The Borg: A Financial Allegory
Posted by Gail the Actuary on October 6, 2008 - 10:38am
This is an allegory explaining some of the monetary issues associated with the current financial crisis. It was written by Jason Bradford. Jason was an academic biologist who "retired" at a young age to become a community organizer and learn how to farm with peak oil in mind. He also hosts a biweekly radio show on public radio called The Reality Report.
I have never been a huge follower of Star Trek, but when thinking about the financial beast thrashing about the Borg comes to mind.
"Strength is irrelevant. Resistance is futile...Your culture will adapt to service ours." -- The Borg.
The Borg is a hive-like hybrid swarm of humanoid species, turned partially robotic. They are distinctly goal oriented towards “assimilation” of all other humanoids and press themselves relentlessly with the creepy mantra “Resistance is futile.”
The money system is eerily Borg-like. Because it structurally requires growth, it works relentlessly to assimilate all forms of capital. The natural consequence is that everything must be for sale. Values of freedom, independence, self-reliance, and even conservation are subservient to the goal of growth—which is really just growth of the financial Borg, not human welfare or the security of a habitable planet.
How the Money System Depends on Growth
Modern money is not based on any physical assets or intrinsic value. Instead it is called a “fiat currency,” which in Latin means, “let it be done.” The government, or law, decrees that the face value of money is what it is. Money is created through forms of credit and debt, i.e., when banks make loans and debtors accept them, the money instantly exists. Only a fiat system can allow this form of money creation.
Money is used as a claim on real things, like labor and material goods. The money system is supposed to be regulated, usually via central bank interest rate policies, to make sure that what money can purchase, or what value it holds, doesn’t change too rapidly. When money changes in value quickly it is difficult to plan, and a panic may even occur that could collapse the system.
A collapse can happen, for example, when too many people try to collect their bank deposits at once. Banks don’t keep all the money given to them by depositors, only some portion of it. This is called “fractional reserve banking.” Banks have to constantly manage their reserves, which means juggling how much money they lend out, how much is coming in from new deposits, and how many of their loans are being repaid. If a bank is having trouble with cash flow and can’t keep up its reserves internally, it can borrow money from other banks that have more than they need at the moment. If too many banks are having trouble, the Federal Reserve (in the U.S.) can step in and lend.
The money system needs to grow because money is lent into existence with interest. All borrowers need to come up with principal plus interest. The interest portion of the money supply needs to be created in the future or too many borrowers will default. How is more money created in the future? Through more debt!
Debt and money supply will necessarily rise exponentially until they collapse. And collapse is inevitable because money is still a claim on real, tangible things, like labor and resources, which in the real world are finite.1
Real World Growth Can’t Keep Up with Money
A human being eats and grows, and produces wastes in the process. The energy and mineral resources of an animal are called food. If someone doesn’t get enough food and they are a child, they fail to grow. As an adult they may lose weight or starve. It is also important that a person doesn’t grow too fast, and at some point stops altogether or health will decline—possibly leading to death.
The economy does something similar by consuming resources and causing pollution. The energy inputs of our economy are called gasoline, natural gas, hydroelectricity, etc. Other resources our economy claims include mineral ores, forests, and, as I explain further below…people! And just as a human should stop growth due to physical constraints, an economy can become too large relative to the support structure of the ecosystems around it. Many old civilizations ended up in the archeological trash heap because they over taxed agricultural soils and deforested too extensively.
What is happening in the financial world is that the claims the money system is making on debt holders are greater than their ability to pay. Most of the blame right now is being placed on a bubble in lending to purchase homes. But is the sub prime mortgage fiasco the only explanation for money troubles?
I don’t think so. What we are seeing reflects a general insolvency of the global financial system. Part of the problem is that investors, business people and governments didn’t foresee that crude oil production would flatten in 2005 and prices would go from $10 per barrel in 1998 to $100 per barrel in 2008. Or that China and India would consume so much so fast that nearly all forms of commodities would rise in parallel with oil prices.
When credit is extended over a long time horizon, as in a home mortgage, the underlying assumption is that the future will be akin to the past. Inflation will be relatively modest and incomes will keep up so that a steady flow of cash can go back to banks and keep up their reserve balances. Obviously this hasn’t occurred: prices rose faster than incomes and the ability to repay debts faltered.
As an example, I learned at the 2008 ASPO-USA conference that the airline industry was given credit to buy planes and enlarge airports with the expectation that crude oil wouldn’t be higher than $30 per barrel. When banks see that many of the loans they previously extended can’t be repaid in full, they become less able to loan out more funds in order to preserve cash reserves. Bankers are currently asking the governments (in the U.S. and elsewhere) to remove many of the bad loans from their books so they can become less stingy extending credit. In the short term this could help banks and borrowers create more money. But this move would do nothing to change the underlying dynamics of the situation, only move the debt plus interest obligations elsewhere, such as to taxpayers.
What Changes Hath the Borg Wrought?
The financial Borg isn’t as creepy looking as in Star Trek, and that’s why we have trouble seeing it. Instead, money works through slow, steady pressure that manifests itself in Borg-like assimilation over time.
Think of America circa 1950, where mom stayed home and cooked and cleaned and everyone watched each other's kids. Now we have fast food and cleaning services and professional child care and all adults join the labor pool to pay money for what they once did themselves. Mom and Dad are now Borgs.
Imagine small, mostly self-sufficient farmers. They live on inherited land and have little need to buy anything, including food. Now put in place trade policies and land reforms that lead to consolidated land holdings and encourage migration to cities where factories reside. These once largely self-sufficient people now need to rent their shelter and buy their food. The world’s poor workers are now Borgs.2
The financial Borg does two things to grow. It promotes increasing consumption by those it has already assimilated, which results in further ecological debt, and it assimilates those on the margin and gives them prosthetic appendages to yield ever more of the species Homo colossus W. Catton.3
What Next?
The United States (and likely other nations with negative trade balances and large foreign held debts) is in a Catch 22 situation. Flows of credit are so crucial for the daily functioning of our economy that it looks as though these will be preserved at all cost. Practically, this means Federal Reserve regulated interest rates will be kept low in the short term to encourage banks to make loans. It also looks as though "a higher power" is going to try to lift the bad loans off some bank balance sheets. This may lower bank-to-bank lending rates which are currently very high. The medium term risk (within a year) of low interest rates is a rapid collapse of the value of the dollar.
Remember that when something is in greater supply, its value declines. Because low interest rates and huge government bailout schemes place more dollars into circulation, the owners of dollars could panic over concerns about the value of their holdings. But the U.S. is desperately dependent upon foreign creditors. In order to attract foreign creditors into the U.S. market with a weaker dollar, U.S. Treasury bill rates would need to be raised, which would then lead to an increase in interest rates. Because imports of foreign resources are also crucial to the U.S. economy, a weaker dollar will make these more expensive. The overall impact is therefore even higher inflation, perhaps hyperinflation, while the economy actually contracts.5
It is difficult in a panicky time to step back and ask questions about the greater purpose of what we are doing. One of the problems I have is balancing my current anxiety over the unraveling of systems that I depend on, with the knowledge that these systems are highly misguided and need radical change. As a people, we have become very poor at distinguishing between productive and unproductive debts. Not all debts are bad. We probably need to have lines of credit in order to install renewable energy systems, build low energy transportation systems, and develop local food systems. But too much of our debt does not generate future revenues and is simply wasteful, such as the military and much of the travel industry. And much of our debt is incurred building "assets" that will be seen as liabilities once oil declines and the oceans rise, such as NAFTA superhighways or sea-level ports for trade with Asia. My bigger worry is that current leadership will do anything to prop up what exists, such as feeble U.S. car manufacturers, rather than demand a shift in priorities.
Fig. 4. Ever larger quantities of debt are now being required to produce the same amount of GDP.6
Our Borg-like monetary system is showing us how poorly it serves our needs. What it needs is growth—growth as measured in the "formal economy" in the form of monetary units, which is recorded in the ledger books of banks, businesses and governments. Because this formal economy is structurally dependent upon growth, it has worked to incorporate more and more of the "informal economy," meaning the work done without monetary reward. Growth in the formal economy does not necessarily lead to our prosperity, and as the formal economy declines we will be back to more of the informal economy. There will likely be much fear and real pain in the short run, but in the long run a stronger informal economy and reprioritization of investments is what we need. And in typical human fashion, it looks like it takes a catastrophe for us to pay close enough attention to see something other than what we want to see.
Notes
1Good on-line material that covers these points in greater detail can be found in Chris Martenson’s Crash Course and associated materials. See: http://www.chrismartenson.com/
2Thanks to Sharon Astyk for describing this: http://sharonastyk.com/2008/09/25/peeling-the-onion-whats-behind-the-fin...
3 I am using the scientific notation for naming species, i.e., Genus species Author, and the colorful terms of William Catton. See: http://dieoff.org/page81.htm
4Find image here: http://whatsinmyipod.blogspot.com/2008/01/african-jazz-n-jive-authentic-...
5I am only discussing one possible dynamic to illustrate the systemic risk and feedbacks. If the money supply can’t be expanded fast enough, prices fall and cash is hoarded, which is deflation. Financial system catastrophe can go either way.
6 Source of chart: http://yellowroad.wallstreetexaminer.com/blogs/files/2008/06/img0009_209.... For a very nice U.S. only chart see: http://www.buchananfs.com/files/23843/Total%20Cdt%20Mkt%20Dt%20thru%2020...
There have been a number of previous articles that have featured either Jason's writings or his radio interviews. This is a link to some of them.
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Take away thought: Does the current monetary system serve us, or are we slaves to it?
Yet another insightful article, Gail.
I don't deserve credit on this article. The work was Jason's, and several other of TOD staff reviewed it and provided input, including Nate and Ace. I did the HTML and a bit of final editing.
Does the current monetary system serve us, or are we slaves to it?
Do you believe in the illuminati, New World Order? The creature from Jekyll Island?
Or...
"Never ascribe to malice, that which can be explained by incompetence." - Robert J. Hanlon (though perhaps Heinlein or even Goethe)
Nevertheless, we are all born into it, and have been for at least 300 years, which gives an idea of the probability of changing it for the better.
I've always heard that notion attributed to Napoleon. But in honor of Heinlein, I offer the corollary:
"Any sufficiently advanced stupidity is indistinguishable from malice."
oh, I like that and with permission. will spread it.
I think the point of "not ascribing to malice" is that it is much better for one's own mental health, and thus leading to a more positive state of mind w.r.t. adressing a problem.
If one ascribes something to malice then one is creating an additional problem to deal with. Namely, one has the tendency to take things personally when one perceives them to be the consequence of bad intent. One then has additional personal issues to deal with, rather than deal with the actual problem at hand in a detached, objective and constructive way.
The statement to me, therefore, is about how we personally *chose* to perceive/interpret a situation.
So your corrololary essentially turns the statement upside down.
Let me put it this way. The following two statement seem logical equivalent:
However, there is a world of difference in the direction of the implied choice of one subjective point of view over another.
Clarke
Nice call -- the corollary above does seem to pattern after Arthur C. Clarke's third law better: "Any sufficiently advanced technology is indistinguishable from magic."
I've always been partial to Salvor Hardin's saying: "Violence is the last refuge of the incompetent." In context here, what would that be, perhaps: "Bailouts are the last refuge of the incompetent."
Do you believe in the illuminati, New World Order? The creature from Jekyll Island?
Is something a conspiracy if it is done out in the open?
Perhaps the cancer is that sociopaths are running things.
http://www.energybulletin.net/node/3066
http://www.energybulletin.net/node/37751
(and if the nutters are running things, how does one determine who is or is not worthy of your support? Where is the social rating network for who's a sociopath?)
Although this isn't the best place to discuss things like the Illuminati, Freemasonry, conspiracies, or similar things... there is a lot of evidence proving the existence of these things.
No less than David Rockefeller blatantly admits that his goal in life is to promote a one world government. I'm not saying that a one world government is a bad thing in and of itself. Instead the evidence is that the people promoting these agendas at a high level have malicious intentions and will push forward their ideas at nearly any cost to the general public (aka "cattle").
When you look at the various secret societies and think tank organizations (CFR, Bilderberg, PNAC, etc.), there is a great deal of reliable information about their membership and agendas. It's rather eerie to find out the big names in business, government, and media who are part of these organizations. However, TOD tends to be more scientifically oriented and from what I've seen there are only a small percentage of members who have taken the time to delve deeply into these subjects. Perhaps people are afraid of being labeled kooks.
I agree fully with your observation. I think the "enemy within" angle is one that is frequently forgotten in discussions on how messed up our societies have become. Myself, I was quite naïve about this until I had a stint in the corporate environment (the natural habitat of the sociopath).
One suggestion to the Oil Drum editors: try to get a psychologist to write a guest article on sociopaths. Hopefully it will be an eye-opener for many people.
Energy flow is the key to all activity on earth. Economics is a book keeping system, a way of using an abstraction such as money to allocate available energy and resources. If the public can be kept ignorant of means of the bookkeeping the bookkeepers will be king of a mass of ignorant slaves. Money is the means and the end is control.
"[T]he powers of financial capitalism had another far-reaching aim, nothing less than to create a world system of financial control in private hands able to dominate the political system of each country, and the economy of the world as a whole. This system was to be controlled in a feudalist fashion, by the central banks of the world acting in concert, by secret agreements, arrived at in frequent private meetings and conferences.
The apex of the system was the Bank for International Settlements in Basle, Switzerland, a private bank owned and controlled by the world's central banks, which were themselves, private corporations. The growth of financial capitalism made possible a centralization of world economic control, and use of this power for the direct benefit of financiers and the indirect injury of all other economic groups."
~Carroll Quigley, Tragedy and Hope: A History of the World in Our Time (New York: Macmillan, 1966) p.324
If you wish to believe it was just happenstance that it turned out this way that is your choice. The modern global finacial system and "globalization" in general represents exactly what Rome stood for but on a global scale. It offers the least "happiness" to the greatest number of people.
“America is today the leader of a world-wide anti-revolutionary movement in the defense of vested interests. She now stands for what Rome stood for. Rome consistently supported the rich against the poor in all foreign communities that fell under her sway; and, since the poor, so far, have always and everywhere been far more numerous than the rich, Rome's policy made for inequality, for injustice, and for the least happiness of the greatest number.”
~Arnold Toynbee, 1961
Since most of us who have access to computers and an education are amongst the lower tiers of the “rich” it is hard to gaze out into the world with unfettered eyes. The fact remains that the “wealth” we now posses has been stolen; our civilization has been built with military power and conquest and there are no signs of changing that course.
“What we call progress is a mysterious marriage of creativity and plunder. Civilization has flowered when human beings have devised ingenious new ways to organize production and social life, but such organization has usually been accomplished with stolen goods…. Under girding [its] extraordinary achievements in art philosophy, literature, and statecraft [are] military power and conquest.”
~Richard J Barnet
As we collectively head down the road of diminishing returns any and all arguments will be conceived to maintain the current state of wide spread inequality. All the arguments will be thinly veiled lies carefully crafted to work in the favor of the global capital Empire.
"Wherever men hold unequal power in society, they will strive to maintain it. They will use whatever means are convenient to that end and will seek to justify them by the most plausible arguments they are able to devise."
~Reinhold Neibuhr
==Angry Chimp
Great Post, AngryChimp! Keep it coming.
Energy flow is the key to all activity on earth. Economics is a book keeping system, a way of using an abstraction such as money to allocate available energy and resources.
And so is eMergy.
True but Odum’s eMergy is based on real values, i.e. solar energy, unlike “money” which is just printed with no relationship to a natural energy value.
I would not be surprised to see a play at an integrated, global governing body come out of all this. Fear can do a lot to making people bend to the "only" option available.
From what you state above, you could currently argue there is already one integrated entity running the global financial machine.
"From what you state above, you could currently argue there is already one integrated entity running the global financial machine."
I would argue that there is an affiliation of different groups/families running the financial machine. The question is how tight is this affiliation? Nietzsche wrote long ago:
“…every specific body strives to become master over all space and to extend its force and to thrust back all that resists its extension. But it continually encounters similar efforts on the part of other bodies and ends by coming to an arrangement with those of them that are sufficiently related to it: thus they then conspire together for power.”
In the journey of increasing net energy even former powerful enemies would unite as they conspire together to increase their power. The rub lies in a world of decreasing net energy will this formation of different groups brought together by the desire of power fragment once again and begin to fight amongst each other for their piece of the ever shrinking energy pie?
==AC
thats the paradox of materialism. . what else are we slaves to?
"what else are we slaves to?"
We are slaves to our own ignorance…
“Each person “has” an idea of the absolutely real, the highest good, the greatest power: he may not have this idea consciously, in fact he rarely does. The idea grows out of the automatic conditioning of his early learning; he “lives” his version of the real without knowing it, by giving his whole uncritical allegiance to some kind of model of power. So long as he does this he is truly a slave; not only is he unconsciously living a slavish life but he is deluding himself too: he thinks he is living on a model of the true absolute, the really real, when actually he is living a second-rate real, a fetish of truth, an idol of power.”
~Becker, “The Birth and Death of Meaning”
I made the comment in a different forum that the financial system was in effect a sort of Ponzi scheme. I suppose it isn't a 100% accurate metaphor either, but this need for constant growth has concerned me as well. In my view, globalization was done largely because Western consumers were saturated with debt, and the only way that further growth could take place would be to develop consumers in other parts of the world. Even assuming that this could actually work, eventually you would reach a point where the entire world is saturated in consumer debt, and there would be no way to expand further.
The other question I have has to do with the question of the degree to which economic growth is aided by population growth. And if you assume that population will plateau and then decline, will traditional types of economic growth ever be possible in the future?
Nobody really reacted to my comments in that other forum. I suppose most people wrote it off as crazy talk..
I hadn't thought about the idea of globalization fitting with the need for more growth, but of course you are right.
I don't think it is just consumer debt that it is growing. It is business debt, and government debt, and undeclared government debt (like social security). Population growth enters into this as well.
I have said many times before that in a finite world, we reach limits. There is no way this growth can continue. It is not possible for the majority of borrowers to pay back principle plus interest in dollars that buy as much as originally, if the world is not growing. Lenders will eventually figure this out, and stop trying to lend. Then (now ?) the whole scheme starts to unwind.
"Lenders will eventually figure this out, and stop trying to lend. Then (now ?) the whole scheme starts to unwind."
um... They've had several millennia to work it out. Perhaps they consider the acquisition of assets for little effort a feature rather than a bug in the system.
There is a rather lengthy (almost 4 hours) video conspiracy theory about the nature of the Federal Reserve, and the use of such to deliberately alternately inflate and deflate the monetary system in order to maximise the acquisition of real assets.
http://video.google.com/videoplay?docid=-515319560256183936
With limited resources, the acquisition of assets for very little effort is going away. One has to pay more and more, for quite a wide variety of minerals and energy products. This adds a whole new recent twist to the process.
Gail
I think yours is a very important point of recognition.
Globally, 'we' are only part of the way through a roll-out of industrialization. Roll-out of BAU (and commanding the resources to underpin industrial 'growth') to encompass all the globe is, as you say, clearly not possible. Creation of new 'markets' and technologies which have allowed and still allow investments in one part of the world to be realized as profits in another, run up against critical limiting factors.
Technological changes in transport, storage and production have always been accompanied by a competitive race for resources. Money chases industrial and market 'growth' in a feed-back loop?
Globalization is a way of importing resources. I'd see it not as a way to increase debt, but more like debt is one of the tools used to enforce and define globalization and technology (as in form of treaties and trade agreements).
Population growth is one of the multipliers in the growth equation. That's a trivial answer. Going beyond that takes a whole library. That's probably why you didn't get a response.
cfm in Gray, ME
I understand that 97% of our money supply is debt based (in the UK anyway), I wonder if anyone has a historical graph of this over the last say 100 years?
Prior to the Great Depression was it very high, and did it fall afterwards, and if so, by how much?
I sometimes wonder if debt been growing worldwide since the inception of the Bank of England? Wasn't that their agenda?
Also, I see the the main benefit of credit cards etc, is that they reduce the public demand for cash, and therefore allow more of the base cash to be used as the reserve requirement component for lending, and the growth of debt.
Globalisation was done simply because of modern cheap transportation technology. It gave companies access to cheap labor and lower costs than even western robotic factories.
In addition to that you had construction companies going to the developed world, and offering to modernise countries infrastructure. And that of course was paid for with debt. But the ultimate push behind it all was cheap labor, it let developing countries see a chance for growth and become willing to lay down debt.
Basically it's that maximising the remaining human labor was more efficient than going to automation. But there's still quite a way to go before we reach peak productivity with just existing technology. But standing in the way of increasing productivity is demand which has been maxed out with every means possible including of course debt. And also supply of raw materials.
Globalisation will reverse when oil peaks, at least in manufacturing, companies will build factories closer to where their consumers are, with tiny work forces and robotic labor, powered potentially from solar energy or other means. Once you've built the solar panels you now have free electricity essentially, instead of being reliant on electric bills.
Expensive energy will even encourage even factories to go off the grid. ;)
The need for growth will lead to efficiency once scarcity is reached. Assuming the system doesn't implode first.
Which it unfortunately very likely will, due to the debt bubble imploding.
The debt bubble is as much a risk to the global economy as peak oil. And it will add difficulties to efforts to deal with peak oil. The government should not be throwing away tax payer money on propping up the finance industry which is only allowing them to get further into debt, that just serves to make a larger implosion, this $700 billion should go to peak oil mitigation efforts. At this point a depression is inevitable, and what credit we still have really needs to go towards alternative energy.
The relative value of modern currency is determined in the currency marketplaces. ALL hard currencies are 'fiat' in that the primary exchange rate (Dollar- Pound- Ruble- whatever- Gold) are fixed by decree ... and can therefore be ignored. The only true fiat regimes today are the Chinese Renmimbi and some currencies that have dollar pegs or countries like Ecuador and Panama which use US dollars as currency. The petrodollar regimes are more market derived than fiat since the underlying crude is traded and price control is difficult to achieve. What has been happening to crude prices at the moment is a good example. Most dollar pegs in oil producing countries have been strong even under pressure of high crude prices. High crude prices tend to be inflationary for the producer countries.
Most of the debt creation of the past ten years has remained in the asset markets; debt is used to inflate the values of things that hedge fund managers can make fortunes upon; stocks, real estate paper (ABS) and 'companies' taken over. It remained in this sphere and does so today ... somewhat unBorglike. The debt trickling down to the masses has been expensive and where it wasn't - home equity lending, for instance - the price of the cheap credit is being paid now.
A good overview of the situation can be found here:
http://www.prudentbear.com/index.php/commentary/creditbubblebulletin?art...
Fiat comes from the statement that "you must accept this as payment of debts". Rather than the value itself.
Hmm then its made from lead.
I've said several times the the US has perfected turning lead into gold.
Hot metal jacketed lead but still lead.
.
Think of cash & money as food, and picture 2 male twins, pigging out on the food. EVERYDAY. The only difference is one sits on the couch and keeps eating and eating while watching TV. While the other goes to the gym, and and sticks to a strict workout routine. The result, the food in the first twin will go too all the unwanted places, and be stored as excess fat (bonuses, political scrimmage) and the outcome will be viewed as undesirable, and unappealing (by the vast majority). While the other twin who utilizes his food correctly, begins to develop muscles in places he never new existed, and turn out chizzled, and well defined. Overall he is not only more appealing, but his health is stronger, he is more disciplined, and he has learned to become more focus.
This is our monetary system. It all depends on how money is used, and the impact of its effectiveness. Lets not squander the few dollars we have left, but use it wisely, learn from our mistakes, and become more disciplined, and improve the overall health of our economy.
What you have described, Gail, is a cancer. Unrestrained, all-consuming growth without purpose, until the host is dead.
The key concept seems to be "without purpose."
Borg, in Star Trek had some kind of central direction and purpose, though it wasn't necessarily understood by the Good Guys of the Starship Enterprise.
So my question now, as always, is there something purposeful behind this worldwide economic meltdown?. Are the "crazies" who have been warning us of a takeover of the world by a relatively few shadowy bankers ("The Bilderbergs", etc.) to impose a World Wide Dictatorship through the U.N., etc., really that crazy?
Are we being set up? Or are we merely victims of our own good fortune gone terribly wrong?
This is Jason's post, not mine.
I doubt conspiracy has anything to do with the situation. It is really the way the monetary system works. It can function as long as there is growth, but once you run out of growth capabilities, it falls down. We don't know whether this happens in stages, or in very big chucks. It looks like we may be witnessing a step-down of some sort now.
OK. Then I would keep the Borg out of it. Their "purpose" was to rule the Universe.
Apparently no one, and no group is interested in such a thing, here on Earth.
What remains is that Western Finance is a cancer. Our Islamic brothers (half-brothers if you buy the Ishmael story) have been telling us that for a long time. Now perhaps we will have a chance to see if they can do any better.
Organisms with a mind are said to be goal oriented. The Borg would qualify.
The money system doesn't have a mind, so it can't qualify as being purpose driven, but the results are the same--growth and assimilation.
Allegories often personify processes.
Something like a cancer would probably be a better analogy. Each individual cancer cell is only programmed to grow and divide, but there isn't a greater purpose or intelligence that ultimately motivates the thing.
Or perhaps a parasitic infection is a better analogy. A parasite can kill the host if it grows too rapidly, but the parasite also depends on the general well-being of the host for the survival of the parasite.
Very true.
Part of why the Borg allegory is helpful, though, is that it puts a "face" on it. And because humans brains are wired to respond to faces, perhaps more people will pay attention when presented this way.
The reason the Borg analogy falls down for me is the apparent absence of "purpose" in the financial meltdown.
If there is a purpose behind it (as there was for Borg), then there is an intelligence and a will which guides it.
That is precisely what we are all at pains to do here on TOD-- a "purpose" would imply that someone was trying to initiate, then control the situation for their own purposes. That would amount to "conspiracy theory", and I guess that is bad.
If there is no intelligence behind the collapse -- just the result of overbuilding of a house of cards-- then it really is more like a cancer.
The important thing is that the remedies are different -- you can't treat a cancer as though it were a criminal, and you can't pretend that a criminal doesn't know what he is doing.
The purpose of financial markets is to make rich people richer as fast as possible. The this particular get rich scheme had a short time horizon for sucess, indicating that the perpetrators were not thinking very far ahead. However, this lack of foresight is only an extreme case of a general characteristic of our economic system. Even more 'solid' growth base on manufacturing infrastructure building and adequate intermediate term energy flows refuses to look at the long term future. The whole background of our economic system is the assumption that the vigorous economic growth of the last two centuries is going to continue on into the indefinite future.
I once audited a Macro Econ 101 class at a major public university and sat dumbfounded as the very nice and capable professor explained in clear as can be terms and equations that it makes no sense for the people alive today to conserve out of concern for the future because high growth today permits the problems caused by that growth to be solved by our descendants.
I tried introducing him to Ecological Economics and still wonder if I had any influence.
I'm still a little surprised my Macro Economics professor not only passed me with an A+, but also refrained from ejecting me from class. At one point I made a major mistake by openly referring to basically the same thing as bull!#@$. Undoubtedly I could have used more tact, but when I took the class I already had rather strong views about the demise of our economic system.
I'm more of a Ron Paul leaning, Austrian school of economics sort of person.
Here is a potential purpose. The top 1% are harvesting the real wealth of the planet. Outlandish, but a purpose.
Processes probably don't like being personified.
What remains is that Western Finance is a cancer. Our Islamic brothers (half-brothers if you buy the Ishmael story) have been telling us that for a long time.
Meditate on if the reason to vilify Islam is because following Islam breaks the banking/money system as the west practices it.
Just a note on why Islam doesn't allow charging interest.....
Apparently charging interest was frowned upon by Christianity many many centuries ago too. However, I would expect that Islam stuck with this, because it largely came out of the desert environment of North Africa+Arabia and growth in such a fragile environment was probably always extremely slow, so it would be not surprising that this is embedded in the psychic or culture of Islam since it would have been plain that charging interest required growth and that was never going to last. Indeed it has probably been long recognised that in that part of the world that a burst of rains can bring a spurt of growth but that things soon return to 'normal'
I don't know if anyone is still looking at this thread-- but my knowledge of Islamic finance is minuscule in the worst way. All I know I learned from Wisdomfrompakistan on his posts here.
He seems to be very certain that charging interest to one's brothers is immoral, and fundamentally will result in the collapse of the system for purely structural reasons, let alone its immorality.
That seems to make sense -- one can't have unlimited growth through debt and interest-- it becomes unsustainable. Instead, there has to be some way of pruning the debtors (send them to war, kill them, send them to Australia, etc.), or forgiving debt (Jubilee, etc.) Western finance has its own form of jubilee--bankruptcy-- but it seems like the rules seem to favor the giant players over the weaker ones. (That's just life, right?)
Now the government steps it to decide who will live and who will fail -- I suppose wisdomfrompakistan would consider that to be a desperate act that is beginning to show the cracks.
I'm not much of a conspiracy theorist but, to put on the tinfoil hat for a moment...
I have been wondering whether it might be possible that the PTB finally came to a consensus that peak oil, or resource depletion, was an imminent show-stopping reality and that, if the system fell apart on it's own, they could lose a lot. But, if they knocked the system over discretely they could manipulate the fall and take advantage, while also hiding the resource problem from the masses, enabling a continuation of BAU through a long portion of the beginning of The Great Decline.
(I've personally named the time before "about now" as the Age Of Abundance, and the time after "about now" as The Great Decline, not depression, because it will likely not end for a hundred years or more.)
while aesthetically appealing in theme, the reality is the origins of this crisis were when SEC approved wall st banks ability to lever 30-40 times and pushed FNM/FRE to lend to sub-standard credit risks. While the swing for the economic finances was an attempt to replace a declining energy surplus (at least partially), I can't imagine this has all been orchestrated, other than maybe in our genes. A)there would be enormous unintended consequences based on chaos theory (of course - we ARE seeing those) and b)those SEC changes occured when EROI was still increasing and oil was $10 a barrel. I guess it's possible that they had foresight back then but I doubt it.
Quite true. And while I don't doubt the fraudulent practice of the bankers and predatory loans, on the other hand it did to a certain extent require all those taking out the loans to believe that the economy really would grow and somehow it would be all paid back. And this belief is very much part of the general belief, growth will somehow continue. The almost religious like faith in technology is part of this too, since I find that the vast majority of people that I try to discuss any of these resource issues with are convinced that technology will solve any problems. And why do they believe this? -because as far as they are concerned it has delivered and will do so again.
In a strange way a lot of this is tied up with both the denial of Peak Oil and Climate Change. Lots of people are vaguely aware, we must doing something about the later and of the former say we have biofuel and shale oil, but are unable to accept that deep change is needed. They still think technology will allow Business As Usual and not only that but life will somehow get better. They just simply ignore the elephant in the room of PO and CC. It is this set of still widespread beliefs that formed the other half of the debit-loan fiasco. Indeed a good many of my colleagues are certain that an upturn will appear in a year or two. Nobody wants to accepts the Limits to Growth have well and truly arrived.
You're likely correct, it's probably far too complicated to have all been constructed. But I was thinking only of the recent part, the collapse, as having been "forced" for gainful purposes (after a majority of TPTB, only recently, finally realized where things were inevitably headed). The build up of this house of cards over the last few decades was not within my tin foil delusions.
It was quite coincidental that it all started falling apart right when prices were zooming sky high and PO was starting to enter the public discourse...remember that hopeful moment not too many months ago?
Yes, I do!
Just a couple months before that I had the PO thing 'properly' sink in, after knowing about it for a couple of years. But was still in the bargaining phase ("Wait! We can still do something if people wake up!").
That has kind of faded. I'm really infuriated now, that we justed wasted that money / chance. :/
Guess I hadn't really done the anger stage yet.
I'll try to keep my old foil hat in the attic for a while...
(Hey! Everybody write CNBC and ask them to do a follow up on "The Hunt For Black Gold" that could talk about how depletion will make recovery difficult/impossible.)
It was quite coincidental that it all started falling apart right when prices were zooming sky high and PO was starting to enter the public discourse...remember that hopeful moment not too many months ago?
Great story... There are limits, there must be limits. Nothing is infinite, including growth, credit and oil.
I'd propose that the real problem is that money has become divorced from physical assets- Money is not something that is tied to gold (or any other asset) but the idea that things have value, and will continue to have the same value in the future. It's the idea that stock has a value over time, that the pretty green pieces of paper in your wallet has value to someone else and will continue to have value.
A fix (as I see it) would be to tie it back to physical assets... It does not necessarily need to be gold- it could be a basket of items (Gold, Platinum, Silver, Oil, etc.) that are TANGIBLE. "Fiat" is just another 4 letter word...
Another fix is sustainable living- we are consuming too many resources and causing large and possibly unsolvable problems. There may need to be an adjustmnet to our population growth (and it'll happen either voluntarily or involuntarily).
A book I'd recommend to Jason (or anyone else) is When Corporations Rule The World by David Korten . The idea of what has happened with globalization is explored here... A partial synopsis is below:
Thanks, I haven't read Korten's book, but he did speak in our town and I saw him speak at a BALLE conference too. That quote is a great summary of a main point of this article too.
Instead of using metals to constrain money supply, FEASTA suggests an energy/pollution backed currency system for international trade. See: http://www.feasta.org/money.htm.
Gail/Jason/all, I really enjoy your posts. It frustrates me that you don't talk about what I feel is a glaring problem with our modern economy. The fact that some of the participants are provided a free giveaway of limited liability insurance regardless of risk.
The idea that the voting owners of a business have no personal liability for the debts of that business is simply a break in the market logic at it core. Because the "cost" of this liability is not factored into the price of owning a business (share price), there is no way the market is pricing these businesses correctly. The idea that an investment bank with 30 to 1 leverage should pay the same liability insurance as a farm or a software developer (currently they all pay ZERO), is not a workable long term solution.
Note, I am not talking about getting rid of limited liability, liability insurance in the case of bankruptcy simply needs to be *paid for* by the individual business based on the risk (like all insurance), only then will the market price the risk and determine which business is worth investing in... or not!
That "flaw" is really a design of the system. By definition, the owners of a corporation have no personal liability for the misdeeds of the organization. The price of the stock can fall to $0, but beyond that, there is no liability.
I think some have been arguing here that with all of the bailouts (historically and now), there is also a "heads I win, tails you lose" aspect of big businesses. Businesses that are considered too important to fail are frequently bailed out, if things go too badly. The taxpayers get to pay for the mess, even though they never owned stock in the company and may not have gotten much benefit from the company.
Liability insurance is somewhat different. It pays for specific kinds of risks--that people will be injured by a product a company makes, or will be injured in the parking lot of the company, for example. There is also insurance for Directors and Officers of the company, to the extent that this can be insured. Rates for liability insurance will vary with the type of business, based on historical claims experience for that type of company.
In some cases, industry groups put together insurance programs (typically in offshore locations) that insure risks of a particular kind. These pools will cover up to a selected per claim limit. Reinsurance or excess insurance may purchased above that limit. For example, actuarial consulting firms have a pool to cover their liability risks. I am sure that there are insurance pools in the banking industry, in the nuclear industry, and almost any industry you can think of. The rates, of course, will reflect the experience of the particular type of business.
"the owners of a corporation have no personal liability for the misdeeds of the organization"
I guess that's exactly my point. In a market context, that makes no sense. It hides a potentially huge cost of doing business from the owners of that business. Markets depend on pricing risk in order to work. If risk is not priced, then it is not a "real" market.
Let me put it this way: you gave a number of examples of liability insurance in your answer to me. All I'm saying is that the most fundamental insurance: that insurance that covers the owners from personal risk in the event of a bankruptcy is being given away FREE when it really doesn't have to be. How tough would it be to have businesses pay for liability insurance for it's owners?
I feel like you are just saying "hey that's just the way it's gotta be.." I think it's really worth examining if that's true. One thing is certain in my mind, if the owners of Bear Sterns had to pay for limited liability insurance, they NEVER would have leveraged 30 to 1 on the kind of BS that they did,because the liability insurance would have skyrocketed, cutting profits and making taking that risk much less attractive.
That's exactly how a market should work, the owners assessing a risk and investing or not. Hiding risk is just never going to work out...
One purpose of government is to act like a giant insurance agent. The economy tanks, the government makes sure the jobless get food stamps. Regulators are supposed to be there to make sure that business doesn't try to externalize all costs, e.g., don't add cheap toxins to the food supply. This would be similar to an external auditor from an insurance company making sure the price of the risk is appropriate.
Unfortunately, after a long trend towards corporate control of politics the foxes now guard the coop.
"This would be similar to an external auditor from an insurance company making sure the price of the risk is appropiate"
Similar but not the same. Regulation costs the taxpayer, the whole point is that taking high risk bets should cost the *owners* of the business taking those risks not the taxpayer. Having the business pay for insurance does this, and allows shareholders to get an independent guage on how risky a stock is.
One purpose of government is to act like a giant insurance agent.
That would be a Kensian model, no?
Von Mises and his Austrian school have a different opinion - correct?
(and what other models exist?)
I think if you go back to small enough businesses, the owner has his reputation to uphold. If things go badly, everyone knows who he is, and who is family is.
I think that part of the problem is that we have moved toward huge organization. No one really feels much responsibility. The person in charge is getting a huge salary, and a bonus based on quarterly or annual financial targets. Al he (and it usually is a he) cares about is meeting that target.
As we move toward relocalization, I would think that the problem should start to get better. I think the legal system will start playing a smaller role also, regardless of how the laws are changed.
the owner has his reputation to uphold.
How does one create a 'reputation system'?
How does one encourage small business - follow the 'abolish the IRS' for individuals camp - thus making a 1 person business tax-advantaged?
Small communities create their own reputation system. When one knows everyone else in a community it is difficult to do business if you screw someone over.
Often a small business owner will own their business premises and home in the area and will maintain both of these.
Gail, I agree with all your points individually. Let me point out that the very reason we have such huge organizations is, in part, free limited liability insurance. Many of these giant corporations could never have grown at the rate they did if they had to pay liability insurance. The cost would have eaten into earnings, the stock price would not rise as fast, so people would not invest as much in it, less available capitol = slower growth for many of the highest risk corporations.
Markets work when you pay for what you get. Right now owners of businesses are not paying for this insurance, and you are seeing the results ~ 1 trillion so far in my money and yours because the owners simply didn't have to worry about 30 to 1 leverage - they just walked away.
I want to stress that this isn't a matter of removing protections from investors, it's simply that those investors are getting something for free that they should be paying for - insurance in case the company they are part owner of owes a debt that it doesn't have the assets to cover.
It seems like companies will start getting smaller if we start losing services that make big companies "work"--such as large quantities of imports from overseas, easy airline transportation, universal electricity, jumbo sized banks to handle their accounts, and cheap transportation of goods over long distances. Credit is another essential service. Government will attempt to keep everything going, but at some point, it will not be possible to do so.
"That "flaw" is really a design of the system. By definition, the owners of a corporation have no personal liability for the misdeeds of the organization. The price of the stock can fall to $0, but beyond that, there is no liability."
So my blind 92 year old mother in an assisted living home should have personal liability for any misdeeds of employees of J.P. Morgan-Chase or insert your choice of evil Wall Street bank? (The dividends pay the cost of the home and then some.) You want to punish stockholders, beyond loosing everything for the misdeeds of the corporation, huh? And what do you think that would do to capital markets? The possibility the value of your stock falling to $0.00 seems to be a pretty good definition of a liability to me. (Try using stock in Fannie or Freddie as loan collateral about now.)
puhkawn, as I said in my initial post, I do *not* advocate getting rid of limited liability. This insurance is clearly needed to insure that people like your grandmother feel comfortable investing in businesses.
However, that creates a problem. Right now, according to you, your grandma happens to be a voting owner in one or more businesses (she's a shareholder). And right now if those businesses goes into debt and fails, the tiny fraction of that debt that is owed by your grandma (let's be clear, your grandma is part of that business - that's what ownership is) is not paid by your grandma. Why not? Because there's a special type of insurance given away to certain types of businesses for "free" by the government (that is, the cost is picked up by the taxpayer).
All I'm advocating is that the cost of covering the owners of a business in this way be born by the business as an expense. This would allow price signals to better inform the owners like your grandma.
"The possibility the value of your stock falling to $0.00 seems to be a pretty good definition of a liability to me."
To me that sounds like partial liability. That is, liability until the stock hits $0. What happens to all the money that is still owed? Why, you and me pick up that tab. Instead Goldman should have been paying for liability insurance that would cover it's owners in the event that they go belly up. If they had, the insurer would have taken one look at the 30 to 1 leverage on unbelievably risky mortgages and said "fine, but your limited liability insurance is going to cost xxxx hundred million dollars a year". This would have implications on the profitability of the company, and thus the stock price. Grandma would have seen her stock price going down and asked "WTF??!?!?! I'm selling or voting those idiots on the board out" - which is *exactly* how a market should work. But because there was no price signal on the risk of debt default, Grandma, and we, got the total shaft.
And what do you think that would do to capital markets?
It could cause them to act in a responsible manner. Pray tell how the value of Leaman's stock falling to zero be enough of an impact when the company was leveraged 30 to 1. Are the big wigs giving back those Christmas bonuses?
You will be assimilated.
I am Locutus of Borg. Lower your shields and surrender your ships. We will add your biological and technological distinctiveness to our own. Your culture will adapt to service us. Resistance is futile.
Thanks a lot guys for new nightmares to haunt my already shortening sleep....a Paulson Borg...ewwwww!!!
Looks like he's wearing a bluetooth headset - they just usually use a blue LED.
That photo was made, I estimate, in 1992. I don't think any blue LEDs were available then.
--- G.R.L. Cowan, author of How fire can be tamed
I changed the initial pic to this one because Jean-Luc looks a lot like Paulson. :) I almost was going to go over to the lab and get on Photoshop, but this one will do.
If you click on Locutus' picture, it takes you to the MemoryAlpha site, which provides a Star Trek geek's wet dream of information: http://memory-alpha.org/en/wiki/Locutus_of_Borg
Holy macaroni he does look like Paulson! Nice catch.
Of course I saw that one when putting this together, but found the other image more creepy.
"FREEDOM IS IRRELEVANT. SELF-DETERMINATION IS IRRELEVANT. YOU MUST COMPLY."
"We would rather die."
"DEATH IS IRRELEVANT."
Science fiction is often clever social commentary in disguise.
As in Bob Shaw suggesting we explore the relevance of Asimov's Foundation Trilogy.
Asimov's Foundation is rather simplistic, although well written, it has the old idea that complex systems can be predicted once we know the rules. Social engineering in the literal sense. Chaos theory has shown that is not true, but Asimov does have his own Black Swan in the form of the Mule.
As a message to mankind, I much prefer Brian Aldiss' Helliconia trilogy.
Your forgetting the Asimov's Foundations concept of predictive collapse and directed decline. See Naomi Kline's 'Shock Doctrine' and 'Confessions of an Economic Hitman' by John Perkins for more details.
Cascading blowbacks, assertion of Liebig Minimums, Strategic Element Control, the Rise of Earthmarines, the Porridge Principle of Metered Decline, and other concepts I have briefly sketched all play into Optimal Overshoot Decline.
That's a lot of jargon, I don't know what it means, and some conspiracy theories thrown in. It sounds like you are trying to engineer an ideal society like you would design a machine. Calculate inputs, outputs and design a sustainable process, which everyone follows. I just don't think it works like that.
Have you read the Helliconia trilogy? I highly recommend it. Some words about it from Brian Aldiss:
I had the idea once to start a blog about the BORG and economic assimilation on planet earth. But given the antics over the last few years I thought it appropriate that it be named after what we used to call "Banana Republics".
Hence I registered the domain name "BananaB.org" for the blog. Problem was I really didn't have enough to say and certainly nothing new. Never used it.
So I still own that name - if anyone wants to use the name for a site, I'm sure I can be convinced to part with the name for a very reasonable sum. And giving it added value: the BananaB part is whatchamacallit, you know when a word reads same forward and backwards... forget what that is called now.... um, palindrome.
Here is the solution, implement all of the following:
(1) Stop fiat currency altogether. Money should be gold and silver coins and only that.
(2) Eliminate all interests on all debts at once. The lender has right to only take back the loan given. The lender never had right to take any interest on the loan for so many obvious reasons.
(3) Stop all governments' manipulations of the market at once. All markets must be free markets and must be allowed to work freely. That would naturally kill the bad and save the good. If you not believe in free market then better be communist, don't expose yourself to the bad of both worlds.
These are the necessary steps to solve the financial problem world is facing today. Once the problem is solved implement the following (in addition of keep implementing the above) to avoid any future financial crisis:
(1) Minimize government taxes as much as you can so that governments not have that much wealth at first place to bail out the bad portions of society, to start unnecessary wars, to perform unneeded space research etc. Low taxes also means more disposable income for people which means better and more desirable economy.
Note: Any reduction in taxes must be accompanied with equal reduction in government expenses.
(2) Avoid taking any kinds of debts even non-interest debts for any purpose. Do business with your own money so you can keep functioning in less profit too because you would not have to pay interest. Buy houses, cars, fridge etc with your savings and don't buy them when you not have enough savings.
(3) Be more good to people around you, your neighbours, relatives, friends, colleagues etc and help them when they are in trouble to encourage them to help you when you are in trouble. That eliminate any need of insurance.
(4) Learn to produce more and consume less to be a net positive to society.
(5) Learn to take only as much from nature as it can renewably supply you in long run.
With respect to 'free markets' unfettered by government: I just read an enlightening article in the New Yorker about the illegal timber trade. A huge amount of timber gets cut in Russia and sold to China where it is turned into goods to sell at places like Wal*Mart. The trade is dominated by Mafia-like crime organizations, since government doesn't really exist on these frontiers, whose modus operandi is to wipe out competition--literally. The 'fiat' is cash and cash only.
This type of situation is what I see as happening if governments and government regulation is done away with. Free markets, indeed!
WFP,
While your suggestions sound simplistic, their simplicity gives them viability.
The question then becomes how do we do this globally and simultaneously?
Perhaps a global ctrl/alt/delete. Eliminate all fiat currencies, issue every global citizen 10,000 grams of gold and title to the dwelling they occupay and any business they may own. After that, its a clean start with a realtively leveled playing field.
Just a thought.
I like the analogy of a global crtl/alt/delete!
Hello Gail,
IMO, it's more precisely known as Jay Hanson's fast-crash, Thermo/Gene Collision prediction timeline, as opposed to the ArchDruid's long grind to Catabolic Collapse. For TOD Newbies [small PDF]:
http://warsocialism.com/thermogenecollision.pdf
--------------------
...If you were born after 1960, you will probably die of violence, starvation or contagious disease...
-------------------
My Peak Outreach efforts to the young is to hopefully induce them to move towards Optimal Overshoot Decline, which will shoot the gap between Jay's and Michael's great works. Time will tell...
Although the best approach would be to do it simultaneously but we can also do it country by country.
Stop giving vote to any political party that supports this system and tell people to do so. When the vote turnover would be less than 10% of adult population for a while existing political parties have to change their strategy and new more desirable political parties can emerge.
Avoid taking any further debts. Buy things from your savings only. Try to repay the debt by cutting expenses, sooner the original debt is paid lesser would be the total interest paid.
Follow the insurance avoidance method told above.
Take out all investments and deposits from all interest based banks to accelerate their shut down.
Teach others the same.
and within a year there will be poor and rich once again.
You do not begin by doing it globally. You do it locally first. Save your own community and establish useful relationships with other communities.
Debt and money supply will necessarily rise exponentially until they collapse. And collapse is inevitable because money is still a claim on real, tangible things, like labor and resources, which in the real world are finite.
I don't think that follows. I grant you that interest-paying deposits force the banks to reloan your money on fund the interest they pay you and thereby continue existing, but nothing sets an absolute minimum on that rate. (I have a checking account that pays 0.25%... I don't think that's inflating any asset bubbles!) And labor and resources are growing: population increases, and new capital goods (machinery, intellectual property) are being created, as well as more natural resources entering the economy. So, there should be a rate at which the money supply is growing at the same rate as the actual economy. Now, certainly irresponsible lending in the quest for higher yields was a driver for the credit collapse. But I think it's completely possible for "the system" to work in a healthy way, and that the fact that this crisis occurred is more of a failure of the people involved (Fed Chairmen setting rates too low, investment bankers getting greedy, morons watching Flip This House on TV and thinking "me too!" with interest-only mortgages, bankers blindly trusting Moody's instead of doing research) than our financial system.
Naturally, given where I'm posting, I want to make it clear that I do believe natural resources are limited in the grand scheme of things, and that at some point we'll have to transition from a growth-based economy to a sustainable one where populations remain stable and total wealth grows only when someone discovers a way to use the same sustainable resources more efficiently. BUT: it seems like the eventual resource constraints aren't what's being discussed here, just an assertion that the banking system causes crashes on its own merely by existing.
The interest you receive on a checking account is the bank letting you in on a share of interest-earned profits.
Another way to look at this would be the natural rate of increase in an asset, such as a forest, and compare that to interest rates. If a forest grows at 2% per year, and an old growth forest doesn't grow at all, then liquidating that forest in order to sell its wood and put that money into even something like CDs will yield a greater return on money. Stuart Staniford discussed this in his post The Net Present Value of Grandchildren.
So, I would argue that the interest placed on most credit instruments is much, much higher, than growth in real-world assets and so we simply are forced to liquidate Nature to get the return demanded by our debts.
No, do you have a link to that post on NPV?
Here:
http://www.theoildrum.com/story/2006/6/24/184325/864
This is a link to Stuart's Inflationary Collapses, or the NPV of Grandchildren.
Jason, I was looking for the right place for this comment until I saw your mentioning SS's post. Because the following comment is an upgrade of one I made at that thread.
For a clear understanding, it's necessary to decouple the monetary system and the banking system and look at the options for each. Below are the possible combinations in the form:
Monetary system; Banking system; stability; historicity
1. Gold standard; 100% reserve banking (or usually no banking); stable; historical (first)
2. Gold standard; fractional reserve banking; unstable (no bullion lender of last resort); historical (1694 in England - around 1930 everywhere)
3. Fiat money; fractional reserve banking; stable (as long as central bank is willing to print currency as needed); historical (since around 1930 everywhere)
4. Fiat money; 100% reserve banking; stable; theoretical (Simons 1934 and Fisher 1935).
Heretofore, I refer to system 1 as pure precious metals-based (actually, silver has a longer and richer monetary history than gold), and to systems 2, 3 and 4 as "soft" (should be "funny money" in gold bugs's jargon).
Of note, the biblical prohibition of interest:
Ex 22:24 - "If you lend money to one of your poor neighbors among my people, you shall not act like an extortioner toward him by demanding interest from him"
Lev 25:37 - "You are to lend him neither money at interest nor food at a profit."
Ez 18:8 -"if he does not lend at interest nor exact usury..."
was issued when the monetary system in effect was pure precious metals-based. And it applies only to that system, so that it is legitimate to earn interest from soft monetary systems. That's because the properties of the currency (the entity performing the functions of money) are fundamentally different between pure pm-based systems (where gold and silver have to be mined), and soft systems (where central banks can easily print bills and even more easily create their electronic equivalent).
Below I try to show that:
1. The existence of a widely available, RISK-FREE interest bearing investment requires a "soft" monetary system.
2. For that investment to also yield a REAL positive interest rate, real economic output must grow at that rate or higher.
To demonstrate the first point, let 's assume we have a pure gold system. How can some person or institution make a risk-free promise to anyone to pay them interest on the gold they initially lent (plus the principal at maturity)? By one of two ways:
a. The borrower has the power to exact ever increasing quantities of gold from subject/victim populations, i.e. to forever expand its share of the total bullion stock. Clearly that cannot last long.
b. If we assume the borrower's share of total bullion stocks to remain constant at most, which is plausible, then we need the total stock of monetary gold to grow exponentially at that rate or higher (which implies that the amount of gold mined each year must grow exponentially at the same rate too). Actually, the cumulative gold production did grow exponentially, only the rate was very low, as you can calculate from the data at page
http://www.gold-eagle.com/editorials_00/mbutler031900.html
Thus, the annual rate of growth of above-ground gold stocks was
0.11 % from 1200 BC to 600 BC and again from 300 BC to 500 AD (see the reason for the biblical prohibition of interest?),
0.05 % during the Middle Ages,
0.59 % during the XIX century, and
1.7 % on average during the XX century (actually it was 1.8 % 1900-1950, 1.6 % 1950-1975 and 1.5 % 1975-2000).
Adding silver to the picture changed the above percentages very little.
(As an aside, this shows that a pure pm-based monetary system would have been deflationary since the industrial revolution, most notably after WWII: during the period 1950-1975 world real GDP increased at a cumulative rate of 4.7%, while world total gold inventories rose at a cumulative rate of 1.6%, so that a pure gold-based monetary system would have caused an annual DEFLATION rate of 3%. In practice, that level of deflationary pressure would have directly prevented the occurrence of that economic growth rate. Which could have been actually good, but that's another story.)
As said, the above figures provide the ceiling for the interest that could be offered by a risk-free investment if a pure gold standard had been in place. BTW, 1.5 % leads to k = 1/67. Clearly, the correlation of higher rates of growth of above-ground gold stocks with higher energy use in the XIX and XX centuries is no coincidence, as modern mining is very energy intensive, which also means that, after Hubbert's Peak for oil, the annual growth rate is bound to get lower and lower.
In a fiat money system, on the other hand, the monetary stock can (and certainly does!) grow exponentially at any rate that suits the keepers of the printing press or its electronic equivalent, so the government can promise beyond any risk to anybody to return them any nominal interest rate below that.
Now comes the second point: how do you insure that the nominal interest earned (plus the returned principal) allows the lender to buy more REAL goods and services than the principal initially allowed them to, in a fashion of a certain annual real rate? By having the amount of available goods and services grow exponentially at a rate that fulfills:
(1 + yGR) = (1 + RIR) (1+MGR) / (1 + NIR)
where
yGR: real Net National Income Growth Rate (approx real GDP Growth Rate)
RIR: Real Interest Rate
MGR: Monetary stock Growth Rate
NIR: Nominal risk-free Interest Rate
Since MGR >= NIR as said above (to make the investment yielding NIR risk-free),
it follows that the real GDP growth rate must be >= the real interest rate.
(BTW, the last condition holds for any monetary system, hard or soft, and it comes from the Fisher Equation of the Quantity Theory of Money, M V = P y, assuming constant V. See below.)
The "good" news, then, is that after Hubbert's Peak, since real GDP Growth rates will become negative for a long time, so will real "risk-free" interest rates, and therefore there will be no financial incentive for clearcutting the forest.
Calculation of the real interest rate:
Again from the Fisher Equation of the Quantity Theory of Money:
M V = P y,
where we assume constant V.
P = M V / y
At t=0, let be:
y0 the real Net National Income (can be substituted by real GDP, since we will deal with its growth rate, which will not differ substantially)
M0 the monetary stock (M1 or M2 depending on country)
P0 the price level = M0 V / y0
Let's call Real Purchasing Power at t=0 what an initial amount A0 can buy:
RPP0 = A0 / P0 = A0 y0 / M0 V
Let that initial monetary amount A0 be invested in a risk-free vehicle that yields a nominal interest rate NIR.
At t=n, we have:
yn = y0 (1+yGR)exp(n)
Mn = M0 (1+MGR)exp(n)
Pn = Mn V / yn
An = A0 (1+NIR)exp(n)
where
yGR: real Net National Income Growth Rate (approx real GDP Growth Rate)
MGR: Monetary stock Growth Rate
How much can An buy at t=n?
RPPn = An / Pn = A0 (1+NIR)exp(n) y0 (1+yGR)exp(n) / [M0 (1+MGR)exp(n) V]
RPPn = RPP0 (1+NIR)exp(n) (1+yGR)exp(n) / (1+MGR)exp(n)
Now, you want RPP to grow at a certain annual Real Interest Rate, RIR, so:
RPPn = RPP0 (1+RIR)exp(n)
From the last two equations:
(1+RIR)exp(n) = (1+NIR)exp(n) (1+yGR)exp(n) / (1+MGR)exp(n)
Taking the nth root:
(1+RIR) = (1+yGR) (1+NIR) / (1+MGR)
As said above, for an investment vehicle that yields a nominal interest rate NIR to be risk-free, NIR has to be <= MGR (otherwise it needs to capture an ever greater share of the monetary stock).
That implies RIR <= yGR
You should do a full post on this and submit to TOD for those who love to study the equations!
I think that what happens is the debt part of the money supply collapses at some point. Because the world is finite, the amount of oil, food, and other resources entering the system slows down. The amount of resources in the system eventually reaches the point were it is no longer sufficient to generate enough output from the system to pay back the loans with interest (unless the dollars are worth much less then they were when the loans were taken out). Lenders eventually come to the realization that they cannot make loans without high interest rates to compensate now for the higher default risk and the risk that money will be worth less when the loans are paid back. At these higher interest rates, many fewer loans make sense. The volume of debt drops precipitously. If debt is what is used to drive investment, this collapses. Simple transactions like mortgages become difficult. Real GDP levels drop greatly.
You can argue as to exactly what collapsed, but the outcome is a very much reduced standard of living.
Is this basically that the debt:GDP ratio gets so large that the size of the required payments becomes debilitating/overwhelming?
The way I've thought of this whole idea before is that when you take on debt you either use it to grow your income so that you can pay the debt back without compromising your future standard of living or you don't and your future standard of living falls by the amount of the payments until the debt is paid off.
At the collective level, new loans must constantly be made to replace the currency that leaves circulation when loans are repaid; otherwise we get deflation because the currency:asset ratio declines as the loan's principle vanishes back into the void from where it came when it was initially loaned out. (And we really don't want deflation unless there is something like a demurrage rate in excess of the rate of deflation because otherwise people have the incentive to just hold onto their money while waiting for better prices, rather than invest or spend it, which just feeds back into even more deflation.) The consequence of this is that in order to get people to willingly (& rationally) continue to take on debt, much of it will have to be for investing in growth in their incomes, and this expectation will have to be routinely validated or else people will stop taking on more debt, with all of the previously stated problems.
I like the idea that you put forward, though, that the physical growth rates fail to keep up debt growth resulting in periodic financial implosions, although maybe in the short term it's demand that fails to keep up? I'm thinking this could tie into the behaviour of the capitalist business-cycle, with its over-build-up of productive capacity that results in oversupply of markets, followed by reduced investment (i.e. fewer loans issued), which threatens the aforementioned deflation unless the central bank drops interest rates to encourage even more debt. I suppose that's where your idea comes in: if continued long enough, the debt:GDP ratio gets so large there is never any hope of the debt being paid off (particularly if most of it was taken on not as investment but for "parties"), and at some point, enough debt has to be defaulted on to enable starting it all over again (assuming the physical resources are available)...
Just my thoughts; I'm curious what you think.
The rub is the transition. I doubt there is any historical precedent for this sort of transition being done in an orderly and peaceful way, if at all. The growth paradigm is firmly embedded in at least Western society and won't be easily overturned for something significantly different. You will see TPTB trying repeatedly to 'jump start' the economy using the same paradigm, in the process wasting valuable time and energy that could be used for a sensible transition.
Great post Jason - This an important topic to consider when thinking about and planning a future.
I have been looking at is from the perspective of job creation.
It seems that many big developments in our society were designed, or simply evolve out of the need to keep people off the streets.
"Idle Hands Are The Devil's Tools"
There simply is not enough productive work for the population so we needed to encourage make work. Thing is the make work can’t just be building sand castles on the beach. It has to make money.
Everyone is familiar with the cliché that goes something like “ An average man works for money, a smart man has his money work for him”.
Well there you go! The perfect job, and scalable too. Or at least everyone thought so.
My point is that IMO this financial bubble was a last ditch effort to keep people happily busy and I for one don’t see any possibility of ramping up another one.
Good point, and that leads to the next question. Does it all come down to food, food security then? And is Cuba the model? When there is not enough food (as the oil dependent, monoculture, FF fertilizer paradigm fails) will those idle hand return to food production ... or to hostility?
Very good point. And it is absolutely critical to see that, if that work consumes exhaustible essential resources, that path leads to societal collapse. Easter Island is the perfect model.
I've touched the issue some time ago, and will repost below:
Looking at a simplified model of the economy based on the Easter Island (EI) case: one part of the population works on the production of necessary items/services (EI: fishing) and the other on discretionary items (EI: statue carving, transporting and setting up).
In the case of EI, the Island Council (?) could have realized in time the deforestation problem, foreseen its devastating potential consequences, and decreed an immediate end to all statue-related activities, so that the new rate of consumption of trees - now restricted to life-sustaining activities (canoe building, etc.) - was equal to the reforestation rate and the society was saved from collapse. This sustainable path could have been followed in any of 4 possible sub-paths:
A: Feed the people formerly working on statues while they relax on the beach.
B. Same as A. but have them develop polyphonic music, martial arts, and calculus (with the restriction of not cutting trees to make instruments, weapons, or paper!)
C. Have the people working in essential activities share those activities (and the associated capital goods: canoes in EI) with those previously working in discretionary activities. Thus, if initially 50% of the people fished 6 days a week and 50% worked on the statues, in the sustainable arrangement 50 % would fish Mon, Tue and Wed, the other 50 % would fish Thu, Fri and Sat using the same canoes as the other 50%, and everybody would have 3 additional free days per week to either relax or develop polyphonic music, martial arts, and calculus. This option is equivalent to the shortened work week, and is my personal favorite.
D. Let the people formerly employed in discretionary activities starve.
IMV this is one of the (if not "the") most important issues to solve as we face Peak Oil. Everyone here would agree that all forms of car racing (and jet ski rental and so many other unnecessary activities) should just end for good. But what about the people today making a living from them?
Thanks for your comments Beach Boy.
"IMV this is one of the (if not "the") most important issues to solve as we face Peak Oil."
I feel very strongly about this too. I wish it received more attention and discussion.
Cheers!
This is one reason why I have gotten into small scale farming in a very public way. If the social norm is "Farming is for dumb folks who couldn't figure out how to get off a stinky farm," then it will be difficult to grow food in the future.
There's so much work to do it is ridiculous. I look around town and see a million jobs. But they don't pay. And yet, really idiotic stuff does pay. Go figure.
First thing I have to note is that farmers have never really been terribly self sufficient. A lot of the rural social unrest was based upon farmers perpetually been in debt, barely making it from season to season, and with every bad harvest you had more and more farmers driven off their land. Ironically, farmers were the ones who wanted to get off the gold standard, as a stagnate money supply with economic growth leads to deflation--a disaster for those that are in debt, especially for producers of commodities. This also lead to the new deal agricultural subsidies/price supports.
Also, your claim to risk for the dollar isn't precisely accurate. Ironically, despite the crisis in the financial markets, the dollar is the strongest it's been in over a year. That's because despite the problems we're having now, the it's spreading to the rest of the world as well. The losses on US loans was not limited to the US, and the US isn't the only economy dealing with a debt-frenzy hangover. With the rest of the world's economy is tanking now, the dollar based economies not only look economically relatively better, the dollar is also a safe-haven currency during financial crisis. As bad as the US economy was in the early 80s, the US financial crisis hurt developed countries far more than it did the US.
You may be right re. the dollar, and I tried to "hedge" a bit in my notes on the subject. Who knows how long that will last though.
Farmers are very worried about deflation in commodities right now. Another good point.
Self-sufficiency is a relative thing. Some farmers are more self-sufficient than others. Those who grow a couple of crops, run tractors and buy fertilizer have no self-sufficiency, while a farmer who mostly feeds their family with a diversity of crops, trades surplus with neighbors, and uses animals and dung for power and fertilizer is nearly self-sufficient.
Self-sufficient farmers?
Quite rare here in my home county. Back more towards the east and into the shutins of the mountains perhaps it exists to some degree.
Back where the land does not lend itself to massive modern ag. Back where people once had to live self-succiciently. Of course back before LBJ and his Great Society made them all 'Happy Pappies' with his free handouts.
But here where the bedrock is not exposed and we have very fertile (or once did) farmlands...most farmers buy their vegetables at Wally World and make no bones about it.
The old 100 acre 'places' are now all brought up and in intensive rowcropping.
Lord I wish I had a few mules and a good barn to put them in. Just to hear a mule bray would be worth it. Oh wait....the political candidates are doing plenty of that!!!! Signs posted all over the landscape...which they never take down ,just let the garbage rot on the roadsides.
Airdale
BTW I did pick up a nice Peter Wright #105 anvil yesterday at an auction.
I have thought of restarting my blacksmithing craft as a means of barter , if I survive the dieoff that is.
I need to find a good source of welding coal and find a good forge. But I did get a nice blacksmith leg vise for $10...but the anvil went way way high since a front man for the Amish was bidding against me.
I got it for $265..should have been about $1/lb but the Amish are buying up all this sorta stuff. They know what is coming for sure.
Airdale
Hi Airdale,
Sometimes when you post, I wonder about your taking up a few apprentices (interns?). It seems you have a lot to teach.
read all the posts, esp the ones of the about 'forging for food - and shooting others' or 'the old indian'.
Hi Eric,
I thought about you after I posted (but was away from computer).
I should have included others, such as yourself and Todd, in my comment - i.e., people from whom others could learn.
(It would be instructive, I think, just to sort of "follow you around" and observe what you do in a week, as an example.)
Hi Aniya,
I am not an expert blacksmith but I can start a good fire, heat metal as I wish, know when its coking right. Bend metal and in general do a lot of ordinary smithing but I am way down on the food chain when compared to my peers.
In my area not many are interested in older craft skills. Most do cold shoeing as well and have no clues about smithing.
Thanks anyway for the comment.
To Blair: Shooting others? Am I the only one realizing that protection of ones right to life is apparent? Or protecting your assests that you have created by the sweat of one's brow might be necessary in the near future?
Why do you try to hound me always? Do you have a mental problem?
Get a life son.
Airdale
"despite the crisis in the financial markets, the dollar is the strongest it's been in over a year"
Ahh..but the dollar of the past year was its weakest in history. When you say something went up 10% and neglect it was down 50%, before it went up 10%, thats not a honest comparison.
$1.00 minus 50% = .50 cents plus 10% = .55 cents...Something I wouldnt write home to mom about and brag.
No argument about that, but when a currency goes from 1.60 to 1.34 in 5 months (it was still about 1.55 in August), that's no small thing. The dollar's gain against the Euro was the biggest one week move since the Euro has been a currency.
I agree on your comment about farmers never being self sufficient. A quick example from not too long ago-prior to the globalization of most manufactured products-the item often lamented was shoes. Hard for families to afford them, and they were worn, worn, and worn out. And saved. First farm we bought had a room that was full of old boots-holes in the soles, no heels, or the leather upper and stitching disintegrated from daily treks through the acids of manure. The gambling dice were thrown with a familiar cry-"Seven-Eleven, poppa needs a new pair of shoes."
Your history forgets a couple salient points. Many early "farmers" were share croppers, weak, powerless people who at the hint of a good year would find their share of the crop fall, with little they could do about it. Those self righteous, independent folks who pushed off west to their own land found a crop is worth little in the middle of nowhere. Whoever controlled the shipping made the money. The Eastern and English cattle baron's wealth derived more from the cattle drive itself and contracts with the railroads than the green riches of the plain's grass.
Some may have hated the gold standard, but the rallying of 20th century US farmers was always parity. Debt would be easily swayed with the right commodity price. Willie Nelson continued to sing it as his first Farm Aid concerts responded to the foreclosures of the eighties. Every time a place went under,though, it was bought by another. Whose only personal solution, increase his yields to pay off the new place, helped depress prices further by increasing supply.
A great circle seemed solved only by parity. Parity is actually an attempt to lock prices at a unique time, when the world was trudging off to WW1 and ag commodities soared above everything. X bushels of corn should fetch as much a pair of shoes, every year, at the exchange rates of 1910 to 1914. Nice thought, for farmers, but it never worked. Some basic laws were passed in the thirties, that later morphed into our present ag programs. By the fifties and sixties, the idea of 100% parity, though often still called for, was discarded for less ambitious goals.
As the global economic systems tank this morning, the one line worth remembering from this Star Trek TNG episode is this part:
"...Your life as it has been is over. From this time forward, you will service us.
Wow! Excellent article. I have been trying to explain why continuous growth is analogous to a cancer and is ultimately unsustainable. I think your analogy to the Borg is much better. I'm e-mailing links to this article to all my friends. I think more knowledge about the underlying fallacies propping up our economy and the sacred belief "growth is good" has to be spread to the masses. Unless we see the Borg in all it's malfeasance we won't be able to defeat or transcend it.
Thanks again for your writing!!
http://slashdot.org/firehose.pl?op=view&id=1235509
I fast scanned the text and ended up looking for his summation. Didn't find one.
A lot of discourse here on TOD is basically the same as what he aimed at. Or so it appearer to me.
In the form of an outcry against the stupidity of modern life here in the USA. Raging against yuppieism,the failure of our youth, the educational system, the propensity of the medical industry to feed off out blood,the idioticy of our politicians.
It all comes down to very very poor management and extreme lack of leadership.
As I said a few days ago: " Where are our poets,our artists,our authors,our past?" and several comments regarding how it was in my youth vs today.
So let me carry on then with observation about currency:
Last nite I was looking thru some containers and stumbled across some coins. One was a real Silver Dollar. It brought reality of the past back to mind.
Does anyone remember 'silver certificates'? Back when money had actual value by being backed by silver and gold. Also I found some indian head pennies. Made of apparently REAL solid copper. Intrinsic value so to speak.
Now thru the many opinions stated over the three years on TOD a lot of talk about the 'way things used to be' is rudely discarded by some here on TOD as old people chatter or just dismissed.
Those who would have or might have protested have been shuttled off to nursing homes. The rest have been marginalized by the youth. The youth with blank dull zombie eyes. Jailhouse tattoos. Ugly clothing. Stupid speech and very bad music.
The oldsters among us saw it all. Commented and were ignored.
So we saw them. The BORG. They were among us. The turned the tide. They became leaders of the industry and economy. They shipped it all overseas and forgot the ideals of patriotism and country.
They stripped this country to its bare bones.
At the time I spoke loudly of the ugliness of a Bill Clinton who showed us what real morals were made of. A intern on her knees under the desk in the oval office. Kneeling on the great seal of the USA.
Servicing then the Borg like person occupying that office.
What moral tone did that set for out country then?
Just this: Take what you can get, give nothing back,lie like a SOB, never admit to wrongdoing, and always take care of number one(yourself).
This then was our legacy of our leadership. This was part of our downfall, or more like the real life evidence of such. We were already starting down the slippery slope and this was just evidence and meant that the most powerful person in the world could laugh it off and do exactly as they wished and kiss off the rest of society who would or cared to really do the right thing.
I can find no virtue either in the present holder of that office either.
They all have brought this down on us with the agreement of the younger generation. The 'me too' and 'I want it all now' generation.
Those who sacrifice nothing. Who take everything.
Now 'death on a stick' comes. God help us.
Airdale
My heartfelt thanks and appreciation to Mr. Jason Bradford for putting this key post together. Excellent , very excellent.
Wish it had been posted long ago but then surely it would have been dismissed. The time for dismissing the real truth is long long past.
Now we will be getting mostly start, mind bending realities of the real truth. From here on its all downhill. IMO.
This week I hope to stock up on a packframe and lots of freeze dried survival food. I also reach the age of 70 and not sure at all if I will be able to survive the possibly coming chaos of our future. If so I am sure I will get to view some of it ..as the Borg landing ships arrive....
here on spaceship Earth. A small variegated planet, third out from the sun. Somewhere in the Milky Way. Full of worrisome lifeforms that can't seem to get it together.
Ripe for the taking. Easy prey.
Airdale
Hi Airdale,
Well, I'll be hitting the big 70 in December. I think one of the problems we old farts have is that we have experienced other realities and it is impossible to recreate those realities in younger people's minds. We have seen the Borg or Borg-like creatures in the past. Because of this we have a far better idea of what is coming down. Granted our idea my be somewhat off, but I don't think that much.
I think much of the problem is that younger people cannot envision a different life/society since all they know is "today's" reality. Given this I hold out little hope.
Todd
I am 39 years old and grew up among Yuppyism to the max. I was raised in the heart of Silicon Valley and attended a private college prep school.
How is it that I see things so differently than my peers? It may be because I am a biologist, and a specific type. I traveled extensively in other parts of the world, including ca. 16 non-OEDC countries, where life is a lot different. First hand I could see that "our way of life" is unique and highly dependent upon vapid consumerism of non-renewable resources and destruction of life support systems like forests, soils, tidal marshes...etc.
I would go looking for forests to study and along the way I'd have to pass through the Borg-esque landscape and ask "What's this all for?"
Am I angry about it? Yes. But I am also practical about it and looking for a way to spend less of my time being pissed off and more of it accepting the situation and making the best of it.
Jason,
I agree that people will adapt. But what I was alluding to was that younger people never lived when there was no TV, when even middle class families had few appliances (we had a toaster, stove, wringer washing machine and a refrigerator), when few cars had radios muchless AC, etc. They have never lived during a time of global war when there was rationing.
They probably never saw the impact the Depression had on families including our parents. My dad's father went from lower upper class to upper poor when he lost his business while my mom's family had two other families living under the same roof. One time the only food my folks had was a can of peaches.
Now I grant that this is still far from a third world existence. Still, in my case, these things have profoundly influenced my life and world view. "The situation" as you call it still isn't here but likely in a few years. Those of us who are older can look back and say, "Life wasn't that bad." But what about the millions of people who have only experienced the "good times?" They have no frame of reference.
Todd
My grandparents were born during the Great Depression but my parents were born during the late 1940s. I think 50s and early 60s America had a great influence on their perspective. I have made no inroads into their belief that we go through ups and downs but always come out alright. I think a great work of art that exemplifies this cohort in America (Baby Boomers) is Donald Fagen's Album The Nightfly. (Note that this was written to express irony).
http://www.steelydan.com/lyrnightfly.html
The opening song goes:
I.G.Y.
Standing tough under stars and stripes
We can tell
This dream's in sight
You've got to admit it
At this point in time that it's clear
The future looks bright
On that train all graphite and glitter
Undersea by rail
Ninety minutes from New York to Paris
Well by seventy-six we'll be A.O.K.
What a beautiful world this will be
What a glorious time to be free
Get your ticket to that wheel in space
While there's time
The fix is in
You'll be a witness to that game of chance in the sky
You know we've got to win
Here at home we'll play in the city
Powered by the sun
Perfect weather for a streamlined world
There'll be spandex jackets one for everyone
What a beautiful world this will be
What a glorious time to be free
On that train all graphite and glitter
Undersea by rail
Ninety minutes from New York to Paris
(More leisure time for artists everywhere)
A just machine to make big decisions
Programmed by fellows with compassion and vision
We'll be clean when their work is done
We'll be eternally free yes and eternally young
What a beautiful world this will be
What a glorious time to be free
Yeah, I'm just 25. So I will try and give you an idea of how this younger generation views things.
I can accept relying on public transport instead of cars or even walking. I can accept a limited choice of food and rationing, I can accept hardships, don't think the new generation is weak. ;)
But take away my computers, mobiles phone and TV, and I'll be joining the revolt. ;)
They are this generations communication, art and knowledge, the medium they are contained in, what is a human being without art and knowledge? It's comparable to asking past generations to do without books, plays and music.
Hi Jason,
Thanks for this article and for all your posts.
Somewhere you mentioned that you'd been part of a group that got your town's water treatment system connected to solar panels (or some other form of "distributed energy" - sorry for the rush, or I'd look for your post).
Have you written anywhere in more detail about your efforts? (How you organized things, how it's going, how you convinced the...was it City Council?...to think, let alone act, along these lines?)
I'd be very interested in specifics.
You can check out: www.willitseconomiclocalization.org
It is a local non-profit that started after I began showing End of Suburbia and leading discussions. The story is covered a bit in the movie Escape from Suburbia and you can look me up on www.globalpublicmedia.com where I explain what we have done.
Todd,
I'm a youngish 42 and have a very clear vision of what's coming down the pike. However, with rare excpetion my family and friends think I am a class A wingnut even as the story unfolds before their eyes.
Vermonster on leased 90 acre farm. Sounds wacko but they say possesion is 95% of the law.
Todd, I had no idea you were this "experienced." You write, well, "younger" or something. Perhaps it's the clean living? Anyhow, just wanted to say I enjoy your posts and hope you continue.
"Does anyone remember 'silver certificates'?"
Yes I do remember, as a matter of fact, I remember you couldnt actually redeem them for silver. No person ever actually went to one of the Fed brances or treasury and did so...cause you couldnt. Sure some coins had a smidgen of silver in them. Not pennies or nickles mind you, just dimes, quarters and silver dollar coins. Careful how you remember history, not recognising where youve been, leads to not knowing where you're going.
No person ever actually went to one of the Fed brances or treasury and did so...cause you couldnt.
http://www.apmex.com/Product/24291/1_in_Silver_Shot_Nuggets_7734_Silver_...
Sure some coins had a smidgen of silver in them. Not pennies or nickles mind you, just dimes, quarters and silver dollar coins.
.7723 oz per dollar of face value was 'a smidgen'?
Careful how you remember history, not recognising where youve been, leads to not knowing where you're going.
Correctness counts too.
Thanks for pointing out the correctedness.
I remember well my fathers very large number of silver dollars. We all had some of them. I still have some.
If the silver certificate stated...to give the bearer silver then I am pretty sure that is exactly what the bank had to do. Though I never actually demanded it but when I exchanged the paper dollar or whatever for change then in my mind there was precious metal in the coinage.
To this day I freely give away the newish zany quarter and now nickels but I keep all quarters that I get prior to the new 'state' related issues. Call me silly. Someday we may need to smelt some of this stuff down.
I recall that in the past one could actually make a silver item out of coins. Or a silversmith could.
Right now I am collecting lead and copper when I may. Left the auction last Saturday with about 200 lbs of wheel weights and other ingots. Plus a melting pot and dipper, which I already had one of anyway.
Having some smithing skills I love metal. Of all kinds. Intend to start learning how to make cowbells.
Airdale
AIRDALE: The local bank wouldnt redeem the silver certificates. You had to go to the treasury and it was at the treasures secretary's discretion. Iam trying hard to explain it was a scam...the goverment does it everyday, has done it all the time. Please believe me when I tell you..dont believe some ink on a piece of paper with a portraite of a dead guy on it. Learn to make draw knives drill bits, axe heads, heck, make me an Eastwing hammer for less than $22.00. Study how to draw and temper, look into damascus steel folding, stock up on chemicals to case harden
purchase simonds files ( the best) and Cleveland twist drills again (the best) But dont think the gov honors its promises or Indians will point and laugh at you.
Hi Airdale, Todd. I turned 70 this year also. I remember as a kid taking a "silver certificate" to a bank and asking for silver, just to see what would happen. They gave me a silver dollar. That was fun.
If it was pre 1964, they would have given you a silver dollar in exchange for 100 copper pennies. Please don't be disingenous. We all know the silver certs were a scam. The reason the BANK gave you a silver dollar, wasnt because of the silver certificate....besides, eric posted a site that described how the treasury was responsible and the minimum allowed to be redeemed was $10.00 and at the TREASURY and the SEC discretion. Do you really think, the guy who's signature is on the bills, will meet and greet you at a window and determine if he will give some silver for a silver note?
The U.S gov also has printed "marijuana tax stamps" but no person has ever obtained one as the gov refuses to issue them. The law was very ambiguous concerning redemption of silver certificates...such as no less ammounts than $10.00 and at the discretion of the treasurer. The entire scam is still a point of argument and discussion to this very day....except it was a scam and uncontitutional. The silver act itself was done in secret to remove America coinage from the gold standard. Ive known countless individuals who hocked jewlery or silverware and pawned all manner of items, Ive never known, met, heard of or read about any who redeemed silver certs for silver...nuggets or coins or otherwise.
The U.S gov also has printed "marijuana tax stamps" but no person has ever obtained one as the gov refuses to issue them.
http://marijuanastamps.com/state-stamps.htm says stamps have been issued.
http://marijuanastamps.com/federal-stamps.htm
For the used examples to exist, someone had to have obtained them.
eric: If you need to perform such feats of rhetorical gymnastics, spliting a hair into quarks...
(few examples of used stamps exist)
The system WAS NEVER IMPLIMENTED...not just "never truely"
Just forget I mentioned anything....keep thinking the gov exchanged silver at a local bank because you had a silver cert note. Believe the gov gave out Mary Jane tax stamps....HEMP is quite different then marijuana mind you...but forget I pointed that out...you will just use semantics...when anyone can see its a statement of fact, unless they drank the bong water. Jeesh, John and Mary.
Reform of the money system is a necessary but not sufficient condition for ending the growth orientation of our economy. It is possible to imagine a system of interest free public finance which would draw down finite resources even faster than our current system of interest based private finance. After all if the price of innovation includes paying for rich people’s yachts and ski condos, then this excess cost acts as a drag innovation.
As long as the financial security of families and individuals is based primarily on private savings (with or without interest) a growth orientation of the economy will continue. The money you earn represents the economic value you created. If you do not take the full value of somebody else’s output in exchange, then factories close down and people lose their jobs. When you save money, somebody else (retirees, businesses expanding their productive capacity, etc.) has to be spending, or we have a recession.
The only real store of value is the economic community and the infrastructure and the resource base which supports it. If we want to stop destroying the commons we have to reach a point where our future security is based primarily on the community whom we are supporting by our efforts, and who will support us in our turn when our productivity declines.
The community as a store of value has always been an objective reality whether we recognize it or not. When John D. Rockerfeller retired he was able to go on living comfortably because men and women got up out of bed every morning, went to their jobs, and produced stuff which they gave to him. If they had collectively decided to stop doing so, his financial ‘store of wealth’ would have vanished in an instant.
Voluntary simplicity and mutual support is the only route to ecological sanity. If we have to go all the way back to neolithic villages where it obvious to our puny social intelligence that the land within a few miles of where we live and the people who work it are the real source of our security, then so be it. However, I refuse to completely abandon hope that social intelligence can be applied to a more complex system of economic production.
This is so true!
Every time I read about, say, Norway and their 'sovereign wealth' fund that they have amassed from oil revenue, I wonder just how much will it be worth in the resource-constrained future. Hence the impetus toward survivalist mentality by many. While it's true that actual resources such as tools and skills constitute a more 'real' measure of wealth, they have their limits too. We are all ultimately dependent on a larger human community. Even the legendary Sylvan Hart had to pack his mule out to get gunpowder and salt.
Roger K,
I agree! You make some good points. It this age of huge businesses and "he who dies with the most toys wins", we have forgotten community.
Hmm.
It always bothers me when people talk about the community. I see the foundation of morality to be about respecting the individual first, it is dangerous to place a community on a pedestal. Our society is all about the individual, and I still believe this is the right way things should be. Loving humanity means ensuring that each individual has the maximum opportunity to choose it's own way and beliefs, and to maximise it's potential.
The borg in star trek are infact a symbol of a repressive non-pluristic community. The borg are if anything intended as a criticism of socialism and communism.
There's a balance somewhere. We have probably become too individualistic. I believe individuals need a sense of respect and even duty to community while aspiring to have tolerance of individual differences. In fact, individual uniqueness is what makes community interactions interesting and permits social groups to change.
Does it bother you when people talk about the law of gravity? You may not like being bound to the earth, but that does not change the nature of physical reality. Believe me I am not putting the community on a pedestal. I am largely a loner who can spend large amounts of time by myself far from the madding crowd and be perfectly happy. But I also objectively realize that I am dependent on other human beings. I am not suggesting that we should spend every waking hour thinking about benefit of the community. However, if we are going to provide for our material need in an ecologically sound manner some kind of social intelligence is needed. I don’t think that I should be accused of being a socialist control freak just because I suggest that intelligent cooperation between human beings is good idea.
Fair enough.
As Thomas Hobbes said, there is a social contract to prevent life being a war of all vs all.
I just tend to be suspicious of people who are pushing 'community' and groupism for the reasons I said above.
I really advise to watch this excellent documentary about our financial system and its implications :
http://video.google.com/videoplay?docid=7065205277695921912
Our monetary system is equivalent to disguised enslavement.
Best regards,
In June I wrote a blog post called "Can you say contractflation?". Subsequently I have written extensively about the relationship between debt, wealth production, and energy.
Question Everything
George
THIS IS THE END OF THE WORLD AS WE KNOW IT
Many people are looking at the DOLLAR RISE as a GOOD SIGN....This is furthest from the truth. Jim Willie CB who has forcasting the collapse of the DOLLAR and the MARKETS makes a point that the reason the US DOLLAR is rising is due to the fact that the largest HEDGE FUND on the earth, which is the UNITED STATES is being LIQUIDATED out of POSTIONS...when companies, Foreign funds and Govt's pull their POSTIONS out of the USA, the DOLLAR GOES up as DOLLARS are needed to CLOSE OUT THESE POSTIONS.
Jim Willie says this is likened to the TSNUAMI that hit INDONESIA and SUMATRA in 2005. Before the BIG TIDAL WAVE HIT, the TIDE went out. This is the SUCKING OF POSTIONS by FOREIGNERS OUT OF THE USA. Traders who think the DOLLAR is heading higher and are getting in on the SPECULATIVE TRADE are like the poor people who got LURED to the BEACH in amazement as the TIDE got SWEPT out...Thus after the postions are settled.....the WAVE OF WORTHLESS DOLLARS comes back on our shores collapsing the DOLLARS WORTH.
I recommend you listening to JIM WILLIE's Short INTERVIEW:
http://www.kereport.com/DailyRadio/Daily100608-2.mp3
Furthermore, Dimtry Orlov's 5 stages of COLLAPSE are becoming a reality. Right now the UNITED STATES is in STAGE 1 heading into STAGE 2. Here are the 5 stages:
Stages of Collapse
Stage 1: Financial collapse. Faith in "business as usual" is lost. The future is no longer assumed resemble the past in any way that allows risk to be assessed and financial assets to be guaranteed. Financial institutions become insolvent; savings are wiped out, and access to capital is lost.
Stage 2: Commercial collapse. Faith that "the market shall provide" is lost. Money is devalued and/or becomes scarce, commodities are hoarded, import and retail chains break down, and widespread shortages of survival necessities become the norm.
Stage 3: Political collapse. Faith that "the government will take care of you" is lost. As official attempts to mitigate widespread loss of access to commercial sources of survival necessities fail to make a difference, the political establishment loses legitimacy and relevance.
Stage 4: Social collapse. Faith that "your people will take care of you" is lost, as local social institutions, be they charities or other groups that rush in to fill the power vacuum run out of resources or fail through internal conflict.
Stage 5: Cultural collapse. Faith in the goodness of humanity is lost. People lose their capacity for "kindness, generosity, consideration, affection, honesty, hospitality, compassion, charity" (Turnbull, The Mountain People). Families disband and compete as individuals for scarce resources. The new motto becomes "May you die today so that I die tomorrow" (Solzhenitsyn, The Gulag Archipelago). There may even be some cannibalism.
Realize when we get into STAGE 2, PAPER MONEY becomes DEVALUED and or SCARCE, COMMODITIES will be HOARDED......GOLD, SILVER, OIL, GASOLINE, FOOD, WATER, and etc. Even though prices of commodities have been CLOBBERED this is in the PAPER MARKETS. Physical markets for SILVER AND GOLD are so TIGHT PREMIUMS PAID ABOVE SPOT are extremely high.
Take for example SILVER....the spot price on the COMEX is about $11....but if you CAN FIND ANY SMALL PHYSICAL COINS, BARS or whatever are priced from $2.50 above spot for 100 oz bars to $5.00 for SILVER EAGLES. GOLD 1 oz KRUGGERANDS are $70 over SPOT. So even though the PAPER MARKETS of the COMEX are showing LOWER PRICES....the PHSYICAL MARKETS are seizing up...that is there is very little to find and the premiums are skyrocketing. This is the DEFAULT OF PAPER...occuring right before our eyes.
Jim Willie states in his INTERVIEW posted above, that certain Countries like MIDDLE EASTERN, CHINA, and RUSSIA are going to a GOLD BACKED CURRENCY. This means that the US DOLLAR DENOMINATED CURRENCY will be WORTHLESS. That means no longer can the USA send over WORTHLESS FINANCIAL TOXIC INSTRUMENTS for OIL, GOODS, and SERVICES anymore. How are we going to AFFORD OIL and GOODS....we won't....this is the Realization that the COLLAPSE of our SUBURBAN INFRASTUCTURE will take place at a RAPID PACE.
It might be WISE to BUY PHYSICAL GOLD and SILVER BULLION, BULK FOOD and some CASH DOLLARS.
We live in INTERESTING TIMES.
This style of posting brings to mind immediately the Crackpot Index...
(I'm not saying anything about the correctness of the post; just that even attempting to read it is a very daunting challenge. Not sure it's worth it...)
I've lived happily for years at 4.5. I don't see family dissolving soon - quite the opposite actually
These 5 stages seem out of order to me. The fifth stage particularly. Except for the cannibalism....all the other stuff has already taken place.
People lose their capacity for "kindness, generosity, consideration, affection, honesty, hospitality, compassion, charity"....check
Families disband and compete as individuals for scarce resources....check
"May you die today so that I die tomorrow" ...check
The first on about capacity for kindness....Been Christmas shopping in the past decade? How about trying to hitchhike a ride lately?...you get my point.
The second one about families...You don't think divorce, prenuptuals, the break up of the nuclear family unit is apparent or well documented? Visit a hospital and ask the nurse staff how many patients with family...never get a visitor, or phone call of inquiry.
The third one...Who gets sent to war? The rich or the poor? Who is employed in those occupations that are detrimental to health or sanity? Who lives next to the park and who lives next to the landfill?
Cannibalism....okay...ya got me there but I will be watching for it, okay?
As usual, Jim Willie makes very good points-thanks for the link.
Gail: Great article. The Borg are a good allegory for this situation and Jason was wise to use it.
"Resistance is futile..." is exactly like saying...
"We have to act and bail out Wallstreet, before it affects maninstreet"
The collective thought imposed on the masses is also quite apparent. When the population is told repeatedly " A weak dollar benefits all Americans and America in general".....Not one pundit or talking head, not a single Borg drone, dares ask, "Why don't we make it worthless and become all the more benefitted?"...When talking head and pundits express.."The market fell slightly today, as there were more sellers than buyers" No Borg dares imply its impossible or asks.."By a factor of how many, were there less buyers than sellers?"
The Borg were force fed via tubes...The world today is force fed via THE TUBE (TV). The Borg were ignorant and totally ignored threats to their collective...unless the threat was deemed dangerous to only the Queen Borg herself....Take note how individual investors, institutions, regions, entire countries, are sacrificed, because the Central Contollers don't assess that risk as a direct danger to themselves....its scary how art mimics reality...or wait...reality mimics art..Damn it, Iam on a endless loop again.
I think a closer analogy would be the Matrix. We are born into it and we don't question our economic reality unless someone awakens us or we awaken to our situation on our own. We are slaves to the system unless we choose to take steps to unplug from it.
I don't think its wise for a community of people who strive for an understanding of energy sources to reference a work of fiction that so blatantly insults the second law of thermodynamics.
And in Star Trek they routinely surpass the speed of light.
With anti-matter produced from energy derived from hydrogen fusion. ;) Yes star trek is a hydrogen economy. :P
There is a theoretical (conceptual) basis for traveling faster than light. That being said, pushing the limits of theoretical science for science fiction is alot different than ignoring simple logic.
I am not happy at this point, that I chose to take the red pill...it sucks to be right.
people, in five years time you will be:
A: DEAD
B: REFUGEE
C: CHIPPED with RFID - yes, out with the old money, in with the new!!
did you know it is theoretically possible to modulate human brainwaves with radio frequencies?
I LOVE BIG BROTHER!!!
The real problem is that the fraction in our fractional reserve banking system has been changed.............We will have to deleverage.
This is at least part of the problem. Banks need to put all the things that slipped off the balance sheet back on. Hedge funds with no capital requirements may need some actual regulation--less leverage. The there are all the derivatives and swaps.
I am still unconvinced by this assertion, since growth will also occur by increased resource utilisation, or what you call the real economy. Obviously the economy, money supply, wealth, resource utilisation and debt are connected in some way but I don't think anyone has really understood the interconnections yet.
But I also think it is quite misguided to pin the blame on the system, and label it as evil, as your comparison with the Borg clearly tries to do. The "growth" system was chosen by people, because people desire growth. Read that again carefully. The system is the effect, not the cause. Changing the system won't help, you need to persuade people now and forever that they don't need growth.
We are the Borg. That's not a quote, I actually mean, people are the Borg. We actually do intend to take over the Universe, the goal being to assimilate everything to support the human biomass. It's in our genes.
For arguments sake, taking your assumptions for granted, what is the solution? Do we just simply ban any form of lending, and then any growth must occur organically, thus solving the problem at a stroke? If it's that easy let's pass the law tomorrow.
I am pursuaded because I have a couple of brain cells which are actually functioning. 3% growth for a thousand years would expand our economy by a factor of over 6 trillion. This expansion is not going to happen. We cannot even figure out how to transport human beings to Mars without being killed by solar radiation, let alone figuring over how to take over the universe. The reindeer on St. Matthew island liked procreating and look where it got them. I don't know if you are really stupid enough to believe that exponential growth can continue for centuries and millenia into the future, or if you are just egostistical enough to hope that growth will last for your lifetime, and some other poor set of bastards will be left holding the bag when the overshoot disaster arrives.
You are stupid enough to think I believe in exponential growth. I said nothing of the sort. I'm actually saying the opposite. So maybe you're not as smart as you think? Kinda proves my point.
But the point is you need to persuade everyone, and forever, that continued growth is not feasible (which obviously it isn't, for the stupid). Otherwise some small group will decide to grow and take over and we are back where we started. Remember that little group who left Europe and set up in a new land called "America"? It is a very simple evolutionary principle.
So it's option two. You think that we should party on and hope that some other set of poor bastards gets stuck with having to deal have to deal with the effects of resource overshoot.
However, I do not really agree with you that everyone (meaning everyone in the world) has to be persuaded to abandon the goal of growth in order to make any difference. If we in the United States abandoned growth as a goal and concentrated on building energy efficient housing, and energy efficient foods systems which preserve soil and recyle nutrient, etc. these changes would improve our long term prospects for suvival even if the rest of the world decided to continue the consumer feeding frenzy.
Before the creation of debt-based money there were surely societies that grew too big for their eco-britches and collapsed. In a cheap energy environment the money system allows our society to do the same at a rate and scale unsurpassed by previous civilizations and empires. And now, even if we recognized limits and wanted to scale back the money system doesn't allow us to do that. That's a key point--unless we change the way money is created and used we will always strive to overshoot even further.
You are giving me a chicken and egg question re. persuade people they don't need growth. A cultural anthropologist would be better than myself here, but I see people as conforming to social norms that permitted their culture to survive and grow over time. These norms may no longer serve people in the present, but because they worked in the past and became institutionalized and socialized they are adhered to. Tradition is strong, but traditions also spring from how well they permitted past generations to compete.
Go back to a time when hunter-gatherer tribes roamed North America. These were seasonally migrant people. They had to make a camp for a few months, then pack up and make another camp elsewhere. Where I live these people were called Pomos, and inland tribes also had zones on the coast they would go to. In this situation the tradition calls for not acquiring too many material resources because they are just a burden if you are going to abandon a camp and haul your stuff 30 miles by foot.
Now the Pomo live in the USA and they run gaming casinos and live in suburban wonderland with all the accoutrements that implies.
So do we just ban debt then?
No. I never said that. There can be interest free debt. And even banks can get in on it!
http://en.wikipedia.org/wiki/JAK_members_bank
Well I can try and answer some of that.
Money supply and debt are directly connected. Debt is infact the way money supply is grown.
Here's how it works, the federal reserve gets 10 billion dollars worth of bonds from the government. This money is then loaned to private banks. Now when a private bank gives out loans it doesn't actually have to have the money it is lending out. (as crazy as that sounds) Banks are only required to have 10% of the money that they lend out. So a bank can lend out $90 billion if it has $10 billion in assets.
And this is how the system works essentially, new money can be created as debt! Yes that's right, banks can create money out of thin air to 9x the value of their assets. And hence why inflation exists, as money supply is enlarged by ever increasing debt, and this inflation also drives down the burden of the existing debt.
And if you run out of resource,s you're going to have high inflation and a slowing economy. Obviously an economy has to reduce activity with fewer resources, or replace those resources. Also though, the banking sector keeps creating new money as debt, without growth of production of resources and goods, there are less ways to make use of the increase in money supply, hence what you get is high inflation.
However, there is a need to pay interest on this debt money created out of thin air. This is the main assumption of growth that's built into the system, interest. If money is created from debt, and all debt has interest, ever more debt to cover both debt and interest is required. Economic growth helps keep inflation low. The consequences of no growth to the modern banking system would be, a huge increase to the inflation rate. But if the banking sector collapses, if debt goes beyond what can be sustained, what you get is deflation as the money supply shrinks.
I'm not quite sure what the consequences of massive amount of inflation or deflation are however.
Hello TODers,
Other lifeforms don't assimilate in the Borg, they just Dieoff:
http://www.washingtonpost.com/wp-dyn/content/article/2008/10/06/AR200810...
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Survey Finds 'Bleak Picture' for World's Mammals
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Recall my earlier speculative posting series where we universally start loping off fingers based on extinction rates of other species. This new cultural 'countdown' process will make everyone aware of our global destruction, and help promote radical change.
The good thing is that there is no way to cheat on this finger system -->"show me your hands". If everyone on the planet is moving to only eight fingers because we stupidly let draft animals, dogs, and whales go extinct [bees & bats going extinct = earlier loss of everyone's pinky finger], it won't be possible for someone with nine fingers to hide the extra digit for very long.
IMO, this 'countdown' to Optimal Overshoot Decline will force the Borg to collapse long before we are all reduced to just having two stumps. It will save countless species to help minimize the ecological Undershoot phase of what lies ahead.
Bob Shaw in Phx, Az Are Humans Smarter than Yeast?
Recall the Jay Hanson 'Requiem' Quote: "Trapped in obsolete belief systems, Americans won't even know why their society disintegrated."
http://dieoff.org/page181.htm
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Requiem
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Never forget Tadeusz Borowski, #119198. If the Germans had all started loping off their fingers as the various groups started to disappear-->Hitler would have been overthrown very early.
http://dieoff.org/page226.htm
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THIS WAY FOR THE GAS, LADIES AND GENTLEMEN
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'Counting down' is a way to break out of our Obsolete Belief Systems. Recall that I volunteered to join with Bush and Putin, in a globally televised event, of us three being the very first to start this new cultural paradigm shift for everyone. IMO, these leaders don't have the nerve to follow through, but do see the need for an idea like this, or some variation thereof, to protect our ecosystem.
Fully convertible currency is unstable and subject to periods of vicious deflation and unemployment. It was abandoned for a reason.
That isn't to say that the current system is better, but it would be pointless to exchange one set of unworkable problems for another.
One of the underlying assumptions of fractional reserve banking is that the money created via credit is put to productive us. In fact, it has to be sufficiently productive to pay back the credit with interest. If 'the market' is so dysfunctional as to signal that suburban sprawl, CDO's and Maserati for the boyz on Wall St. is productive us, then the problem is not banking, it's the context in which the banking operates.
Re. the context in which the banking system operates.
The study of economics used to be called political economy and asked questions such as "What is the purpose of life" and then "How might the allocation of scarce resources" be used to serve that purpose.
But questions of purpose aren't easy to solve mathematically, and so economists were encouraged to avoid "normative" statements, or questions of value and purpose and judgment of good and evil, so to speak. See: http://ingrimayne.com/econ/Introduction/Normativ.html
What happened next is that economists realized that they still needed their policies and equations to be about "something." So an overly simplistic framework for modern economics was concocted: 1) humans are basically happy when they can consume stuff, 2) economic policy should therefore strive to maximize the amount of stuff available to consume.
These supposedly non-normative economists had, by default, decided that the purpose of life was to consume and that resources should be allocated to that end above all others.
What is unstable is the combination of a precious metals-based currency AND a fractional reserve banking system. Because the gold standard prevents the existence of a lender of last resort, and there's no way to stem a credit bust and its most acute form, a bank run.
In contrast, the combination of a precious metals-based currency AND a 100% reserve banking system is perfectly stable (though Simons (1934) and Fisher (1935) originally proposed the 100% reserve banking system to be used with fiat money).
In this system banks do not lend, i.e. they keep as cash in their reserves the full sums left on deposit with them. Accordingly, they do not pay interest on their accounts, and they cover their operating expenses and make a profit by charging a fee for their service.
The main benefit of this system, when compared to fractional reserve banking, is the avoidance of credit booms and busts (M1 would be equal to M0 at all times), including the most acute form of credit busts, bank runs (why rushing to withdraw deposits if all the money deposited is always in the bank?). I.e., you wouldn't have had the Depression because you wouldn't have had the Roaring Twenties in the first place.
Fisher, Irving (1935), 100% Money. New York: Adelphi Company.
Simons, Henry C. (1934), "A Positive Program for Laissez Faire: Some Proposals for a Liberal Economic Policy". In H. D. Gideonse, ed. Public Policy Pamphlet No. 15. Chicago
Simons, Henry C. (1936), "Rules Versus Authorities in Monetary Policy". Journal of Political Economy. (February, pp. 1-30.)
On growth: KCBS radio in San Francisco as an In Depth feature. Over the weekend they spoke with UC-Berkeley business professor James Wilcox about the current financial troubles.
He outright said that the economy will be better for our children, just as our economy is better for us than our parents and grandparents. There was absolutely no inkling from him that we just might be running into hard resource limits. Because the economy over time has grown over the past millennium, it will continue to grow forever and forever, amen. This is just a short term "correction."
Bleh.
Interest doesn’t necessarily require a growing economy. There was interest before Jesus in the code of Hammurabi. There were very high rates of real interest during the Great Depression. http://www.sjsu.edu/faculty/watkins/dep1929.htm. Although I imagine barter and alternative means of exchange were also used at that time. And the high real rates are considered part of the cause of the Great Depression.
The current political system requires growth. If an elected official says we can’t afford current social security payouts in the future because there will be no growth to pay for it then he/she will not be reelected. If there is a recession during an election they are likely to voted out of office so they borrow to push the problem back.
I believe the high interest rate policy of the Hoover admin is considered one of the prime reasons why the depression lasted so long. The economy contracted about one third during that period as high interest rates essentially froze lending. This is why today you see the Fed keeping rates low on their end, they studied the policies of the Fed of long ago and are avoiding them. However, banks are still not lending to each other so the actual inter bank rates are high.
Low interest rates encourage people to accept loans. This puts money into circulation faster, though with a relatively low amount of interest to pay back. It still requires an expansion in the future because the expansion is principal+interest. If interest is low but a lot of principal exists...that's still a lot to pay back. E.g., 5% interest on $1000 = 1050.
High interest rates discourages people from accepting loans. Less money is placed into circulation but it comes with a higher interest penalty. So, low amount of principal plus high interest still requires future expansion. E.g., 15% interest on 920 = $1058.
The Fed totally messed up. They created a housing and debt bubble with cheap interest that imploded.
An implosion is inevitable you can't have debt increasing exponentially forever, but this current crisis, is the fault of the federal reserves policies.
What if that was actually a semi-optimal solution, and we have opportunities for worse? Is it not hubris to presume to know better without proven cases in support?
Well actually the only answer I came up with was a controlled implosion.
The problem is they are not doing anything about electric rail higher density living alternative energy etc etc.
The have no answer and are effectively accidentally doing the controlled implosion. Actually they do have and answer they want to ensure the current elite can transfer to the post implosion world that all they care about. Right now all that matter is ensuring the super rich stay super rich.
Remember too, that as resources deplete, we are probably talking about a shrinking economy. This would be truly a unique experience--much worse than in Jesus time.
http://biz.yahoo.com/cnnm/081006/100608_depression_poll.html
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Poll: Almost 6 of 10 Americans see depression as likely
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Hopefully our Peak Outreach efforts will make them home in on websites such as TOD,EB,LATOC,DIEOFF.ORG,etc. WT's ELP, and Alan Drake's RR & TODevelopment ideas could really use a goose of TOD newbies to help push the paradigm shift along.
Have you hugged your bag of NPK today? Don't forget to have a wheelbarrow and bicycle for every family member!
Consider the biblical concept of the Jubilee. It was essentially an economic reset which by canceling all debts allowed for a painless deflation of the currency and a restart of growth from an equitable base. Under Mosaic law the charging of interest was not allowed but the practice of being a silent partner in another's business in exchange for a financial investment was allowed. For instance a farmer's oxen die so he goes to an ox breeder and they make a deal for a pair of oxen in exchange for a percentage of the farmers future crops forever or until he is bought out. In the event of a crop failure the ox breeder gets the farmer's land. If the ox breeder does that with enough neighbors he could control much more of the food supply than any of his neighbors and becomes rich while having to do very little physical work. He could corner the area's food market and control prices all to his advantage at his neighbors expense. He could actually give up ox breeding entirely and instead simply sell his share of everyone else's productivity. This could go on for generation after generation. Except that every so often the Torah required that those who lost land would have ownership returned to them. It was supposed to prevent the few from becoming to rich and powerful enough to manipulate markets at the expense of others. It never worked out that way due to the desperation of the needy and the greed of the rich. There were always ways around the edges of the law that the clever would create. To a limited extent modern bankruptcy laws do something like that. Except you don't get your foreclosed land back.
"There were always ways around the edges of the law that the clever would create."
I cant help but notice that today's prevailing acceptance that "clever" or deviousness and deception are equated with intellect. I know you werent implying this. I personally dont believe that guile and trickery are comparable to intelligence. We even accept the term "Evil Genius" with nonchalance. But you are absolutley correct...the Torah, Talmud...are full of it. Trickery to forfeit ones birthright for a mess of pottage....to ones brother...the deciever.
I think about this often as I sit in traffic at one of the congestion points on my commute. There are always a few who run all the way up along the line of traffic to cut in right before the merge. They invariably think they are so very clever, when in fact being an asshole is really very easy.
This assertion is false. As long as paper-currency is not formally linked to a physical unit its supply can increase infinitely. It is also false that paper-currency has to necessarily grow exponentially.
Interestingly, the concluding section contradicts this faulty logic:
Just about the only way I can understand anything complicated is to put a pen to a piece of paper. Until I do that and start drawing data flows and feedbacks and fiddling with numbers, I am at a loss. What Luis adds here shows how difficult it is to keep your logic straight without formally qualifying your statements.
Correct.
In the fractional reserve banking system, where money is loaned into existence for an interest, the amount of money tends to grow exponentially. As I pointed out in my long post above, the existence of moderately risk-free interest-bearing debt requires that the total monetary stock grows at a rate no lower than the interest rate. That's why interest was forbidden in pure precious metals-based monetary systems.
Yet, M0, M1, M2 and M3 grow at different rates, and what holds the system together is trust. When trust in private banks vanishes, there is a bank run and M1, M2 and M3 tend to converge down to M0, UNLESS the central bank is willing to print however much it takes to have M0 converge UP to M1, then M2, and if necessary M3. This is the usual path followed by central banks, and it brings about the outcome in the second block quote in your comment, with the important note that it is not just owners of "dollars" who would panic, as the euro, gbp, yen, aussie, etc. are also being printed fast and furiously. The only logical escape is to currencies that cannot be printed, a topic I addressed in a previous comment.
I can't read your comments right now, but they surely look informative.
What impedes a central bank (or a government) from directly expanding M1, M2 and even M3?
Meaning: that have a fixed to relation to a physical entity. It will have to be so.
The definitions of Mx. A central bank creates M0. Fractional reserve banks' lending multiplies it to M1 (checking accounts), M2 (M1 + savings accounts), M3 (M2 + time deposits).
Note that the exact definitions of M1..3 differ by country.
Ok, let's stick to that definition (US I think). In Europe there's no M0 and M2 differs from M3 by the deposit time length.
My quesion was about savings. Governments can (and do) issue savings bonds, doesn't that enter in the M2 or M3 category? If a government decides to offer savings bonds with high interest rates, I'd say that translates into an expansion of M2/3. Or isn't?
I don't believe a fiat (paper) currency has to grow exponentially, but if it comes with interest attached then it does.
The trouble seems to arise because the future is tricky to predict. When issuing currency in the present a whole set of assumptions about the future are embedded. What will the rate of economic growth be, and inflation be, etc.? This is why long term interest rates tend to be higher than overnight rates. The odds of something going wrong with a 30 year loan are higher, so the higher interest needs to capture the risk inherent in an unknowable future.
Because system stability requires just the right amount of credit, mistakes are likely to be made, and if mistakes are made failure can be swift and catastrophic. And because growth in the money supply also assumes growth in the real economy, we know that this can't go on forever.
No it does not. In that case there would never be deflation.
Money supply expands faster when interest rates are low and slower when interest rates are high (if high enough, money supply contracts).
Tell me about it.
When issuing currency banks care about the debtor's pay check. When issuing currency central banks care about inflation and foreign debt. No one is thinking about the future, growth is taken as a fact.
We are not talking of planified economics here.
I don't, and I'd like you to explain me why in case the economy stops growing in physical terms fiat currency supply has to stop growing to.
Theoretically I grant that a fiat money supply doesn't HAVE to equate with the supply of real world goods and services. In fact, I suspect a lot of money out there right now has been created in order for the financial industry to have something to play with. People making profit exchanging Money for other forms of Money and never really bothering to exchange Money for Commodity.
I just don't see the theoretical mismatch between money supply and the real world lasting all that long because bubbles will crash and/or everything will get sucked down into a deflationary cycle.
Two problems:
a) You haven't yet provided the mechanism by which money supply has to stop growing once the flux of energy and matter to the economy stops growing. The fact that "you don't see how" doesn't mean it can't;
b) By insisting in this logic you are invalidating all your conclusions about inflation.
I guess I am assuming the velocity of money is remaining constant, which doesn't need to be the case. Just look at what's going on now.
It seems that I am not the only one who feels like being in a pretty thrilling 5D-Science Fiction Movie.
Okay, thanks for the entertainment. But now I'd feel more comfortable if I'd find the fast forward button to the Happy End. Did anyone find it?
Don't we wish!
T mobile will be releasing the android phone soon visa would like for it to be able to do contact financial transactions. In the Borg view of things you should ask the phone if you can leave your house. If you leave the house crowds of people are going to come after you because they need the phone to find work because they will be fined if they don't do some kind of work. and you have to verify that that they do the work and they get paid.
The mpos2002 point of sale terminal is a phone it reads credit cards it prints sales recipts and reads fingerprints.
M.POS China
As growth in the money system implies growth in the real economy, we become divorced from the reality of real production. We are producing goods and services based on what standard? Fiat will not cut it indefinitely. I'll keep this simple, as I am not an economist, but it seems the crack is we are basing our currency on a fantasy. The arguments for reinstating the gold standard will not fly either as we can not peg a monetary system on a commodity with little tangible value.
The idea of an interest based economy (usury) vs Sharia/Islamic/"informal" financial economy is interesting but misses the point.
I have heard some smart people ponder the idea of pegging the currency based on energy, ie: KWh or BTU's. I know it sounds abstract, but all outputs need an input dependent on energy, even real estate. If you purchase something it should be backed by the underlying essence of something not ethereal. As the author says, the problem is that money is used on a claim for real things but the money itself is not "real." Energy is real but can it be identifiable and measurable, nondependent on the sources? You build a fire - you produce Btus but the energy is wasted. You would have to capture it and produce something of value. The world runs on energy, why not peg it as such. Can a system be created that if you buy and airplane or build anything, it is backed by an underlying currency based on the KWh or Btu?
Since the article was analogous to the Borg, just the late night exasperation of a fund manager. OT - check out the juxtaposition of Dow chart 1929 -mid 40's and the Nasdaq 1990's to present. Similar, and puts us in the mid to late 30's. Doesn't bode well.
THENAGUS
On fractional reserve banking as parasitism read the research paper by Vladimir Z. Nuri:
http://www.scribd.com/doc/3123502/Fractional-Reserve-Banking-As-Economic...
" A Scientific, Mathematical, & Historical Exposé, Critique, and Manifesto Abstract: This paper looks at the history of money and its modern form from a scientific and mathematical point of view. The approach here is to emphasize simplicity. A straightforward model and algebraic formula for a large economy analogous to the ideal gas law of thermodynamics is proposed. It may be something like a new F = ma rule of the emerging econophysics field. Some implications of the equation are outlined, derived, and proved. The phenomena of counterfeiting, in inflation and deflation are analyzed for interrelations. Analogies of the economy to an ecosystem or energy system are advanced. The fundamental legitimacy of "expansion of the money supply" in particular is re-examined and challenged. From the hypotheses a major (admittedly radical) conclusion is that the modern international "fractional reserve banking system" is actually equivalent to legalized economic parasitism by private bankers. This is the case because, contrary to conventional wisdom, the proceeds of inflation are not actually spendable by the state. Also possible are forms of "economic warfare" based on the principles. Alternative systems are proposed to remediate this catastrophic flaw."
+ + +
One good book on history and ongoing development of money systems is Bernard Lietaer "The Future of Money"
“Everything has been said, and we are more than seven thousand years of human thought too late.”
~Jean de la Bruyère
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The capitalist system pre-supposes the complete separation of the labourers from all property in the means by which they can realize their labour. As soon as capitalist production is once on its own legs, it not only maintains this separation, but reproduces it on a continually extending scale. The process, therefore, that clears the way for the capitalist system, can be none other than the process which takes away from the labourer the possession of his means of production; a process that transforms, on the one hand, the social means of subsistence and of production into capital, on the other, the immediate producers into wage-labourers. The so-called primitive accumulation, therefore, is nothing else than the historical process of divorcing the producer from the means of production. It appears as primitive, because it forms the pre-historic stage of capital and of the mode of production corresponding with it.
The economic structure of capitalist society has grown out of the economic structure of feudal society. The dissolution of the latter set free the elements of the former.
The immediate producer, the labourer, could only dispose of his own person after he had ceased to be attached to the soil and ceased to be the slave, serf, or bondsman of another. To become a free seller of labour-power, who carries his commodity wherever he finds a market, he must further have escaped from the regime of the guilds, their rules for apprentices and journeymen, and the impediments of their labour regulations. Hence, the historical movement which changes the producers into wage-workers, appears, on the one hand, as their emancipation from serfdom and from the fetters of the guilds, and this side alone exists for our bourgeois historians. But, on the other hand, these new freedmen became sellers of themselves only after they had been robbed of all their own means of production, and of all the guarantees of existence afforded by the old feudal arrangements. And the history of this, their expropriation, is written in the annals of mankind in letters of blood and fire.
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The public debt becomes one of the most powerful levers of primitive accumulation. As with the stroke of an enchanter’s wand, it endows barren money with the power of breeding and thus turns it into capital, without the necessity of its exposing itself to the troubles and risks inseparable from its employment in industry or even in usury. The state-creditors actually give nothing away, for the sum lent is transformed into public bonds, easily negotiable, which go on functioning in their hands just as so much hard cash would. But further, apart from the class of lazy annuitants thus created, and from the improvised wealth of the financiers, middlemen between the government and the nation-as also apart from the tax-farmers, merchants, private manufacturers, to whom a good part of every national loan renders the service of a capital fallen from heaven-the national debt has given rise to joint-stock companies, to dealings in negotiable effects of all kinds, and to agiotage, in a word to stock-exchange gambling and the modern bankocracy.
At their birth the great banks, decorated with national titles, were only associations of private speculators, who placed themselves by the side of governments, and, thanks to the privileges they received, were in a position to advance money to the State. Hence the accumulation of the national debt has no more infallible measure than the successive rise in the stock of these banks, whose full development dates from the founding of the Bank of England in 1694. The Bank of England began with lending its money to the Government at 8%; at the same time it was empowered by Parliament to coin money out of the same capital, by lending it again to the public in the form of banknotes. It was allowed to use these notes for discounting bills, making advances on commodities, and for buying the precious metals. It was not long ere this credit-money, made by the bank itself, became. the coin in which the Bank of England made its loans to the State, and paid, on account of the State, the interest on the public debt. It was not enough that the bank gave with one hand and took back more with the other; it remained, even whilst receiving, the eternal creditor of the nation down to the last shilling advanced. Gradually it became inevitably the receptacle of the metallic hoard of the country, and the centre of gravity of all commercial credit. What effect was produced on their contemporaries by the sudden uprising of this brood of bankocrats, financiers, rentiers, brokers, stock-jobbers, &c., is proved by the writings of that time, e.g., by Bolingbroke’s. [8]
With the national debt arose an international credit system, which often conceals one of the sources of primitive accumulation in this or that people. Thus the villainies of the Venetian thieving system formed one of the secret bases of the capital-wealth of Holland to whom Venice in her decadence lent large sums of money. So also was it with Holland and England. By the beginning of the 18th century the Dutch manufactures were far outstripped. Holland had ceased to be the nation preponderant in commerce and industry. One of its main lines of business, therefore, from 1701-1776, is the lending out of enormous amounts of capital, especially to its great rival England. The same thing is going on to-day between England and the United States. A great deal of capital, which appears to-day in the United States without any certificate of birth, was yesterday, in England, the capitalised blood of children.
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As soon as this process of transformation has sufficiently decomposed the old society from top to bottom, as soon as the laborers are turned into proletarians, their means of labor into capital, as soon as the capitalist mode of production stands on its own feet, then the further socialization of labor and further transformation of the land and other means of production into socially exploited and, therefore, common means of production, as well as the further expropriation of private proprietors, takes a new form. That which is now to be expropriated is no longer the laborer working for himself, but the capitalist exploiting many laborers. This expropriation is accomplished by the action of the immanent laws of capitalistic production itself, by the centralization of capital. One capitalist always kills many. Hand in hand with this centralization, or this expropriation of many capitalists by few, develop, on an ever-extending scale, the co-operative form of the labor-process, the conscious technical application of science, the methodical cultivation of the soil, the transformation of the instruments of labor into instruments of labor only usable in common, the economizing of all means of production by their use as means of production of combined, socialized labor, the entanglement of all peoples in the net of the world-market, and with this, the international character of the capitalistic regime. Along with the constantly diminishing number of the magnates of capital, who usurp and monopolize all advantages of this process of transformation, grows the mass of misery, oppression, slavery, degradation, exploitation; but with this too grows the revolt of the working-class, a class always increasing in numbers, and disciplined, united, organized by the very mechanism of the process of capitalist production itself. The monopoly of capital becomes a fetter upon the mode of production, which has sprung up and flourished along with, and under it. Centralization of the means of production and socialization of labor at last reach a point where they become incompatible with their capitalist integument. Thus integument is burst asunder. The knell of capitalist private property sounds. The expropriators are expropriated.
http://tinyurl.com/6rf8g