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One: Debt.
In my previous post, I explained how the neoliberal revolution involved the use of debt to control governments, corporations, and ordinary people. But beyond this there is another tacit control which is about to break down… the system of debt-based money creation. The Bank of England explains how this operates for domestic currencies:
“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 3%. Finally, most banks have accounts with us at the Bank of England, allowing them to transfer money back and forth. This is called electronic central bank money, or reserves.”
This last category – central bank reserves – is misleading, since it is only available to the banks. In terms of money that households and businesses can use, 96 percent is borrowed into existence. The democratic fig leaf covering this is that the state, via the central bank, ostensibly licences the behaviour of the banks. Although, as we discovered in 2008, it is more a case of the banks doing as they please and the central bank retrospectively providing them with official cover.
This is important because, unlike a system of minted coins and printed notes, there is no democratically elected agency deciding how much money should be in circulation at any time. Instead, the sole focus of politicians is on the gap between government spending and government borrowing. The banking and finance sector, in contrast, is like the wild west… which mightn’t be an issue if the banks didn’t insist that the public bail them out every time something goes wrong.
The reason things go wrong is simple enough. When banks create our currency through the issuance of loans, it comes with interest attached. And since the non-interest-bearing notes and coins in circulation cannot even dent the outstanding interest, there is always more debt than currency in circulation. That is, if we tried to repay all of the outstanding debt today, we would hand over the entire of our money supply and still have outstanding debt. And so, we – households, businesses and governments – must keep borrowing so that today’s debt repays yesterday’s interest.
The problem, of course, is that households and businesses don’t borrow out of some patriotic desire to maintain the money supply. We borrow to buy stuff. But we only do so when we feel confident in our ability to repay – which mostly means when the economy is noticeably growing. So that, in ongoing depressions like the current, post-2008 one, people are more likely to avoid borrowing, while businesses will wait for sales to improve before borrowing to invest. The result is that there is less currency to go around. And so, like a game of musical chairs, someone has to lose.
Governments – which could directly create currency to invest in infrastructure and generate employment – face political pressure to do the opposite. Indeed, fully inculcated in neoclassical economic thought, most western politicians (of all ideological stripes) do not even realise that their governments could create currency directly. And so, just at the moment when debt-based currency is disappearing, they add to the problem by raising taxes and cutting public spending.
Banks too, make matters worse because as currency dries up, banks tighten their lending standards, thereby issuing ever less debt-based currency. Back when we had full-employment and four percent economic growth, they were happy to give you a mortgage or to invest in your business. But now the economy is slumping and growth is barely visible (per capita GDP is negative) loan approvals are slumping too.
The only question left to be answered is which households, which businesses, which governments and which banks are going to crash. And to some extent, this picture is true in every western state at the present time. This though, is merely the tip of the iceberg. Because the same process of debt-based currency creation has been going on without oversight in the international Eurodollar system.
Although denominated in US dollars (the reserve currency) the “offshore” banks within the Eurodollar system (named after the place it originated) create debt-based dollars (without Federal Reserve oversight or approval) to facilitate global trade. The amounts of currency involved may be greater, but the process is little different to the domestic process of taking out a mortgage or borrowing for investment in a business. So long as the borrower is assessed as a good risk, the loan will be made. And so, for example, the agent for a UK supermarket chain wishing to buy a share of the Chilean strawberry crop can borrow the dollars it needs to pay the Chilean export agent, with the supermarket chain’s profits and assets acting as collateral in the same way your income and your house are used as collateral against a mortgage.
As with domestic debt-based currency though, there is never enough currency in circulation to repay all of the debt. And so, across the global economy, we have to keep borrowing. And just as has been happening in domestic economies, lending has been slumping in the Eurodollar system due to a shortage of good collateral and resulting in the equivalent currency (dollar) shortage… something exacerbated by the US dollar being the least dodgy currency at present.
If this wasn’t bad enough, things are made exponentially worse by the system of derivatives borne out of the “big bang” deregulation in the mid-1980s. The desire to make lending as safe as possible has been around for as long as people have used money for trade. But the development of modern securities emerged in the American railroad boom in the 1850s when farm mortgages were used to fund the development of the railway network to bring farm produce to the ports. It went sour very rapidly then, and it has done so ever since… only the size of the crash increases each time.
The creation of securities is simple enough. If the banks can calculate what percentage of loans will default, then by slicing up and repackaging the income from the loans, they can calculate the likely income with the defaults factored in. And just in case, they can insure the security against the risk of it paying out less than expected… what could possibly go wrong?
What went wrong – and what is continuing to go wrong behind the scenes – is that these securities have been used as the collateral to generate even more debt-based currency. And the securities based on that “collateral” has been used to generate more debt-based currency again… and on again on. And since this is all going on out of sight of the regulators in the “shadow banking sector,” nobody knows how big the outstanding debt is. The nearest thing to an official estimate from the International Monetary Fund puts the debt at $4.5 trillion, while S&P Global estimate that some $63 trillion of collateral are held in the sector, up from $28 trillion in 2009. To put this in context, the current US government deficit is $1.78 trillion, while the UK deficit is £150 billion ($197 billion).
On top of this are the derivatives – insurances and bets on or against debts going bad – and the derivatives on derivatives which run into hundreds of trillions of dollars… far more than any nation or group of nations could bail out without destroying their economies. Suffice to say that if the global shadow banking system unravels, it will be impossible for governments to bail it out. And so, absent the arrival of gold-baring space aliens, the only option within the neoliberal system, is to keep everyone borrowing new debt-based currency into existence. Which is why journalists, economists and politicians see growth as the only possible solution.
Two: Growth
The term “growth” sounds relatively benign. After all, we are living in a period in which GDP growth is measured in fractions of one percent. But any growth by a percentage over time is known as exponential growth – and it has a doubling time. Even a modest increase to a 0.5 percent rate of growth would mean that the size of the economy would double in 140 years, while the ideal of a growth rate equal or higher than inflation (currently 3.8 percent) would mean the size of the economy doubling in just over 18 years’ time.
Some of this growth may, of course, be mere financial chicanery – taking out debt to pay off more expensive debt, for example. In the aftermath of the 2008 crash, with interest rates near zero, big corporations (which could still borrow at preferential interest rates) took out loans to buy back their shares (whose dividends were higher than the interest rate on the new loans). But this accounts for only a fraction of overall borrowing, almost all of which is taken out to purchase material goods and services in the “real” (i.e., material) economy.
This is why money is best regarded as a claim on wealth rather than as wealth itself. As Tim Morgan points out:
“… no amount of money, irrespective of its format, would be of the slightest use to a person stranded on a desert island, or cast adrift in a lifeboat. If this castaway had an extremely large amount of money, his or her only (and very dubious) comfort would be the prospect of ‘dying rich.’”
In the absence of food, clothing or shelter, our Robinson Crusoe’s money is of no more value than the very brief waft of heat that would come from burning it.
When a politician, economist or journalist calls for “growth” then, they are implicitly calling for the relatively rapid doubling of our exploitation of the physical world. Although the 3.8% growth to stay ahead of inflation sounds small, it would mean that by 2043 we would be burning twice the fossil fuels and consuming twice the mineral resources and manufactured goods as we do today… with all of the negative impacts upon our life support systems (of which climate change is but one) that this implies.
One objection to this is that as economies mature, they become more service-orientated. The idea being that this somehow lowers our material consumption. Recorded music is often given as an example. In the 1960s, most music was recorded onto vinyl discs for mass consumption. Later, cassette tapes emerged as an alternative, followed by compact discs – each requiring vast volumes of metals and plastics to produce. But then mp3 compression arrived, and there was no longer a physical product… just a puff of heat in a datacentre somewhere when the file was downloaded. If sales of a particular song, or even of music recordings in general, were to double it would have little material impact since it would merely be a doubling of the same file or files being downloaded.
This may mitigate a fraction of our impact on planet Earth. But not by much. As Jason Hickel at Resilience explains:
“This sounds reasonable on the face of it. But services have grown dramatically in recent decades, as a proportion of world GDP — and yet global material use has not only continued to rise, but has accelerated, outstripping the rate of GDP growth. In other words, there has been no dematerialization of economic activity, despite a shift to services.
“The same is true of high-income nations as a group — and this despite the increasing contribution that services make to GDP growth in these economies. Indeed, while high-income nations have the highest share of services in terms of contribution to GDP, they also have the highest rates of resource consumption per capita. By far.
“Why is this? Partly because services require resource-intensive inputs (cinemas and gyms are hardly made out of air). And partly also because the income acquired from the service sector is used to purchase resource-intensive consumer goods (you might get your income from working in a cinema, but you use it to buy TVs and cars and beef).”
The move toward services in the western economies did not, in any case, result in a move away from physical consumption. Rather, it involved the offshoring of manufacturing. We continued to buy cars, washing machines and televisions, we just gave up our ability to make them… money for consumption we can always have, only planetary limits will bring our current economic system to a halt.
Three: The irresistible force and the immovable object
In 1956, Marion King Hubbert, a geologist working for Shell, presented a dry, wordy and technical report whose bottom line was that America’s oil fields would reach peak production in 1970. The (much-simplified) argument was based on the average 40-year timeline from discovery, through production, to a peak and irreversible decline. And since the average of continental USA oil discovery had been in 1930, then the peak would come in or around 1970.
Hubbert was ridiculed and dismissed at the time. And in 1970, US media outlets ran stories about how wrong Hubbert had been, since the USA was producing more oil than ever. The mirth lasted for 12 months – until the 1971 production figures came in lower than 1970. And the decline continued for the remainder of the twentieth century… no doubt feeding into and exacerbating the 1971 currency crisis.
In 1972, the Club of Rome published The Limits to Growth – an early attempt at computer modelling the various processes that maintain industrial civilisation. The modelling suggested a civilisational peak between 2020 and 2030 as a result of declining resources, poorer harvests (soil and water depletion) rising pollution and falling manufacturing output. The result of this would be a return to falling life expectancy alongside fewer births, causing populations to fall.
The October 1973 OPEC oil embargo added to the gathering sense of doom, as people in the developed world were forced to face the practicalities of Earth limits for the first time. Fuel was rationed while the price of goods rose. Energy had to be conserved. Governments encouraged motorists to drive at or below 50mph while people were told to wear sweaters rather than turn up the central heating.
And yet, there was an artificiality about the whole thing. The world was still awash with oil. And once the Arab-Israeli war ended, imports flowed again. Moreover, the higher oil prices had encouraged investment in offshore drilling in Alaska, the Gulf of Mexico, and the North Sea – apparently confirming the economists’ myth of infinite substitutability.
Rather than seeing the oil shock as a harbinger of things to come, most politicians, economists and journalists drew the conclusion that we could never run out of anything because market forces would always deliver more of the same or better alternatives. And this dangerous delusion remains with us to this day:
Global oil discovery peaked in 1964, so, following Hubbert’s modelling, global peak oil should have happened in or around 2004… and it did! So long as we are only talking about conventional sweet crude production. Indeed, the big spike in oil prices which followed was the first domino to fall in the chain of events which led to the 2008 crash and the ensuing depression (in exactly the same way as the 1927 coal price spike led to the Wall Street Crash and the Great Depression). A post-2008 “search for yield” resulted in investment in fracking across the USA’s vast shale deposits. This, together with various Enhanced Oil Recovery techniques (such as pumping detergent and carbon dioxide into depleted deposits) kept global oil production growing for another thirteen years until it peaked again in November 2018.
The price spikes were always short-lived. Because the cost of an economy’s primary energy source affects every other good and service, price spikes led to increased prices across the economy (which most economists mistake as inflation). But unless businesses and households are given additional money, what follows is a process of adjustment in which they reorder their spending, forgoing discretionary spending in order to maintain essentials. And since discretionary consumption is a greater part of the economy, the resulting loss of discretionary activity causes demand for energy to fall, with energy prices falling accordingly.
Since the 1970s, we have followed this see-sawing pattern. The oil price volatility from the second oil shock (caused by the Iranian revolution and the Iran-Iraq war) was followed from the mid-1980s by a period of relative price stability, but at a higher price than previously. The pattern repeated after the 2005 peak, with prices spiking wildly and economists predicting prices of $200 per barrel or more. But the post-2008 depression brought prices down again, with a glut of US fracked oil briefly returning the oil price to $35 per barrel, before prices settled around $60 per barrel. The post-2018 price spike was delayed by widespread government lockdowns in response to the pandemic and was later exacerbated by the self-harming sanctions applied to Russian fossil fuels. But when economies emerged from state-imposed restrictions, we suffered the same period of volatility until the current global slowdown returned prices to $65 per barrel.
Because of the interaction of energy and the wider economy, the swings in the price of oil hide a more important phenomenon. Before we can produce oil (or any other energy) we must invest energy. This energy cost of energy stabilised after the Second World War, after the easy economies of scale and technological advances had been made. This allowed for the exponential growth in oil production which powered the 1953-1973 post war boom, which saw more production and trade than in the previous 150 years. But thereafter, the energy cost of energy began to rise remorselessly. This was because we operate on a “low-hanging fruit” basis. The first oil fields had been very close to the surface in land areas where the necessary infrastructure (roads, railways, ports, etc.) already existed. And because the oil produced was as cheap as it would ever be, nobody was about to plough debt-based money into difficult and expensive deposits elsewhere. Only after the first fields peaked did it make sense to build the necessary infrastructure to recover oil from large swathes of the Middle East and North Africa. And only when those costs rose enough would the expensive and difficult process of deep-sea drilling become viable. Fracking the source rock is even more difficult and (energy) expensive again, and, given the experience of the past 15 years, unable to maintain an oil price which the wider economy can bear:
The problem is compounded by looming oil shortages. Officially, we are less than halfway through the world’s oil deposits, having burned around a trillion barrels with roughly 1.7 trillion barrels remaining, although Rystad Energy put the figure closer to 500 billion barrels, based on a more accurate estimate of what is actually recoverable. What is certain is that since the mid-1980s, global oil consumption has exceeded new oil reserves… and there are no more large, cheap and easy oil fields to be brought into production. What remains are technically difficult and ruinously expensive deposits such as Cambo and Rosebank in the North Atlantic.
Another way of expressing this is to understand that there is an economic limit on how much oil is left to produce, based upon the energy cost of energy. As we approach the point at which we must invest more energy than we receive in return, no more oil (other, perhaps, than state-funded strategic production) is going to come out of the ground.
If oil was just another commodity – as far too many economists, politicians and activists think it is – there wouldn’t be a problem. When the oil gets too expensive, we would switch to something else instead. But oil is the “master resource,” without which all other resources become unavailable too. It is not just that oil does all of the heavy lifting in mining, agriculture, manufacturing and transportation – though it does – but it is also a feedstock for a host of products that make an advanced industrial economy possible… and there is no substitute (at any price).
What we witness in monetary terms – rising oil prices causing increased prices across the economy – is actually an energy problem. We are already in a world in which high energy costs are causing deindustrialisation in the developed economies alongside disinvestment in the developing world in such essentials as copper and lithium extraction. At the same time, with not enough energy to go around (and with godzillionaire lunatics attempting to power AI datacentres) the discretionary sectors of the economy are already deflating (so enjoy your temporary access to cheap consumer goods if you can still afford them, because widespread shutdowns and unemployment are coming).
Other Earth limits (Climate change, soil depletion, growing water shortages, etc.) are available. But these are less likely to stop the banking and financial system’s rapacious need for growth… at least in the short-term. Indeed, there is a small fortune to be made from making loans to the (often government-backed) green capitalist projects touted as a solution to these longer-term limits. Energy though, is the real show-stopper.
Currently, the financial economy looks a lot like an inverted pyramid, with hundreds of trillions of dollars of derivatives based upon derivatives based upon the massive volumes of private and public debt without which the economy would come to a grinding halt. Consider Charles Eisenstein’s observation following the 2008 crash:
“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.”
Ironically, the theoretical system of bartering that so many economists continue to (wrongly) believe led to the origin of money, only ever materialises in this kind of post-capitalist situation. Following the hurricane which devastated Puerto Rico in 2017, for example:
“Because of the extreme economic situation, people have moved to a more primitive barter economy. If someone wants something, that person will barter or trade essential goods with another individual. The Puerto Rican economy has gone from a thriving capitalist economy to a struggling bartering economy.”
In the absence of previously taken for granted essentials like food and clean drinking water, the value of luxury items like jewellery, fashion accessories, surfboards and guitars sank close to zero, with people having to trade prized possessions for a bag of food and some bottled water. The entire western economy would likely have gone the same way in 2008 had governments not co-ordinated a response… albeit one which favoured the already wealthy at the expense of ordinary people. And, because of the exponential growth in debt since then, next time even the collective efforts of governments are unlikely to be enough to stem the collapse.
For all of the financial alchemy carried out by the geniuses in the financial system, at the pointed base of the inverted pyramid is a connection with the real world. The original debt, upon which the unsustainable mountain of derivatives was built, is something real – collateral in the form of mortgages and home improvement loans, cars bought on finance, investment in business plant and equipment, and government borrowing for new infrastructure. But the value of this collateral can evaporate overnight if the borrower is unable to repay the debt.
And one reason why repayment can become impossible – which we have seen increasingly since the pandemic – is because the real economy can no longer provide the raw materials against which the debt was taken in the first place. As Gail Tverberg has demonstrated, rather than resulting in higher prices, oil shortages cause recessions which lower demand for oil. That is, people and businesses who had borrowed on the assumption that energy supplies and prices would remain stable, go under when the price spikes. The resulting unemployment and debt recovery causes a drop in demand across the economy, bringing it back into line with the (lower) supply of oil. The same, of course, happens when there are shortages of any key material, as Europe is discovering to its cost after disconnecting itself from cheap Russian oil, gas and mineral resources.
This is the current interplay between the irresistible force of debt-based money and the immovable object of a planet whose remaining natural resources are too energy-expensive to be brought into production. In a complex global economy, it is impossible to predict which governments, businesses and households will fail first (although there are some obvious contenders such as the big tech AI giants and various European states). But with a derivative mountain more than six times annual global GDP, all that which in 2008 was “too big to fail” is going to be too big to save, even in the unlikely event (in the world of Trump, Brexit and growing national populism) that some form of collective action could be agreed.
Four: Alternatives to neoliberalism
The current quasi-religion of “green” or “sustainable” growth, has its origins in Margaret Thatcher’s 1989 address to the United Nations:
“But as well as the science, we need to get the economics right. That means first we must have continued economic growth in order to generate the wealth required to pay for the protection of the environment. But it must be growth which does not plunder the planet today and leave our children to deal with the consequences tomorrow.
“And second, we must resist the simplistic tendency to blame modern multinational industry for the damage which is being done to the environment. Far from being the villains, it is on them that we rely to do the research and find the solutions.” (my emphasis)
Thirty-six years on, we can see the hollowness of these words, based, as they were, on the debt-based economy at the heart of the neoliberal revolution. There was arrogance too – the belief that (oil-based) technologies were somehow going to reverse the impact of 250 years of industrialisation. And hubris, in handing the keys to the kingdom to a banking and finance elite in the deranged belief that they would operate as a beneficent force to overcome humanity’s woes.
At the time, as with neoliberalism itself, it seemed that the Earth limits that we were crashing into were merely problems which the unfolding information, technology and communications revolution that was just beginning would surely provide solutions to. Even today, adherents of the green religion imagine that the mendaciously labelled AI will soon provide us with a means of overcoming the laws of physics to usher in the Brave New World of automated luxury in which we own nothing and are happy.
Although far from perfect, Modern Monetary Theory (MMT) offers an alternative to neoliberalism… one which will inevitably follow the coming crash. The original neoliberals – refugees fleeing Nazi Germany and Austria – feared the state in all its forms. Just like the German communists of the period, they regarded social democratic government as mere “social fascism” – the iron fist may have been hidden beneath a velvet glove, but it was still there. This played well for their US corporate backers, who wished to subvert democracy and turn the people into little more than debt-serfs.
The energy crunch in the 1970s gave the neoliberals and their backers the opportunity to present a new, debt-based system as the only alternative to the apparently failed consensus which had emerged out of the ashes of the two world wars. They ruthlessly destroyed swathes of the western industrial base in order to crush the unions and (they promised) to pave the way for new, high-tech growth. And then, in the mid-1980s they deregulated banking and finance, paving the way for the inevitable collapse, but providing just enough debt-based growth along the way to keep a majority of the electorate on side.
It nearly unravelled in 2008, except that the old left had been so corrupted that they were unable to prevent western governments from bailing out the failed banks. How this was done was monstrous. Western governments borrowed debt-based money from the very banks they were bailing out. States on the periphery of the European Union, “the pigs” (Portugal, Italy, Greece and Spain), were in severe distress, having given up their domestic currencies in favour of a Euro whose (mostly German) issuers refused to create the new currency to plug the gap. The UK escaped the trap (even the Blairites weren’t insane enough to give up the pound) but (within the terms of neoliberalism) was forced into years of austerity designed to persuade the banks that Britain would be able to repay its debts.
This is usury, plain and simple. The banks persuaded governments that they had no choice but to borrow and then raise taxes to repay the debt. And then the political class (politicians, civil servants, academics and journalists) persuaded the public that they had no choice… and most of them probably believed it, since even among the political class there is a woeful lack of understanding about where money comes from.
Handing control of money creation to the banks though, was a choice… a treasonous one as it turned out, albeit with the fig leaf that the central bank (still nominally controlled by government) was somehow licencing the way the banks create money. The reality is that the central bank is no more than a back stop to an out-of-control banking and financial sector in which most of the money in circulation was created outside any oversight or regulation. But here’s the thing, governments could, if they were so minded, bring the central banks under direct political control… although the public has been persuaded against this by the myth of profligate politicians who would overspend given the opportunity. This done, governments could – theoretically – begin to replace debt-based money with new state-created money that comes without the burden of interest.
As the promoters of MMT point out, governments do not need money to begin spending. By convention in the current system, they issue bonds which are sold to investors and then spend the money into the economy. Taxes come not at the beginning of the process, but at its end… allowing the state to repay the bonds with interest, while holding down any monetary inflation. This process was, of course, easier to see back in the days when money was mostly notes and coins printed and minted by a state agency. Government became the route by which newly printed money could be spent into the economy via public services, infrastructure projects and the wages of government employees. Bonds only really needing to be issued to secure foreign currency and to provide secure investments for pension and insurance funds.
The MMT-based alternative in 2008 was to allow most of the banks to go bust, and then to nationalise some of the banks along with the banking infrastructure. Governments might have then created currency directly to recapitalise the nationalised banks so that ordinary businesses and households could continue to transact. The heavy state investment in so-called Central Bank Digital Currencies (CBDCs) suggests that this, in digital form, is what western states intend doing when the current derivative mountain crashes (although it is doubtful that they have the energy infrastructure needed to make CBDCs programable).
Nor do CBDCs offer an alternative to the massively over-indebted (and unregulated) Eurodollar system which grew out of the collapse of the British Empire and later the post-1971 development of entirely fiat national currencies. Trust has always been the problem with international currencies (which is why European destroyers were ferrying gold across the Atlantic in 1970, and why so many non-western states are joining or associating with the BRICS today). And the most likely means of securing trust internationally would be some version of the distributed ledger that is central to cryptocurrencies like Bitcoin.
Five: An end to debt-based money
If planet Earth was infinite, or if humanity had access to several more Earth-like planets, there would be enough energy and resources to keep the debt-based money system going for as long as the other planetary limits allowed. But the current energy and resource limits make further debt-based growth almost impossible. Across Europe, states are fiddling GDP statistics to mask an accelerating deindustrialisation, while the USA attempts to wring out the last drops of shale oil and gas in the vain hope of keeping the system going for another decade or so (while they look to nuclear and geoengineering as an escape route in the near future). But this is no more than hopium, in the face of an ongoing collapse in living standards which is now spreading to Asia and beyond too.
Within the bounds of neoliberal ideology, debt-based currency may be an irresistible force – explaining as it does why governments routinely fail to address climate change, urban decay and precariat-class poverty. But the physical universe cares not one iota about the rules of the neoliberal system. And without the energy and resources to keep the system growing, it is debt-based money which will be the inevitable loser.
Back in the 1920s a more benign group of economists who called themselves (somewhat unfortunately) “technocrats” proposed a system of currency based upon the energy available to the economy. It was too complicated to develop in practice, and too fringe to be taken seriously even after the system crashed in 1929. Nevertheless, it was undoubtedly correct, and far better than the neoliberal system which emerged out of the energy shortages of the 1970s. Domestically, the state-run money systems put in place after 1945 were probably the best compromise – with democratically accountable governments issuing most of the currency and being held to account for inflation and/or recession.
Internationally though, a US dollar-based system which required everyone to trust that US governments would always act in good faith (and not, for example, issue too much currency to fight wars in Asia, have a cold war with the USSR, and build a “Great Society” at home). That faith broke down in the late-1960s when US inflation was exported to Europe. And it came to an end in August 1971, when the Nixon administration realised that there wasn’t enough gold in the vaults, and acted accordingly.
In the coming crash, another currency reset will be inevitable simply because governments cannot (either economically or politically) bail out the banking and financial system again. Aside from the fact that any attempt to do so would result in guillotines and scaffolds being erected in every western capital, there is simply insufficient real-world collateral on which to base the necessary government borrowing to bail out the $600 trillion or so derivative debt mountain. And so, some alternative is inevitable.
A pro-system approach would be to have a modern debt jubilee, in which governments create new self-cancelling currency (most likely some form of CBDC) to pay off existing debt. Although this is unlikely to be sufficient to overcome the collapse of the Eurodollar system. In any case, a debt jubilee would be more a system reset than the development of an alternative to neoliberal debt-based money.
A true alternative would have to involve removing the banks from currency creation entirely – forcing the banks instead to become what their propaganda tells us they are… mere intermediaries between savers and borrowers. Meanwhile, the people’s currency would – for better or worse – be entirely in the hands of democratically-elected governments. A new international money system – essentially a trusted accounting ledger to balance transactions which occur across national boundaries – will be harder to negotiate since alternatives to the Eurodollar system are already being developed. So that, whatever emerges, it is unlikely to entirely favour western economies in the way the 1945 and 1971 systems did. Nevertheless, some system of trusted accounting will have to replace the Eurodollar eventually. And in a digital world, a distributed ledger based upon real trade rather than financial chicanery is likely the best model currently on the table.
Like so many of the crises gathering over our heads, the coming currency reset will only happen after a profound crash. It is easy to imagine a collapse in global trade following on the heels of the unravelling of the debt mountain. For western states, which have relied on currency-dominance to secure cheap imports from less developed parts of the world, the hardship will be worse than anything seen in the 1930s, as even basics like food and warmth are unavailable. The likely drop in life expectancy – at least on a par with that of Russia following the collapse of the Soviet Union – will at least have a positive impact on climate change where three decades of hand wringing, pearl clutching and unbacked words have signally failed. And it might be that the people and the politicians they elect come to realise that sustainability (or at least managed decline) requires that we stop pursuing growth… and that, in turn, requires that we do away with debt-based, interest-bearing money for good.
In short, until we solve the problem of debt-based money, we can solve nothing!
As you made it to the end…
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