate should be set at one level, and then reviewed and adjusted after a while, so that it wouldn't increase the cost
of living for households when prices go up or down." "That's a daring idea," Dad sounded impressed. "What will be then left for the white-collars to interpret?"
"The rules cannot be continually simplified by exactly the same people who complicated them in the first place. It doesn't make sense. Why aren't we,
the youngest, asked about anything?" I was outraged. "I think they assume you don't know anything."
"You see, our economy looks a bit like a big game, with an unlimited number of players, aged from children to adults. It's like a fishing net held by
all these people. When each person is pulling towards themselves with a different strength, but nobody falls down, there must be somewhere in this net one eyelet that is in perfect balance. You need a beautiful mind, verging on insanity, to comprehend all the processes taking place there."
Dad looked at me and smiled.
I found this subject very interesting, but I had had enough for one day and was a bit tired.
"Dad, I'm dead beat. I'm not sure if I can remember it all."
"I don't think you can. It's good you've been taking notes. It takes time to learn everything. You can't swallow knowledge as if it's a pill. If you
learn continually you become wiser. I just want to leave you with a final remark. Everything I told you are my own personal opinions, which are very, and I mean very, simplified. I had to present them to you in such a way, so that you were able to comprehend them, with minimum effort at your age
. This is absolutely basic knowledge, sometimes pushed to the extremes of absurdity, however it is a sufficiently good start. If you are interested in it now you can learn in a more academic or professional way."
"Are you trying to say, Dad, that what you taught me wasn't the true knowledge?" My heart sank.
"It was only an outline, a bit like a diagram. Let me explain it to you using Physics. You've learnt about how atoms are built, haven't you? What is
the simplest atom?" "It's hydrogen. I remember the teacher drawing it on a board. It looked like a bagel."
"Your gluttony knows no bounds," Dad sighed. "If you wanted to keep correct proportions, the nucleus would be the size of a ping-pong ball, lying in
the middle of an athletics stadium and the electron, the size of a poppy seed, would be revolving around it on the running track. However, that would be only another simplified diagram. In reality, that electron should circulate around the nucleus on a stadium-diameter sphere, moving not
linearly, but wavily. That leads us to the conclusion that the matter is emptiness with some mass scattered in it. It is still just a sketch, however it's already closer to the truth. If a quantum of light hits that electron, it will move it up a strictly determined quantum level, onto the sphere of a bigger radius. You can know which level the electron is on and give its approximate position, yet you won't be able to tell the exact time it is there. If you want to know the time, you won't know the position. It is the rule of indetermination, in fact also used in economics."
"So how are all these diagrams connected?" My head was spinning.
"They are connected by the rules and definitions they operate upon. Each diagram is closer to the truth and one needs greater knowledge to interpret it.
The essence of teaching is making more and more complicated diagrams accessible by using new definitions and laws to govern them, including the latest theories."
"That means you taught me rules and definitions, so it's up to me now to further my knowledge." The penny finally dropped.
"You can do it in two ways, which compliment each other. You can broaden your general knowledge on the economy by reading newspapers and the internet,
while you can get some practical knowledge by observing other small businesses around you." "Does it mean that with my extended knowledge of all-things-financial I will be allowed to argue my corner with you and Grandpa?"
"We don't argue, we only exchange opinions," Dad was surprised. "I've created a monster," he stated with a sparkle of amusement in his eye.
"It's true you've created me, but not the monster, but an adult," I corrected him. "An adult, who has her opinions and wants to exchange them with you
too. I like the format you do it in." "Fine," Dad capitulated. "But who will bring us more beer now?"