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Solve this or you solve nothing (2)

Money, so the song says, is what makes the world go around.  The sentiment is not lost among a growing homeless population on our streets, the millions of working families forced to turn to charity to make ends meet, or the new class of women forced to take up sex work to feed their children. Nor, presumably, is it lost on the tiny billionaire class that purchases the favours of our political “representatives” with a combination of lobbying funds and the promise of a lucrative position in the City after the next election.  As Charles Eisenstein wrote, money – in our civilisation – is the nearest thing we can find to the religious notion of “spirit”:

“It is hugely ironic and hugely significant that the one thing on the planet most closely resembling the forgoing conception of the divine is money. It is an invisible, immortal force that surrounds and steers all things, omnipotent and limitless, an ‘invisible hand’ that, it is said, makes the world go ’round…

“What we call recession, an earlier culture might have called ‘God abandoning the world.’ Money is disappearing, and with it another property of spirit: the animating force of the human realm. At this writing, all over the world machines stand idle. Factories have ground to a halt; construction equipment sits derelict in the yard; parks and libraries are closing; and millions go homeless and hungry while housing units stand vacant and food rots in the warehouses. Yet all the human and material inputs to build the houses, distribute the food, and run the factories still exist. It is rather something immaterial, that animating spirit, which has fled. What has fled is money. That is the only thing missing, so insubstantial (in the form of electrons in computers) that it can hardly be said to exist at all, yet so powerful that without it, human productivity grinds to a halt.”

Little wonder then, that those promoting the various forms of Green New Deal that are supposed to save us from our self-made human impact crisis turn first to money as the starting point for reform.  Government corporate welfare schemes – similar to those that have propped up the extractive industries for decades – are to hand newly borrowed currency to a new green energy sector to deploy en masse non-renewable technologies like wind turbines and solar panels that we already know cannot solve the problems we face.  A new generation will get rich on the back of the implausible levels of resource extraction that will be required to switch even a fraction of our energy consumption away from fossil carbon fuels.  At the same time even more ordinary people will be plunged into poverty as the tax demands of an increasingly indebted government and the profit demands of an over-extended energy industry strip away what little prosperity (i.e discretionary spending power) the majority currently has.

“Where”, conservatives mendaciously ask, “is all of this money supposed to come from?”  There is, we are told, no magic money tree.  And yet anyone foolish enough to make such a statement effectively admits that they believe that there really is a magic money tree; for if not, where do they think money comes from?

In the (very limited) classical economic thinking of most politicians and economists, money is yet another “externality” – a given that exists independently of the human realm.  Businesses, they assume, engage in some strange form of alchemy during which an entrepreneurial priesthood “makes money” by manufacturing and selling widgets.  It matters not a jot that such alchemy would – if the story were true – amount to large scale counterfeiting of the kind that periodically results in mafia bosses receiving long prison sentences.

Meanwhile in the real world, currency is created in two ways.  The first is the one that most people still believe to be the only form of currency creation: governments print and spend new currency to fund public investments, services and social security payments.  Prior to financial deregulation in the 1980s, government quite literally printed new notes into existence at the Royal Mint; and since notes and coins were the only form of currency available to the mass of working people, they were the main form of currency in circulation.  Today, government borrows new currency into existence by issuing government bonds which are auctioned to selected banking and finance corporations which sell them on as investment vehicles.

It is where these private banks get the money to buy these government bonds that gives us a clue to where most of the currency in circulation today comes from.  According to the Bank of England:

“Money is more than banknotes and coins. If you have a bank account, you can use what’s in it to buy things, typically with a debit card. Because you can buy things with your bank account, we think of this as money even though it’s not cash.

“Therefore, if you borrow £100 from the bank, and it credits your account with the amount, ‘new money’ has been created. It didn’t exist until it was credited to your account.

“This also means as you pay off the loan, the electronic money your bank created is “deleted” – it no longer exists. You haven’t got richer or poorer. You might have less money in your bank account but your debts have gone down too.  So essentially, banks create money, not wealth.

“Banks create around 80% of money in the economy as electronic deposits in this way. In comparison, banknotes and coins only make up three percent…”

More or less the same process of currency creation occurs in countries that have their own central bank (Eurozone countries are different because their governments do not enjoy their own currency).  This episode of Mike Malone’s Hidden Secrets of Money walks you through the process for the US dollar.

Discovering that commercial banks can print electronic currency out of thin air has opened a new avenue of thinking for those seeking to address various sub-sets of the human impact crisis.  For example, those who see the carbon dioxide emissions produced by western electricity generation as the primary problem before us look to the apparent power to create currency out of thin air as the means by which millions of wind turbines and billions of solar panels can be manufactured, transported, deployed and maintained.  Either governments can directly create new currency (in the same way as they did through quantitative easing to bail out the banks) or they can establish arms-length public investment banks to loan new currency into existence on their behalf.

The problem with this thinking is that Eisenstein’s sentiments above are wrong.  Money is not the animating spirit or the hidden hand of the Almighty.  Currency – to stretch the analogy – is more akin to the prayers and incantations of the priests as they seek to bend the will of their chosen gods to meet their desires.  Energy is the true animating spirit; the force that makes not just the world, but the entire universe go around.  As contrarian economist Steve Keen put it:

“Capital without energy is a statue; labour without energy is a corpse.”

Energy – more precisely surplus energy – is the limiting factor behind currency.  Provided that there is abundant surplus energy – after energy has been invested in securing future energy – additional currency can be used to mobilise surplus energy to generate additional economic activity.  When, as is the case today, the energy cost of energy is so high that surplus energy is shrinking, the result is inflation.

This is not immediately obvious because of the extreme inequality in the developed states.  The official inflation rate – drawn from a “basket of goods” that supposedly represents the average purchase – fails to account for inflation at the extremes.  That is, for those at the top – who received most of the quantitative easing currency – there has been a massive inflation in a range of assets including property, fine art and vintage cars; for those at the bottom the inflation has been in the price of essentials such as housing, energy and food.  The mythical “average household” no longer reflects either experience.

Mainstream economics assumes the unprecedented and never to be repeated post-war boom 1953 to 1973 to be the “normal” to which we have been trying to return ever since.  A massive experiment in currency printing in the shape of the Marshall Aid program apparently laid the foundation for that economic upswing.  There is some truth to this.  Certainly had the USA retreated into splendid isolation and left Western Europe to its own devices in 1945, any recovery that did occur would have taken longer and been far less spectacular. From this, many economists and politicians assume that currency printing to fund infrastructure is the means by which new growth can be started.

There was, however, an even bigger historical experiment in currency creation that had a very different outcome.  In the late fifteenth and early sixteenth centuries the conquest of Central and South America brought untold riches in the form of gold and silver to the Spanish Empire.  With the new influx of wealth, many Europeans expected the ruling Hapsburg monarchy to crush their English and French opponents and go on to establish something akin to a United States of Europe.  Gold and silver – as with any currency – is, however, only a claim on energy and resources.  And the problem for the Hapsburgs was that sixteenth century Europe was out of power.  As historian Clive Ponting notes:

“A timber shortage was first noticed in Europe in specialised areas such as shipbuilding… In the 1580s when Philip II of Spain built the armada to sail against England and the Dutch had to import timber from Poland… Local sources of wood and charcoal were becoming exhausted – given the poor state of communications and the costs involved it was impossible to move supplies very far.  As early as 1560 the iron foundries of Slovakia were forced to cut back production as charcoal supplies began to dry up.  Thirty years later the bakers of Montpellier in the South of France had to cut down bushes to heat their ovens because there was no timber left in their town…”

The timber shortage was unquestionably one of the drivers behind the colonisation of the Americas and a spur to the coal-fired industrial revolution that swept across eighteenth and nineteenth century Europe.  In the sixteenth century, however, shortage along with an overshooting population that had finally recovered from the Black Death rendered the influx of gold and silver worthless – all it could achieve was to devalue the existing currency in circulation; in a word – inflation.

During World War Two the United States of America, whose industrial output already led the world, turned vast industrial potential into the economic basis for becoming a post-war superpower.  Not least among its achievements was the development of its indigenous oil industry; allowing the USA to produce six out of every seven barrels of oil consumed during the conflict.  Every allied division that landed in Normandy in June 1944 was motorised.  Against them, 89 percent of the German divisions depended upon horse-drawn transport.  Ironically, it was the logistics of supplying these divisions hundreds of miles east of the same Normandy beaches that prevented the allied armies from ending the conflict in 1944.

Nevertheless, despite unleashing the massive continental energy and mineral resources of North America, in 1945 the vast majority of the world’s energy and resources remained in the ground.  As a result, as the economies of Europe, Japan and the USA began to take off in the early 1950s, there were more than enough resources to go around:

World oil production exponential-linear

The exponential increase in oil production between 1953 and 1973 provided the economy with the animating spirit that all of those Marshall Aid dollars has summoned into existence.  It is no accident either that as the energy industry struggled to maintain exponential growth at the end of that upward curve, things began to fall apart.  First, the Texas Railroad Commission (TRC), which had set global oil prices throughout the period, lost its position as the world’s swing producer.  As the US oil industry passed peak production in 1971, the TRC could no longer ramp up production to keep prices low.  In the same year, the US dollar was undermined by inflation; forcing the dollar off the gold standard.  OPEC, sensing the USA’s growing energy weakness (and to some degree irked by US support for Israel) switched off the pumps, plunging the oil-dependent western economies into shortages which translated into even higher inflation for the remainder of the decade.

Once OPEC reopened the spigots, oil production got back on its exponential track for a couple more years until the Iran-Iraq war broke out in 1979, signalling the end of the era of cheap and easy oil.  Production did not decline, of course.  But nor could growth continue on an exponential track.  More expensive and technically difficult oil fields such as those off the Alaskan North Slope and the North Sea were brought into production to replace the depleted US fields.  Around the world offshore drilling provided new oil to replace depleting land-based reserves.  Nevertheless, production growth had slowed and – unseen by most economists and politicians – the oil that was being produced provided ever less surplus energy to the wider economy.

The inflation of the 1970s, the depression of the 1980s and the once-and-done debt-bubble of the 1990s and early 2000s were all a response to the new energy situation that the world found itself in after 1973.  All of the economic formulas that had appeared to work during the post-war years seemed to have the opposite effect in the new circumstances.  For a brief few years in the late 1990s and early 2000s the massive debt binge that western states engaged in appeared to bring prosperity.  But it was a false prosperity based on rising asset prices that favoured the very rich at the expense of the majority.  When oil prices spiked upward again with the global peak in conventional crude oil production in 2005, the whole house of cards came tumbling down.  Since then, the economy has been on the life support of quantitative easing and lower than inflation interest rates even as the surplus energy available to the economy continues to fall.

The problem for the monetary system is that it is based upon infinite growth by design.  This is because almost all of the currency created (notes and coins excepted) comes into existence with interest attached.  When you or I borrow £100 from the bank, we are expected to repay more than £100.  The same is true across the economy.  But if the economy as a whole must always repay more currency than there is in circulation, where does the additional currency come from?  The answer, of course is that it has to borrowed into existence.  And the problem with this is that even in the reckless years leading up to 2008, the banks will not simply lend currency to anyone that asks.

It is hard to think of anything more socially necessary than providing shelter to someone who is homeless and sleeping on the street.  Nevertheless, there is not a banker on the planet who is about to give that person a loan to buy a tent and a sleeping bag; still less a mortgage on a modest home.  In the same way we can look at all kinds of social circumstances in which currency could be morally deployed, but where banks simply will not lend.  In my book The Root of all Evil I give two examples – someone who wants a loan of a few thousand pounds to provide care for an elderly relative and someone who wants to borrow a few hundred thousand pounds to buy an ancient wood to save it from development.  Even assuming that both potential borrowers have a good credit rating, the bank’s main concern will be with repayment.  In exactly what way will the borrower invest the new currency so that it generates more than was originally loaned?  In both cases, the borrowers have no means of repaying the loan.  Imagine, however, two slightly different borrowers.  The first is a corporation that wants to borrow millions of pounds to build an old people’s complex with which to harvest the monthly rents paid by elderly residents in exchange for the minimum care the law will allow them to get away with providing.  The second is a land developing corporation that wants to purchase the ancient woodland in order to demolish it to make way for new business and residential property.  The timber will be sold off to the highest bidder and the developed property will return far more currency than is needed to purchase the woodland to begin with.  Both, of course, are precisely the kind of borrowers that banks lend new currency to.

Any version of a green new deal that begins with debt-based currency suffers from the same problem.  Wind turbines and solar panels will not be deployed as a social good, but will have to stand as a money-making business proposition.  One way or another, energy bill payers and/or taxpayers are going to have to repay more than the initial investment; something that is already creating social unrest across the developed world.

The only solution to this is to change the way money works.  Instead of allowing private banks to generate debt-based currency with interest attached, government could reclaim its sovereign role as the sole creator of money (although this comes with problems of its own).  Crucially, this would allow the purposes to which new currency is created to be radically altered.  Newly created currency that does not have interest attached could, indeed, be paid directly to people who provide care to elderly or disabled people; just as it could be used to purchase and protect what remains of the natural habitat.  And with no need for economic growth to repay the debt with interest, there is no longer a need to exploit the residents of care homes or to consume the natural environment for private gain.

Whereas central banks today use interest rates to regulate the flow of currency in and out of the economy in order – ostensibly – to prevent both stagnation and inflation; debt-free government currency could be regulated via the tax rate; so long as taxes coming out of the economy balance spending going in, monetary equilibrium can be maintained.  A reform of money of this kind is envisioned by some green new dealers who have adopted Modern Monetary Theory (MMT) as an alternative to the current neoclassical economics.  Whereas neoclassical economists imagine taxation as the starting point for public spending – the source from which governments derive their spending power – MMT sees taxation as the end point.  In addition to regulating the money supply, taxation – along with legal tender laws – give government currency its value: unless you have it you cannot pay your taxes, and if you cannot pay your taxes you go to jail.

There is, unfortunately, a major flaw in MMT which manifests in an obscure economic measure known today as the “current account.”  The over 50s may remember this measure as being front and centre of the economic stage in the 1960s and 1970s when it was known as the “balance of payments.”

In the modern world, countries cannot operate using their indigenous resources alone.  Each must trade with others to meet its needs.  The current account (balance of payments) measures the difference between the cost of imports and the returns from exports.  The balance then influences the value of the currency on international markets.  Major importing states like the UK and the USA run large (but manageable for now) current account deficits with exporting states around the world.  They are only able to maintain this situation by carefully maintaining the value of their respective currencies.  An exporting country could, to some extent, print and spend additional currency.  But when an importing country attempts this, it risks devaluing its currency on international markets.

This is a particular problem for those who believe that the answer to our problems lies in wind turbines and solar panels simply because these are made in countries like China that have export surpluses; but are intended to be deployed in countries that already have large deficits such as the UK and the USA.  In effect, the more currency we print out of thin air to buy windmills, the higher the price of importing windmills is going to get.

Surplus energy, however, is the real reason we are witnessing these import-export imbalances.  One of the reasons why China in particular and Asia in general has emerged as the global centre of manufacturing is precisely in response to the first oil shocks in the 1970s.  To deal with falling surplus energy, the developed states on both sides of the Atlantic did four things:

  • Introduced anti-discrimination and anti-union legislation to dilute and disempower the workforce
  • Enabled the transition to debt-based consumption
  • Privatised and sold-off government assets in order to stabilise the exchange rate of the currency
  • Offshored manufacturing (and energy consumption and pollution) to Asia (where labour and environmental regulation is weak).

This was what placed the developed economies on a debt-based treadmill from which there is no obvious exit.  In the aftermath of the 2008 crash, our governments are left scraping the barrel to find assets to sell off.  Nor is there sufficient surplus energy to ever repay the public and private debt that is outstanding. The income from a numerically tiny manufacturing sector can no longer sustain a mass population that is increasingly confined to labour-intensive (i.e. low-energy) low-paid and insecure work.  The financial alchemy of the Federal Reserve, the Bank of England and the European Central Bank is the only thing keeping the charade going at this point; and the recent ECB and Federal Reserve retreats on raising interest rates and rolling back quantitative easing suggest that we have entered the endgame.

Before we can adapt to the crisis that is breaking over us, we absolutely have to change the way that money works; simply because the outstanding debt is already unrepayable.  Allowing the banks to continue pumping new debt-based currency into the already breaking system takes recklessness to new heights.  There is simply not enough surplus energy or affordable resources remaining on planet earth to ever repay it.  So while decoupling currency from debt is necessary, recoupling it to energy is essential.

Historically, this was achieved using precious metals as a proxy for energy since they were rare and energy-intensive to produce.  In practice, of course, governments and bankers down the ages found ways of cheating.  In the wake of the 1929 crash, economists like Frederick Soddy proposed – but lacked the means – a monetary system based directly on energy:

“A continuous stream of fresh energy is necessary for the continuous working of any working system, whether animate or inanimate. Life is cyclic as regards the material substances consumed, and the same materials are used over and over again in metabolism. But as regards energy, it is unidirectional, and no continuous cyclic use of energy is even conceivable. If we have available energy, we may maintain life and produce every material requisite necessary. That is why the flow of energy should be the primary concern of economics. In a world which has adequate supplies of energy, scientific knowledge and inventions for utilising it, and the man-power able and willing to perform the necessary duties and services, poverty and destitution are purely artificial institutions, due to ignorance of the principles of government, actively, if not deliberately, fostered for class ends by legal conventions confounding wealth with debt. Under any scientific system of government they would disappear like small-pox and malaria, by means of preventive rather than ameliorative or curative measures…

“Although, to everyone except an engineer or a physicist, energy seems to be quite a minor item in the production of wealth, if we concern ourselves with what is used up in the process of creating wealth, it is the largest and most important item…

“The production of Wealth, as distinct from Debt, obeys the physical laws of conservation and the exact reasoning of the physical sciences can be applied. Wealth cannot be produced without expenditure, and a continuous supply of wealth cannot be supplied as the result of any expenditure once for all, for it is a form of energy, or the product of its expenditure under intelligent direction. Its production demands a continuous supply of fresh energy and continuous human diligence, nowadays, rather than physical labour. The scale on which it can be produced is practically limited only by the state of technical knowledge of the time…

“The value of money should not depend on the quantity of a single commodity, such as gold, and the standard of value should have reference to the general average of goods consumed and used in living. That is to say, the index number of general price-level, or its reciprocal, the purchasing power of money, should be maintained constant by regulating the total quantity of money in circulation. The index number should be continuously ascertained by a national statistical authority who would report its findings to the national authority charged with the issue of money, so that the issue may be regulated to maintain the standard of value constant, much as the National Physical Laboratory in this country is charged with the standardisation of weights and measures.”

Soddy, who also won a Nobel Prize in chemistry for his discovery of isotopes, was optimistic about the future because of the potential he saw in (at the time entirely theoretical) atomic energy generation.  This, he argued, would provide sufficient surplus energy to confine unemployment and poverty to the history books, provided the debt-based banking system was prevented from continuing to create currency out of thin air with interest attached. 

The future imagined by Soddy was realised to some extent by the massive growth in oil production following the Second World War – for a couple of decades the workers’ share of productivity increased as unemployment declined.  The banks were not, however, reformed and their continued adulteration of the currency was the primary cause of the economic crises that emerged in the early 1970s.

Given our current computing power, a monetary system based on energy flows and the wealth (embodied energy) they create could (theoretically) be achieved (although the banking class would rather see the planet burn than change the current money system).  Moreover, if someone could figure out a way of unlocking the energetic potential of the nucleus of atoms (as opposed to the current practice of using it wastefully and dangerously to boil water into steam) Soddy’s imagined future might still come to pass.  But for now, any monetary system based upon the energy available to us would necessarily be a system in which the stock of currency would have to fall year on year to bring it into line with our fast-declining surplus energy.

The deployment of non-renewable renewable energy-harvesting technologies serves to make the problem even worse because their true energy/wealth benefit – once the cost of linking them to the wider grid in order to produce firm and continuous electricity – is tiny when compared to the energy benefits of fossil carbon fuels.  Nor, given the impact of the extractive industries from which they are created does their proposed mass deployment offer much in the way of greenhouse gas reduction.

The necessary step of changing the way money works – without which our crises can only worsen – offers us just three possible futures.  The first – and by far the least likely – is that some yet-to-be-invented technology manages to harness energy in an entirely new way; allowing the currency supply to increase and to pull economic activity along with it.  The second option is to link the supply of currency to our declining surplus energy so that the stock of currency declines in a managed de-growth; obliging us to shrink our population and economic activity back to levels sustainable within planetary boundaries.

In practice, of course, we will do nether simply because those calling for green new deals and Keynesian-style reflationary currency printing have no intention of challenging the primacy of the banking class and its practice of printing currency out of thin air.  Instead, as our surplus energy declines we will stagger from crisis to crisis – as, incidentally, we have been doing since 1973 – with each subsequent depression being worse than the last; until such time as currency itself is no longer trusted/accepted as a medium of exchange.  By which time, Mother Nature will no doubt be giving those humans that remain a lesson in hubris as the full weight of the human impact crisis drives most – if not all – of our species to extinction.

As you made it to the end…

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