"The penalty good men pay for indifference to public affairs is to be ruled by evil men." attributed to Plato

"Bad men need nothing more to compass their ends, than that good men should look on and do nothing." attributed to Edmund Burke

Let's between us make the world a better place.

Wednesday, 21 November 2012

Why do we need Growth?

There is a beautifully sustainable cycle within nature.
Dead bodies provide food for living creatures, plants photosynthesize and produce oxygen from carbon dioxide and animals use that oxygen in their respiration of which the by-product is carbon dioxide.
At school we learnt all about this and called it the Carbon Cycle, little suspecting that 50 years later this would have such a fundamental significance for the future of the world!
If we can see the Earth as a single living entity involving complex interrelationships and a finely tuned balance of all life, as envisioned for example by James Lovelock, should it not be logical for a sustainable economy to mimic that natural world, indeed be a part of that world, where everything is recycled, everything has a further use elsewhere. We would then be able to build a system that is totally cyclical and sustainable and environmentally sound. Evolution biologist and futurist Elisabet Sahtouris once posed the question: doesn’t it seem crazy and so obviously illogical that our household finances and the study of how we make a living (or economy) should be so totally divorced from the study of how other species make a living (or ecology)? Satish Kumar often says the same thing.

This seems so simple and obvious but we cannot see it!
Neither a borrower nor a lender be; 
For loan oft loses both itself and friend, 
And borrowing dulls the edge of husbandry.
Thus said Lord Polonius in Shakespeare's Hamlet, in 1603.
One of the greatest flaws in our flawed "growth" economy is that loans for interest are made out of fiat money. In other words, money is created out of nothing. Yes, money is created by bank debt against the payment of interest. It is fiat money. This is not widely understood by the general public outside the banking world and usually comes as a surprise. Someone, I believe a Canadian journalist, has estimated that only one person in a thousand really understands how money is made! It is certainly not something that is widely publicized. What is more each bank also has what it calls its Reserve Ratio. This means the proportion of cash invested into its bank deposit accounts that the bank estimates it needs to retain in case the customer wishes to withdraw again against their deposit. If for example £1000 is put on deposit with the bank and they calculate their Reserve Ratio to be 10%, then they reserve £100 and the remaining 90% of the deposit or £900 is available for the bank to lend on. And it does. The bank sets up a loan of £900 to another customer for interest, neatly increasing the supply of money available in the economy by a simple accounting entry in its books. The bank has not only made money out of nothing but it is also making an interest profit on that money that it has created out of nothing. And the bank almost certainly charged a fee for arranging the loan as well. The more times the same money can be recycled and recreated in this way the greater the arrangement fees and the interest profit that the bank can make, all from the creation of illusory money out of nothing. What is more, the amount borrowed by the customer is likely to be placed on deposit again elsewhere and the creation of further debt out of nothing can continue in another bank. The multiplier effect of this exponential increase in debt is astounding and very dangerous. Money has to continue to grow to maintain this system and to avoid financial collapse, even though actual standards of living may remain stagnant. With consumer spending the lifeblood of the economy and a personal consumption now nearing 75% of GDP, which truthful and brave politician will urge us to spend less? It is not hard to see that the system is unjust and unsustainable.

A government can and does make money out of nothing also, but this is only to the extent of new notes and coins it issues. As long ago as 1939 American President Abraham Lincoln was clear in his warnings: “The Government should create, issue, and circulate all the currency and credits needed to satisfy the spending power of the Government and the buying power of consumers. By the adoption of these principles, the taxpayers will be saved immense sums of interest,” he said. (1) But fiat money is still issued by banks.

I was shocked when I read that something like 98% of the trillions of dollars changing hands in the foreign exchange markets each day is purely speculative and has nothing to do with wealth creation. Only the remaining 2% relates to real goods and services. As Edward Cahn observes: “Money has taken on a life of its own: its function is to produce for the sake of reproducing – regardless of the impact on the health of the human community … increasingly what we are witnessing in the world’s money markets looks more and more like cancer.” (2)
Now cancer is dangerous and often fatal, requiring unpleasant treatments along the way.
In such loan systems there is an impersonal relationship between the borrower and the lender with a minimal flow of information needed between them. Such loans are therefore cheaper to administer. In addition the tax system favors such business fund raising by allowing tax relief on the related interest. Because such loans are not linked to the success or otherwise of the business, there is no reward to the lender if the business is successful and conversely the lender can foreclose on an ailing business that can no longer afford to repay. This makes the problems of the business worse and it may need to curtail its production and make efficiencies of staff by laying-off, with all the inherent human and social consequences that then arise. This is of course harmful to the economic cycle, and means that interest based economies have exaggerated cycles of “boom and bust.” One of the most harmful aspects of this interest on loans is that it is almost invariably charged by compounding year on year. Typically a home “owner” with a mortgage will pay way over the amount of the original loan before the mortgage is fully paid off. Our debts on credit cards have also reached massive amounts and many regularly pay double figure interest rates on their cards each year. A significant number of college students and undergraduates have credit cards and amass debt on these as well as on their other student loans. This encourages an extravagant attitude of spending among students who no longer need to budget expenditure within their means. When I first wrote of these imperfections in our debt system a few years ago I was saying that alarm bells should ring. I was far from alone. In 2001 Bernard Lietaer predicted a 50:50 chance of a global money meltdown within 5-10 years unless steps were taken to heal what he called the global foreign exchange casino (3). He was pretty much right, wasn't he? 

Unfortunately those in charge of our finances do not appear to consider alternative economic models. They want us to spend and consume our way out of recession. They're stuck in the idea that a growth economy is the only way out of our problems. But the problems and dangers of debt, at personal, corporate, national and international levels, are the cause of huge social disease. Such debt involves the transfer of wealth from the poor to those who are already wealthy. The system does not reflect the skill or the labor of the participant and encourages short termism. Indeed it has been shown that interest based economies cause unemployment, social violence and pollution. Indeed it seems clear to me that compound interest is for the monetary system what excessive carbon dioxide is for the earth’s atmosphere: it is man-made and unsustainable. For an up to the minute campaign on promoting an alternative and workable economy see for example positive money and http://projects.exeter.ac.uk/RDavies/arian/local.html for many resources on alternative monetary systems.

1. Senate Document 23, 1939
2. Edgar S Cahn, 2004 No More Throw-Away People: The Co-Production Imperative Washington D.C.: Essential Books, 2000, p. 68.
3. Bernard Lietaer, The Future of Money – Creating New Wealth, Work and a Wiser World (2001)

From an original idea in Healing This Wounded Earth: with Compassion, Spirit and the Power of Hope, where a chapter puts all this and much more into the context of compassion and healing and relationship.

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