Interesting Economics

[editor's note, by Stuart Staniford] This is a guest post submitted by Mike Hearn. I have some issues with this idea, but it's certainly provocative, and I'm looking forward to seeing what folks make of it.

Mike Hearn writes:

Previously on The Oil Drum, Stuart Staniford demonstrated how the system of interest on savings discourages long term thinking. But is this some intrinsic property of human nature? Or is it something we can change?

The alternative economics community has been studying questions like this for a long time, and much research has gone into what a sustainable economic system might look like. Far from being fundamental to who we are, the monetary systems we use today have evolved haphazardly over the years with no real over-arching design or guiding principles. It should come as no surprise that it has some undesirable properties. But just like our bodies, the more we learn about how they work the easier it becomes to see ways of changing them for the better.

This post will look deeper at the effects of charging interest, and present an alternative that has been widely deployed in practice - an alternative that promotes the long term over the short term.

If he has exacted usury Or taken increase -- Shall he then live? He shall not live! If he has done any of these abominations, He shall surely die; His blood shall be upon him. (Ezekiel 18:13)

Usury, better known as the payment of interest, doesn't only cause discounting of the future. It encourages competition and stresses social bonds - something it seems those who wrote ancient religious texts understood all too well. To see how it happens consider the following story, taken from Bernard Lietaer's book, The Future of Money.

The Eleventh Round

Once upon a time, there was a small village where people knew nothing about money or interest. Each market day, people would bring their chickens, eggs, hams and breads to the marketplace and enter into the time-honored ritual of negotiations and exchange for what they needed with one another. At harvests, or whenever someone's barn needed repairs after a storm, the villagers simply exercised another age-old tradition of helping one another, knowing that if they themselves had a problem one day, others would surely come to their aid in turn.

One market day, a stranger with shiny black shoes and an elegant white hat came by and observed the whole process with a sardonic smile. When he saw one farmer running around to corral six chickens wanted in exchange for a big ham, the stranger could not refrain from laughing. "Poor people," he said, "so primitive."

Overhearing this, the farmer's wife challenged him. "Do you think you can do a better job handling chickens?"

The stranger responded: "Chickens, no. But there is a much better way to eliminate all the hassles. Bring me one large cowhide and gather the families. I'll explain the better way."

As requested, the families gathered, and the stranger took the cowhide, cut perfect leather rounds in it and put an elaborate and graceful little stamp on each round. He then gave ten rounds to each family, stating that each round represented the value of one chicken. "Now you can trade and bargain with the rounds instead of those unwieldy chickens." It seemed to make sense and everybody was quite impressed with the stranger.

"One more thing," the stranger added. "In one year's time I will return and I want each of you to bring me back an extra round, an eleventh round. That eleventh round is a token of appreciation for the technological improvement I just made possible in your lives."

"But where will that round come from?" asked the wife.

"You'll see" said the stranger, with a knowing look.

So where does the Eleventh Round come from? The poor villagers face three options:

  1. They can make more rounds (print more money). But this is inflationary and doesn't change the worth of an invididual round; the stranger in the hat can tell it's happened simply by asking what the price of a chicken is.

  2. They can make more rounds and also expand the economy; for instance by increasing their chicken production (and also therefore their food production to feed the chickens etc). In this scenario the worth of a single round doesn't change, even though there are more of them, because the increased amount of currency "covers" the expanded economy.

  3. But what if they can't make more rounds, and they can't grow their economy? In this case, there is only one outcome: one family must lose all their rounds. Next time there is a storm and a house is demolished, instead of freely contributing their time and resources to help the family rebuild, the villagers will charge one another for their valuable time - knowing that if they don't, they cannot fulfil their obligations to the man who gave them the money in the first place.

Obviously, this story is a highly simplified version of things that isolates only the effects of interest repayments. A real economy is much more complex and a full explanation of how this story relates to our world requires an understanding of the fractional reserve system - perhaps a topic for a future post. However, it nicely demonstrates the way in which the need to repay interest on our debts requires the economy to constantly expand in order to be stable, and how it encourages competition - even when socially harmful.


When you deposit money in an interest paying account at the bank, you are effectively lending it to others and charging interest whilst doing so. If charging a positive rate of interest encourages short term thinking - liquidating the forest in Stuarts example - then would charging a negative rate of interest encourage long term thinking?

In fact, yes it would. The practice of charging "negative interest" - really a tax on money - is known as demurrage. This term was coined by Silvio Gesell who studied alternative currencies in the early 20th century, better known nowadays as complementary currencies. He theorised that if money deposited in a bank lost its value over time instead of increasing via compound interest it would discourage hoarding of currency and encourage long term investment. The concept is subtly different from that of inflation, even though its effects may appear to be similar at first.

To see how this works, let's revisit Stuarts forest. When interest rates are high it makes sense to clear cut the forest and convert it into currency, which will then obtain compound interest and quickly become more valuable than the forest would have been had it managed sustainably. But if that money actually diminished over time rather than growing then liquidating the forest would be the worst possible decision because a constant rate of return would be given every year. I don't have Stuarts skill with graphs, but the differing rates of return would look something like this:

Obviously it's the basic shape of the lines that matter - in no way is this meant to represent a realistic economic scenario. Basic things like the ongoing cost of running the forest in the sustainability scenario are not taken into account.

The top line represents clear cutting the forest for a return of $1000, which at a compound interest rate of 5% will be worth a little over $3000 in 25 years. The yellow line represents sustainable management giving a return of $100 every 2 years, with a 5% interest rate. Clearly, whilst that's still profitable it cannot match total liquidation.

The other two lines are where it gets interesting. The purple line represents a clear cut with a 5% money tax, the other sustainable management in the same situation. Clearly whilst clear cutting will be the most profitable thing to do at first, within only 13 to 14 years sustainable management has matched it and within 25 it's doubled your return over liquidation.

This matches our intuitive notion that if money loses its value over time, long term investments will make sense.

The Cathedral Builders

In the early middle ages, money was issued to villagers and townsfolk by the local Lords, who through their knights ruled supreme. Of course, power corrupts and few lords could resist the temptation to periodically collect and re-issue their currencies with a proportion skimmed off the top. In this way, an informal tax was levied upon the currency in circulation making money a poor long term store of value. What, the peasants reasoned, was the point of saving money when the hated lord would simply take it from you at the next re-issuing?

It was during this time that the great age of cathedral building began. Cathedrals sprang up all over England - astonishing works of architecture that you wouldn't have thought the poor and primitive societies that built them could have produced. But build them they did. Why?

Building a cathedral was the ultimate in long term investment. A project that could take over a century and would be completed long after the founders had died, they took enormous effort to complete. Yet the rewards were equally large - not only a beacon of your dedication to God but a huge creator of employment in the local community and, when completed, a cathedral would ensure a steady supply of pilgrims from far away lands who brought a significant source of income to the local town. This correlation doesn't imply causation but it strongly hints that this sort of phenomenon deserves a closer look.

This is far from the only example - for instance in ancient Egypt grain, an important source of wealth, had a natural loss due to spoilage by rats in storage. This sort of thing was widespread and imposed a kind of natural wealth tax that encouraged large scale spending.

The idea of people funding projects that give a return only after a century is laughable in this day and age, yet it was common not that long ago. Modern money, it turns out, is not some expression of human nature but a tool that can be used to give people incentives to act in certain ways. Existing currencies encourage competition and growth, but as we reach the limits of our planets carrying capacity alternative economic designs will become more and more relevant.

Anybody wanting to research this topic should also look at It is a veritable treasure trove of materials. In particular, the Complementary Currency Resource Center. A good Introduction,A Brief History of Interest and the articles by Michael Hudson are particularly good. There is also a Course on Complementary Currency Systems

Some readers may find Margrit Kennedy's website on Complementary currencies useful. Michael Hudson's website also has useful articles

That article on the history of interest is, well, interesting. I had no idea that it started as a means of sharing the results of natures reproductive ability.
That gives point to the Shakespearean horror at usury as a "breed of barren metal".
Thanks for the links Rajiv, they do look interesting and I will devote a few hours to exploring them properly when I can.

I would add this one:
which explores some of the principles of money in a slightly humorous yet informative way.

I think I understand the issue that this type of approach is intended to address, but can't say I agree with it.

First, cathedrals were not built in order to earn a financial return.  The rate of interest was probably not very relevant. In fact, estimates of medieval interest rates place them generally higher than modern interest rates.  For a reference that is available on the web, see

Second, low/negative interest rates can also stimulate consumption, by making saving less attractive.

Third, even if money has a negative interest rate, other investments will not (and if they do, we don't really want people making them), and it will still be desirable to allocate your capital to those investments that pay off more and sooner.

It is also important to remember that the future is uncertain, and the far future is very uncertain, and investments tend to have finite lives (and/or high maintenance costs).

I think it is hard to say what investments people with then-current knowledge and a very long term view should have been making in the early 20th century that we would be glad they had made now.  For instance, this is the 50th anniversary of the very large investments made in the US Interstate highway system. Certainly that was a far-sighted investment, but in light of the liquid fuels crisis which is now in view, perhaps not far-sighted enough?

I'll stick to conventional discount rates, I think.

Bear in mind that the kinds of communities that built cathedrals didn't do so off the back of cheap credit, so commercial interest rates at this time aren't hugely relevant. That's one reason they took so long to build - they were done off the back of local resources and craftsmen (well, apart from a few cathedral specialists).

Truth is nobody is entirely sure what prompted such a large burst of cathedral building in this time, but given that the cathedral age started and ended around the same sort of times everywhere it seems reasonable that economics had something to do with it.

Third, even if money has a negative interest rate, other investments will not (and if they do, we don't really want people making them), and it will still be desirable to allocate your capital to those investments that pay off more and sooner.

Of course, this is only natural and good. The trick is that it discourages investments like clear-cutting that pay off more and sooner but then stop paying off because they weren't sustainable.

I doubt we'll abandon the road system when gasoline runs out. More likely we'll develop an alternative, or maybe even convert the roads into railways.

Sorry Stuart, but interest is the only mechanism other than central planning that can allocate the supply of money ... and unless the quantity of fiat money is restrained, sooner or later it ceases to have any value.

If you want to support a case for central planning please let me know where you believe such a system has worked to the benefit of the people.

A few additional points: (1) Money in the middle ages was mostly hard money, not "currency". Dishonest lords still play money games. The lords are now Federal Government and the the Financial Sector both of which have grown out of proportion in the last several decades. Both groups are IMO too large for the continued well being of the country. What will reverse the trend, I do not know. (2) Projects with very long paybacks are made much less certain when inflation must be priced into the picture [a moving target made up of not just anticipated revenue stream, but fluctuating real values for those revenue streams.] They become much harder to finance [at least in theory] as who knows what if any value the principle would have upon maturity of a 100 bond. A hundred years ago there was no expectation of a general and persistant inflationary trend. We got that with the birth of the Fed in 1913. (3) If you want to encourage immediate consumption and discourage savings, a "demurrage" sounds like just the ticket. Party hardy. Eat the seed corn. (4) Until our fractional reserve banking reserve requirements got so out of wack, savings were important as the base for the money supply. Now debt is its own merit bringing forth new debt. (5) If booms and busts [which are largely monetary phenomena] were not so prevalent, the desire to clear cut would be a less rational response. During the boom times, the theory is to get what you can as soon as you can, becasue the bust if coming. Most participants in the oil industry see the current price cycle as the prelude to another bust or at least a significant softening as supply overwhelms demand.

Where is Sailorman when you need him? He seemed to just disappear a month or two back. I hope he is well.

Mike Hearn was the author of the piece.
Hello R W Reactionary,

Your quote: "If you want to support a case for central planning please let me know where you believe such a system has worked to the benefit of the people."

I claim no economic expertise, but perhaps the Japanese Edo Period (1603-1867) fits this central planning requirement and was largely a peaceful, sustainable society too:

Bob Shaw in Phx,AZ  Are Humans Smarter than Yeast?

Several prominent economists have already proposed that the central banks directly regulate the money supply rather than indirectly via interest rates. There are good arguments for this arrangement. Perhaps to be covered later.

The issue of discouraging savings is slightly misleading; you can still prepare for the future by investing in enterprises that are likely to give continuous returns - like the example of a sustainable forest. Just because the "savings" aren't sitting in a bank account doesn't mean they are non existant. This model is already used anyway by pension funds, so it's hardly a radical suggestion.

Central planning is another misleading tag. It makes people think of communism. The central banks already try to centrally plan the money supply, but they do so via the indirect mechanism of base rates or the even more indirect mechanism the Fed uses. So this "central planning", if you can call it that, already exists but it's not as effective as it could be.

Hi Mike.

Investments and savings aren't the same thing. Each serves a purpose. Investments sometimes work out ... but often don't. The function of savings is / should be to provide a store of value and to allow for accumulation of assets that can be invested.

Try buying or building a small business beyond the level of the micro loan approaches [used in some third world countries -- often successfully] without some personal savings. Then complicate that situation with a world where loans are not available either because there is no allocation process or because no one is willing to loan with no incentive, but with the certainty of at least some defaults.

I personally have a business that I financed through savings. It hasn't made me rich, but it might. What I can attest to is that without savings I would have lost the business by now as almost nothing in business goes perfectly. Think $10 oil when you were planning on $20 oil. Think lightning strikes, casing collapses, sudden water break throughs, rivers changing courses. Try to survive a few bad years with nothing in reserve, and where partial liquidation of the investment would result in pennies on the dollar.

You are correct about traditional defined benefit pension plans being investors not savers. The trusts are investors. The sponsors have mostly investor attributes. The plan participants see pensions as savings ... but they aren't. The plan participants, the plan sponsor, and the PBGC are at all at risk for the results of the trust returns.

The move toward defined contribution plans makes the new plan participants solely at risk. Sometimes they win. Sometimes they lose. By and large, the political left is more likely to be outraged by turning pension plan participants into non professional, part time, minority investors. I have no real opinion one way or the other about the societal good of this ongoing change, but do not believe that the corporations are doing this to benefit the plan participants.

You are correct about central planning. There is a lot of central planning in the U.S.A. Most of it IMO doesn't work too well. Central planning tends to work best on an ad hoc basis where there is a monumental goal and because of the disasterous consequences of failur, the other consequences [collateral damage from the ad hoc activities] can largely be ignored for what the powers that be regard as the greater good. Central planning can range from these sorts of efforts [e.g. winning World War II or maybe at some point mitigating peak oil]; to the the more mundane and contiunous picking of winners and losers through tax policy and grants; setting of interest rates through the actions of the "independent" Federal Reserve; to the true command economies like the old Soviet model.

Maybe I'm way off base here ... but to my mind, the same people who favor Intelligent Design of the universe are the ones who oppose Central Planning and who want the random wavings of the Invisible Hand to be our only guide.

Let's just give the process a new name. It is no longer "Central Planning". It is hereforth named "Intelligent Economic Design".  --the label is the logic

Maybe you're right. In theory, with perfect knowledge [including a knowledge before the fact of what the perfect long term outcome actually is], an enlightened benevalent dictator might be able to implement a plan that if executed properly would yield optimal results. IIRC "Utopia" translates as "No Where Land."

Central planning has given us, the Five Year Plans of Mao and Stalin, as well as the continuing shining examples of North Korea and Cuba. As I have noted elsewhere in this thread, there may be a place for central planning in the really big areas where an ad hoc effort may alleviate the purely reactive aspects of a pure market based solution by implementing the appropriate approach in advance of the immentent, but belated price signals. I have labelled myself a reactionary, but I believe that I am in reality someone who believes that failed experiments should be considered failed experiments not as something that merely needed more time, more money, more civic spirit, more ____ ???? [fill in the blank.]

Intelligent design? The concept of irreducible complexity has some apparent merit, but the number or opportunities for the monkeys with keyboards to produce the biological equivalent of Hamlet by random chance is indeed beyond comprehension. The jury is out, but if a believer needs a scientific basis to believe, this is as good a basis as I can see. [My personal opinion is that matters of faith are inherently matters of faith.]

In regard to the usefulness of money, I recommend Robert Heinlein's "Stranger in a Strange Land."

Money does not have to work the way our system does. One good suggestion came from the young Milton Friedman, who advocated 100% reserve banking rather than fractional reserve banking.

Another controversial idea was proposed by Nobel Prize winning economist Friedrich Hayek--privatize money so that governments cannot finance themselves by creating too much of it and inflating away their debts.

Personally, I don't have much money--i.e., coins, currency and checking accounts. On the other hand, I do have an income and some wealth in various forms. Many times I have been a borrower and also a lender. You cannot buy health or happiness with money. On the other hand, with money around it makes it much easier for people such as Bill Gates and Warren Buffett to give large sums away. Indeed, IMO the only reasonable motivation for great wealth is to give it away to worthy causes, including some for needy family and friends. Aristotle agreed with this idea and regarded maganimity and generosity as important parts of virtue.

Jubal Harshaw and V.M. Smith both had a healthy disrespect for money. However, they both had enough for their needs at the right time.

BTW, see my earlier post. I was beginning to wonder if you had decided that this forumn wasn't to you or if you had been run over or run aground. :-)

Hold on! Valentine Michael Smith was bowled over with delight when first he grokked money. Martians did not have money, you may recall.

Also, many of Heinlein's heroes were rich, e.g. D.D. Harriman in "Man Who Sold the Moon."

Smith also kept a bowl of the stuff by the door of the nest for use out in the rest of the world. In addition, money just about killed him before he had a chance to grok much of anything about humans.

Beyond this Horizon included a description of a monetary system that I believe you might endorse -- basically non debt based / non commodity based system but with the supply on auto pilot. Citizens received a periodic "dividend" [I believe that was RAH's terminology]basically for being alive to match the money supply with the growth in the economy. The Man from the Past who had at one time sold South American bonds for a living had a very hard time with this because "money has to be based on something." Back to my point ... I am not really against fiat currency as long as the quanity is not being gamed to reward, punish, and shift wealth and facilitate Government theft and other bad behaviors.

This proposal is known outside the fictional world as a "basic citizens income":

"Beyond This Horizon" is one of my favorites of Heinlein novels.

RAH was decades ahead of his time. Look at the issues dealt with in "Beyond this Horizon," e.g. in regard to the genetic modifications of humans. Who else in 1943 was seriously worried about this?

My ambition (possibly delusional) is to write young-adult science fiction novels that will be almost as good as Heinlein's. So far I have two volumes of my future history done and have plotted out the third volume.

Go for it Don. You obviously write well. It would be interesting to see how your style translates into fiction. There is a niche that has not been saturated by any measure [the youth will read when something catches their interests -- witness J.K. Rowlings]. BTW, I didn't read any of RAH's young adult novels until after I had read Stranger in a Strange Land circa 1972 so depending on what you mean by "young adult" the audiance is certainly not limited to the very young. :-)
If you're looking for some good summer reading, just check out and look for inexpensive paperback or hardcover Heinleins. Get about thirty of them, reread or read them for the first time and relive your youth!

The first Heinlein I read was "Rocket Ship Galileo" back in '49. Some of his stuff has been published posthumously.

One of the best young-adult Heinlein's was "The Rolling Stones," and "Farmer in the Sky" was also excellent. Come to think of it, I have not reread "Rocket Ship Galileo" for decades--bunch of teenage boys along with their mentor build an atomic powered rocket and go to the moon. The film "Destination Moon" was very loosely based on "Rocket Ship Galileo."

"Have Space Suit, Will Travel" is also a lot of fun to read.

Frequently I reread books that were my favorites as a child and a teenage--invariably they are as good or better than I had remembered. Why read crappy new books when some of the old ones are so very much better?

In a post a while back, you commented on admiring the economics lessons of The Moon is a Harsh Mistress and the Rolling Stones. I commented that the sustainablity aspects of the former were obvious, and asked you if the the lessons of the Rolling Stones were from you perspective related to selling used bicyles or perhaps the merits of writing space opera [ignoring asteroid mining intentionally as being too straight forward]. You did not answer, but I think that I can infer from this exchange that your comment related at least in part to writing space opera. :-)

I think I have read just about all of RAH's novels and compliations except for Farmer in the Sky. Something to look forward to.

Some of his notebooks from the thirties and forties were published a couple of years ago--very interesting reading.

Ah yes, much better to reread Heinlein than look at the low quality of books on best seller lists.

My motto: Whenever a new book comes out, read an old one.
Same for films. Of the great films, 90% were made before, say 1975.

I read about half of this book before taking it back to the library:

The Chinatown Death Cloud Peril

It was actually pretty good.  Would you believe a book whose characters are all "pulp" authors (shadow, doc savage, etc.) heading for a mystery.  A lot of history of the pulps here ... and would you believe L. Ron Hubbard as a the protagonist?

Funny, with some (apparently true) history, mixed into the story.

In "Rolling Stones" I especially liked the twin brothers' scheme to make moonshine and sell it to the asteroid miners.

Also, I really identify with Hazel Stone, an oldster after my own heart, though I question the wisdom of loading my handgun with gum drops.

Do I hoard copper tubing?

You bet. Heckuva good investment no matter what.

In the Sci-Fi vein, I'm trying to remember something by Larry Niven, maybe "A Modest Proposal".?  The essay had to do with making hard currency radioactive.  This would be done to facilitate circulation (velocity of money) and discourage saving/hoarding.  With radioacive decay, this might also be a sort of natural demurrage. :-)
The only fiction I am reading these days is coming out of the White House.  It seems clear to me that the right-wing is trying to starve the beast by cutting taxes while not cutting spending. This has the effect of making the only possible way to raise revenue by printing more money.  Yes, I know this is inflationary but it is the best and sneakiest way to get the flat tax that Forbes et al have been craving for years.  Printed money meant for government projects ends up getting dispersed to the general population so that it ends up costing everyone by the same ratio relative to their income. No progressivity in this at all.

So the right wing has managed to get tax breaks for the rich and designed a regressive tax scheme off a sleight-of-hand.  Everyone is concentrating on the tax breaks and estate taxes, while they slyly stick it to all of us with the money printing machine.

This may be all well and good in the right-wing's minds, but the people that really suffer from this scheme are the foreign investors, who see their fortunes slowly evaporate in front of their eyes. With real income taxes, the foreign investor gets shielded, but no longer.  This will spell disaster when China and company finally figure this out, as if they haven't already.

privatize money so that governments cannot finance themselves by creating too much of it and inflating away their debts.

We did have an era of 'private money' through bills-of-exchange, bank notes, and so on when government currency was tight due to the scarcity of gold/silver, and likely hurt as many people as it helped. Probably more. Independent central banks has been a partial solution to the inflation problem, but that just creates biases towards the financial sector.

The central problem with contemporary economics is that it is at best a science in its infancy, at worst a pseudo-science. Economists are like 15th century doctors who consistently order patients to be bled for lack of any substantive knowledge on what exactly they should do. Their measurements are crude. Their theories even cruder.  

the united states had that for a while before the feds took it over. there was a big problem with it though.
lets say you have money issued from bank A, this though is not the only bank in the country lets call the rest B-Z.
you decide to go on a trip across the colony's so you take a modest amount of your money out of bank A. but each town you go to that money is worth less and less because more and more people are not familiar with the money bank A. the only and costly solution to this is to stop at each bank on your trip and convert all the money you have to that bank's version of the money of course for a fee.
A variant on full reserve banking has recently been proposed by James Robertson and others, and it has many strong arguments to support it. In this model new money supplies would be injected into the system via government spending; either on existing public works/services or via something like a basic citizens income.

Privatization of money I'm not sure about at all. That was effectively the scenario before the banking system was regulated and massive volatility in the sector was common. Bank runs and collapses were almost expected back then. I'm not sure it makes sense to return to that age, if that's what's being proposed.

There was also the computer, Mike, with a sense of humor in "The moon is a harsh mistress," who inflated the money supply in order to help pay for the revolt
The American Revolution was financed by printing money, and so was the French Revolution. The Confederate States of America financed their war through hyperinflation, and the northern states got into the inflation game in a big way.

Major wars cause inflations.

Revolutions cause inflations.

The superior political clout of the debtors cause inflations.

Single-factor explanations of phenomena such as inflation are silly.

And where is Robert Heinlein now that we need him?

In my future history (set in the near post-apocalyptic future) money is going to be warehouse receipts backed by ethanol. The basic unit will be "The Everclear," which is one liter of [barely] potable ethanol, i.e. lab alcohol or the 190 proof beverage you can buy at your local liquor store.

Don, assuming that the concept of "inflation" we are defining is a general rise in the level of prices ... my [possibly silly] one predominant factor explanation for inflation: Excess growth in the money supply & money like debt instruments vis a vis the availabity of goods and services. I would add velocity as another factor that is so closely related I could still label it a one factor explanation, as velocity of money impacts the effective although not the absolute money supply.

You left out one of the classic instances of monetary inflation -- the California & Klondike gold rushes [and similar mineral bonanzas] where metal was abundant and labor & supplies from the outside were highly constrained by logistics. It is very easy to conect the dots and establish the relationship between the money supply, supply of goods and services; and the general price level.

Major wars and revolutions most often resulted in inflation from the same old over supply of money theory [sometimes against a shrinking supply of goods and services], although at times a loss of faith in the money tied to a loss of faith in the issuer can indeed reduce fiat money to its intrinsic value [ink stained paper.] :-)

I agree.

Your cogent comments illustrate the folly of basing money on precious metals.

Reminds me of old Swedish emergency "coins" that were minted when our government lacked silver and used between 1644 and 1776. They were copper plates stamped in the courners and middle and litterally worth their weight in copper. Few survived from being used as the copper plates they were.

Count me as a skeptic. For the last 30 years, we've effectively had "demurrage", and it has not led to the long term view espoused by the post. Savings accounts are not a good investment, and, after taxes, they are a rather bad investment.

But capital barriers and massive government overregulation, taken together, mean that unless one is enormously rich, one must invest in assets via intermediaries, such as banks, which do not, after all, hoard currency in vaults. (If they did, the post would have a better point.) Almost any economic activity one can name requires a good deal of capital and many hours of hugely expensive lawyer time, so a (quasi-) corporate form is practically mandatory. Reality check - it takes half a million bucks just to open a "simple" local ice cream shop these days - all that government-mandated stainless steel, wheelchair ramps, fancy landscaping, etc. etc. ad infinitum.

Which means that the simplest and safest thing for most of us to do is to buy a house with lots of extra lawn and lots of extra rooms. Which is how we've gotten to where we are - a negative savings rate, overinvested in enormous houses ("I don't really need all those rooms, but if need to put something aside, where else can I put it? In the stock market? Ptui!"), and woefully underinvested in everything except for houses, such as energy required to prevent those countless millions of unneeded rooms from mildewing away.

Life is simply too short for most people to be able to learn enough to directly manage a variety of hard assets, which is what they would have to do under the quasi-barter system recommended in the post. (Throwing everything into just one asset is an excellent way to risk a miserable retirement, unless that asset is a house, protected to the hilt by the government.) So the practical upshot of going aggressively for even more demurrage would be even more hoarding of real estate, and even more consumption of all the resources necessary to support that hoarding. That would happen at the expense of everything else and aggravate an imbalance that is already far out of hand. Not a really good idea.

Except that a house is only and asset in a growing economy with low intrest rates or over a long term. And if someone can afford to buy them. The if is the big problem ( I live in Orange County ) the moment no one is buying house which are the easiest discretionary expense to forgoe the moment this asset turns into a huge debt. That the problem with real estate up to now it only been a big issue in commercial real estate but in many housing markets O.C. housing have been converted into a speculative asset as volatile as the stock market.

So again everything is fine as long is you bought your house early in a expanding economy for a good price and then refinance at the current low rates. So a lot of prudent people in the US that bought in  the 70's 80's and parts of the 90's fall under your assumptions but its not true from there on out. All the properties bought since then are subject to massive devaluation back to there values in the 80's or worse. The early buyers are basically stuck hoping they don't have to sell they won't lose money but there profits will be minimal.

>Except that a house is only and asset in a growing economy with low intrest rates or over a long term. And if someone can afford to buy them.

This is an excellent issue that most people don't seem to grasp or care to.

Too often people get caught up chasing a hot investment strategy and are always dispointed at the results over the long term. Back in 1990s the hot investment was stocks and today its real estate. Unfortunately the majority of investors lack the proper understand of economics and markets and pile in like a herd. Often the herd grows so large that it momentum forces the herd to travel over the cliff.

For instance we can see herd economics in real estate as the majority of the population took out huge loans to purchase real estate as an investment strategy. This quickly drove up real estate prices to the point where price growth was unsustainable. To add fuel to the fire, about 20 to 40% of all US business shifted into real estate related goods and services (chasing after the herd). Home builders started building to the moon and create a huge surplus of homes that will eventual cause home prices to plummet and result in depressed home prices for decades.

If you mean inflation then it really isn't the same thing at all; for one it constantly varies, for another the authorities try to fight it, and finally its effect can be offset by putting savings into an interest paying account. Hence the graph that shows how clear cutting and interest payments are the best option.

I don't recall suggesting a quasi-barter system, and your assumptions about the housing market being special don't seem to hold in the long view.

Under the "demurrage" system one presumably can't protect oneself from inflation, since getting a return on an intermediated investment is prohibited, i.e. there is  negative interest on savings, as indicated in the graphs. So one must invest in unintermediated assets, and one incurs a rather similar problem to that of a barter system. In the barter system the specific problem is that one has to personally match up assets, i.e. there is little liquidity. In your demurrage system, the specific problem appears to be one of personally matching up know-how, since using the bank as an intermediary is a big-time losing proposition. That's what I meant by quasi-barter. (I speculate that there's a lot of pining going on for the allegedly simpler days of yore when ownership and management were less separate, and when, for example, the skill the corner-store owner had acquired at opening boxes and shelving the contents somehow magically qualified him or her to run the local Little League team. But that sort of simplicity will never be coming back so long as there are six billion people on this planet.)

Since the 1970s, using the bank as an intermediary has been a loser because interest rates have usually been less than inflation plus taxes. In effect, we already have your demurrage. Boomers learned that non-house saving is an act that will be brutally punished by interest rate regulations, income taxes, sudden levies on "excess profits" (except of course for excess profits on houses), and so on. So they spent, spent, spent, and put every penny left into houses, which are the one asset that most can  handle unintermediated.

And in general, with a variety of subsidies and deductions available for houses, at a magnitude that is available for nothing else, it's still easier to lose money on almost any other asset - and that includes money in the bank, which is a guaranteed loser. So I don't know of a long view in which houses are not special, even if, on rare occasions, someone has lost money on a house.

So, naturally, we have lots and lots of big houses, often with rooms that are actually unwanted - and less and less clarity about how they will be heated, cooled, and travelled to, in the medium-term future.

It's not exactly negative interest; that was an abuse of terminology by me. It's more a tax on money. Imagine money that you must constantly pay to keep legal - this is how the Worgel stamp scrip worked. It takes effect even when not in a bank.

Getting a return on an investment is not prohibited, that's not what the system does. As you can see from the bottom line of the graph you can still get a healthy return on your forest even in the presence of a money tax, because the forests productivity is greater than the demurrage rate.

If you look at modern examples of where demurrage has been deployed locally, eg Austria, Guernsey etc then the effects are remarkable - it certainly didn't reduce anything to a barter system.

Newbie comment on fractional banking.

Thanks for the article since I don't understand our current banking system its difficult to consider the value of these interesting alternatives. First I read up on fractional banking which underlies our economy. Basically the banks get to generate loans at a rate of 10:1 vs real deposits so for every dollar deposited they can loan out 9 dollars thus creating instantly 9 dollars. Now lets say they charge interest on the loan resulting in 1 dollar interest at the end of the loan period. They have earned one dollar and the other 9 dollars literally disappears at this point but in reality it was converted to a fixed asset i.e. what was bought or created with the loan. In our economy business loans dominate and generally this is hard manufactured goods that were created thus increasing real wealth. Inputs are raw materials and labor.

In this simplistic scheme the government is simply treated as any other company that can borrow money and indeed in general it works that way it pays its debts via taxes. The government power to create money is actually not that important. What is important it seems is that the federal reserve works basically in the opposite manner of most banks. When the banks finally borrow from the feds which back there money by basically faith ( T Bills ) backed in the end by taxes ( real work ) things work a little bit different the feds throw away the money they receive in interest and the principal acting as a sink hole for money.
No problem with the principal since that eventually went to real loans for real assets but by throwing away the interest they decrease the real money supply by exactly the amount of interest charged which must be paid in cash.

At this point feel free to correct any mistakes I've made.
I actually really don't have a problem with this in general as long as the economy is growing. In fact in reading this type of banking became entrenched exactly when enormous increases in wealth were occurring the 1600's in Europe when the new world and trade routes to china. Since then its been periodically powered by colonialism then coal then finally oil along of course with massive technical improvements in manufacturing etc.

Of course periodically the house of cards has collapsed i.e. in the 1920 when colonialism lost steam ( literally ) The oil economy had yet to start and the west was won. The first world war was actually a colonial war and does not seem to be economically driven.
The eventually lead to the second world war where the American economy was basically created from a simple source of wealth which was our factories were not being bombed.

The oil economy was bootstrapped during the second world war and the rest is of course history.

Now I've made a lot of simplifying assumptions but the main point is that this economy only lost it one time when it truly stopped growing this was during the great depression at all other times it seems something has saved the day until now.

No my big question with my new understanding of our economy and the fact that its basically underpinned by growth is what happens when we start economic contraction ?

Well of course the first and obvious response is to raise the fed interest rate reducing the money supply and thus basically treading water.  But that's all I see and it can only go so far before interest rates are ruinous prob say 30% before you basically shut down the economy.

So am I right the feds control of the money supply is actually only useful within a narrow band over basically a growing economy.  If real economic losses start occurring.
Then things get really really messy.

This is the part I'm hoping others will comment on.

Firs lets say you default on the loan leaving the bank with the asset. They of course now sell the asset at the end of the day for a loss against the original loan. It seems to me that this loss is real money i.e. the bank basically lost the difference. The money from the sell went to write off the loan and the difference comes directly out of the bank.

Basically they take it hard on bad loans not surprising and in a sense justifies there real high interest rates over 100% on house loans for example.

Now as the economy crumbles and loans start unwinding forcing settlement in real cash we see a massive deflation of the money supply so to me it looks like the effect of raising the fed rate is actually to flush out bad loans which are the real deflationary effect the other side is tightening credit requirement etc forcing the bank to make less loans and probably forcing them to higher reserves.

So the fed rate which at first site looked like it was ineffectual actually has a profound effect in time on the economy by eventually forcing the poor bankers to cough up real cash not to the feds but covering insolvent loans and simply not issues loans since there is a smaller pool of borrowers as the interest rates increase.

Now at this point we have a unhappy economy but its functioning as designed the money supply is being restricted and anyone in shaky positions is forced into to default with the bankers picking up the tab.

But what happens when the intrinsic reason is that growth is slowing because of a resource constraint or high wages.

Well the high wage problem we solved via globalization giving us many years of unearned growth. This can actually continue but it was tied to cheap resources. So or world economy could perk along. Now in many ways were facing the second time that real growth is stopping from increased resource costs which have the side effect of undermining gains from globalization significantly.

What happens next it seems to me the only way we can respond is to initially increase interest rates significantly to prevent wage inflation and generic inflation as weak business attempt to borrow to cover high fuel costs and then try to pass those off to the consumer. Next I see interest rates start falling ans the economy contracts and nothing the fed can do can restart it since so many business become uneconomical.  For example no one buys the patriotic figurines made in china. Since a lot of our business's are based on discretionary income all of them probably rapidly become effected as the economy contract. For profitable business there is actually wage pressure as they are forced to pay there workers more to maintain there standard of living reducing there profits at least until the work pool increases reducing wages. In any case I see a massive cycle of feedback loops but with the general direction downward and there is nothing anyone can do about it.

The energy producers initially flush with cash but no real economies invest heavily in the mature economies and lose the butts as there investment losses mount. Maybe they try to invest locally but since they produce nothing they must pay a multiple for there high energy costs simply because everything they need costs far more because there commodities are over priced so they really can't win either.

So sure you will see a initial cash flow into the commodities economies but it will get sucked out immediately since they in reality produce nothing outside of there base commodities. Sure there will be a net transfer of material wealth but to what effect ? More mansions who cares. Even more factories who cares ? Since no one can buy there goods.

So at the end of the day the whole world spirals down the negative growth curve.

So it looks to me that our fractional reserve system for wealth creation is particularly destructive in fact it look to me like it over corrects and has a positive( negative to those in it ) loop forcing more and more business to unprofitably since no one knows were it will stop in a sense it overshoots slowing the economy to much which slows the economy.  Lowering rates then does no good since the economy is truly contracting then what ?

This actually seems to have happened in japan the response was massive investment in China and globalization but this won't save us now.

At this point the various alternative economic models presented become interesting and the question I have is how do all of them work in this power down scenario our current fractional reserve does really well in growth okay in temporary downturns and it seems really really bad in real growth reduction.

Can someone more knowledgeable then me correct any mistakes and also present economic models that actually work in a steadily shrinking economy.

I can't respond to all the points in your post, but you raise two valid issues.  It is certainly possible to get into a contractionary spiral--that is essentially what happened in many countries at the beginning of the Great Depression, and also in Japan in the 90's.  The hope is that competent central bankers insure that there is sufficient liquidity (basically cash and credit) to prevent it.  It is not certain that they always will, and even if they do, there may be bad side-effects.

The other point you raise about the economics of a contracting society is also interesting.  There isn't a lot of experience with these in the modern world, and I don't think there is any theoretical reason why economics can't work in them more or less as it does now.  However, there are a lot of existing institutions (the mortgage, Social Security, the stock market) whose current arrangements assume expansion rather than contraction.  Adjustment to contraction would be dislocating unless it were very gradual.  But the initiator of this thread might be happy, because I would expect real interest rates to generally be very low in such a situation.

Finally, don't get too hung up on fractional reserve banking.  Although it is interesting, it is only a mechanism by which central bank actions get converted into circulating money.  If for some reason it doesn't work, (perhaps there is little demand for loans, as there might not be in a contractionary environment), there are other ways to get money into circulation--the present Fed Chairman famously referenced Milton Friedman's "helicopter drop" of money to get it to the public.

The fractional reserve system is horrifically complex, far too much so for a modern democracy and it badly needs to be simplified.

A few corrections according to my own (probably flawed/incomplete) understanding.

They have earned one dollar and the other 9 dollars literally disappears at this point but in reality it was converted to a fixed asset i.e. what was bought or created with the loan.

Not exactly .... a loan is given to a business which then proceeds to spend it. You can't "convert" money to, say, some wood, you can only exchange it. Once the timber merchant has sold you his wood he now has your money, which is deposited back into the banking system at which point it can be loaned out again at the reserve ratio and so the original injection of "high powered money" into the system spirals down through the banking system until it's been multiplied by the money multiplier.

Hence a small amount of high powered money creates a large increase in the money supply.

So am I right the feds control of the money supply is actually only useful within a narrow band over basically a growing economy.  If real economic losses start occurring.
Then things get really really messy.

It's not so much that the Fed is only useful when the economy is growing, it's more that the fractional reserve system is only stable when expanding. It works that way because the currency is backed by debt: that is, money in your pocket represents the debt of somebody else (unless you are holding the very small amount of non-debt backed money issued by the central banks).

Because debt accrues interest as the story of the 11th Round shows, to pay off that interest we must constantly expand. Once we cannot do that we must turn on each other in order to do so and the system begins to collapse. So yes think a repeat of the Great Depression (unless something new comes along to save us and we can continue growing .... doesn't necessarily mean planetary exhaustion).

Firs lets say you default on the loan leaving the bank with the asset. They of course now sell the asset at the end of the day for a loss against the original loan. It seems to me that this loss is real money i.e. the bank basically lost the difference.

Banks actually write down deposits from savers as "liabilities" on their asset sheet, and loans as "assets".

This rather bizarre system is because loans are worth more to banks than deposits. Thanks to the reserve ratio banks can create the money needed for a loan out of nowhere most of the time, however deposits must always be paid back on demand.

At this point you have reached the limits of my understanding. During most economic collapses (and god knows , we have enough historical evidence) what happens is a combination of hyperinflation and bank runs. People lose confidence in the system, effectively, and fiat currencies are viable only as long as people have confidence.

Consider that we disconnected our currencies from the gold standard in the 70s. Before this - theoretically - a dollar in your pocket was backed by something tangible, gold or silver usually. After this a dollar had value only because everybody said it had value.

If people start to lose confidence in the future then inflation begins and rapidly spirals out of control. People don't want to hold dollars because a dollar today might be half a dollar tomorrow. So they ask for more to offset that problem, and now everybody needs to get paid more and suddenly it's cheaper to use dollars to wallpaper your walls than it is to buy wallpaper.

Eventually the currency simply becomes worthless, and the economy collapses (reverts to barter, really). Lots of people die, cities are abandoned and people move back into the countryside and resume subsistence farming. At least this is what happened in ancient Sumeria, one of the oldest examples of this, when the huge ongoing cost of a war with their neighbours triggered hyperinflation and the civilisation collapsed.

Can someone more knowledgeable then me correct any mistakes and also present economic models that actually work in a steadily shrinking economy.

Pretty much any system that doesn't rely on continuous growth to be stable will "cope" with a shrinking economy, in that times will still get hard but the system won't entirely fail. So far one of the better proposals I've seen is James Robertsons, which might be a topic for a future post.

It essentially revolves around setting the reserve ratio to 100%, so ending the fractional reserve system and preventing banks from creating money. The central bank then decides by how much to inflate the money supply and simply creates that money out of nowhere, much as banks do today, then gives it to the government to spend into circulation. The seigniorage goes to "the people" (and a bit of pork of course) so giving a political incentive to implement the system - eventually the money backed by debt would be phased out as the original FR based loans were slowly recalled. There's more to it than that of course ....

To respond to your last statement.

Isn't the situation of 100% savings and the New Deal/WWII exactly how we got out of the great depression. The government created money via the New Deal work projects and going into debt to finance WWII. And to me this seems to be the basic tenet of socialism the government redistributes wealth via control of some basic aspects of our economy.

Not much wrong with that except the gov is horribly inefficient in the business or markets they control.

I'm guessing for the next big depression the money will be funnel into energy and transportation since that would be the root source of financial problems.

Also at least in the case of the Great Depression the gov role was maginified mainly becuase most of the private banks went bust and the finicial policies were sufficiently different form today that its not clear to me that we would end up in the same situation. A hell of a lot of work was done to prevent the same type of finicial meltdown. For example a run on banks is probably not going to happen and were already in general have no savings. In fact where do our bank even get the 10% needed to make loans considering the low american saving rates ?

Spending money into circulation isn't redistributing wealth because the money hasn't been taken from anybody, it's been created for the purposes of the economy.

I'm not sure why you think bank runs won't happen now, they do still happen occasionally.

Remember that banks hold corporate accounts as well as personal accounts. It's not just personal savings that they use to back their loans.

>I'm not sure why you think bank runs won't happen now, they do still happen occasionally.

 Most Americans have little saving and a lot of debt. In order for people to take out money, they have to have savings. I suppose that runs on 401K or other savings plans are possible.

>Remember that banks hold corporate accounts as well as personal accounts. It's not just personal savings that they use to back their loans.

Few banks use personal savings to back loans. Most of the money invested in short term commerical paper (7 to 30 days), which are fairly liquid and stable and are not prone to defaults.

After the S&L crisis, Banks began to monitarize loans by packaging loans and selling the as Mortgage back securities on the bond market. These bonds are picked up by large institutional investment funds, such as Hedge funds or pension funds. A large amount is also picked up by foriegn central banks. For instance China holds about 30% of all new mortgages issued after 2002. Banks make thier money by collecting service fees. The risks to banks from loans is very minimal. Because of this sitution, the banks didn't care who they lent to money, It wasn't the banks money that they were loaning to less than worthy applicants, it was other peoples money (OPM).

However the banks did forget on very important issue: Litigation. When housing bubble bursts, Banks and other lenders are likely to face litigation from two sides: the bond holders who will claim the banks did a poor job at background checks and overestimating property prices, and from the consumers who will claim the banks pushed them into loans that they knew they could never afford.

A large number of mortgages are also converted through the GSEs (Freddie and Fanny), which convert long term mortgages into shorter duration bonds (mortgage swaps). For instance they'll issue short term bonds (2 year and 5 year bonds) and they make money on interest rate spreads. For instance they'll charge the home owner with 6% for a 30 yr mortgage and issue 4% 5 year bond. They keep the difference 2%. However the risks are that over the life of the mortgage, short term rates might exceed the rate of mortgage interest rate. For instance if the yields on 2 and 5 year notes rise above 6%, the GSEs are pretty much screwed.

FWIW: The GSEs are already probably screwed since back in 2004, they offered 30 yr. mortgages below 5% (how stupid!). Today the rates on US treasury 2 and 5 year bonds are above 5%. Unless interest rates come down soon, it won't be too many years before the GSEs run into some serious financing issues. 006-06-23_19-34-59_N23556523&type=comktNews&rpc=44

Hmm, you'll have to forgive the non-American here, I was talking in terms of global trends :) Savings have been going down everywhere in the West but it's not got to the point that bank runs are impossible ...

I'm afraid I don't understand some terms you used; S&L crisis? GSEs?

>I'm afraid I don't understand some terms you used; S&L crisis? GSEs?

S&L: Savings and Loans. A group of banks that defaulted in the 1980s nearly causing a major finance crisis. The gov't bailed them out to avert the crisis.

GSEs: Govenment Sponsored Entities. These were set up by congress to make housing and student loans affordable for low-income families. The two largest are Freddie Mac and Family Mae, which own or garentee about $3 Trillion in Mortgage securities. They are by far the largest financial institutions on the planet. It would be a good idea to do a little research about them, if you have already done so.

>Savings have been going down everywhere in the West but it's not got to the point that bank runs are impossible

I was indeed thinking of terms of the US. At this point of the game, I believe any significant future finance crisis will likely begin with the US. Perhaps, as the result of a housing bubble panic, or the dollar plunging. The only  significant risk outside of the US (and the West) that I can think of is commodity speculation (mainly in metals or other non-energy related raw material commodities).

Banks actually write down deposits from savers as "liabilities" on their asset sheet, and loans as "assets".

Well "yes" but that is how double entry accounting works and is only half the entry. When a bank takes in a deposit, the entry is double sided. It debits an asset account, "cash" [or an account that means cash] and sets up a liablity to its depositor. Assets = Liabilities + Owners Equity. Since assets went up, and the banker has not as yet turned a profit on the deposited amount, the credit is to a liability account. Assets aren't necessarily good, and liabilities aren't necessarily bad ... they are merely respectively the left and right sides the fundamental equation of double entry accounting.

Bravo, excellent post. I'm a big fan of alternative currency systems and I strongly believe that any relocalization efforts are going to have to include some sort of non-FRN currency notes if they are going to be successful in the long run. I'm very glad Stuard & TOD have brought this issue to the table. Money issues desperately need to be discussed in the context of peak oil.

A quick note for the skeptics: demurrage-type currency systems have typically been implemented as a complementary or local alternative to national curencies, not as full-on replacements for them. They've been voluntary, localized, and usually temporary by design.

Also, increasing the velocity of money is not necessarily synonymous with increasing consumption. If I have $100k and I know that dollar amount will increase over time sitting in a bank account, it makes sense for me to leave it there and spend as little as possible by buying cheap goods that need replacement pretty quickly. If I have $100k and I know that the dollar amount will shrink, it makes sense for me to exchange it as quickly as possible on anything that will last a long time. Thus the economy can keep growing, due to the high velocity of money, at the same time that consumption shrinks.

For an example of a demurrage-currency in action, check out the history of the Wörgl stamp scrip.

For another, separate approach to addressing overconsumption from a financial perspective, check out Catherine Austin Fitts' solari model.

Scrip is primarily useful when there is inadequate "real" money circulating in an area.  This has often been the case in the past (areas where there are lots of farmers with no cash income, areas with a shortage of gold and silver when those were the media of exchange, or places where the central bank is not providing enough liquidity, as in the Worgl example.). Scrips are much preferable to barter, which would be the main alternative.

However, while I recognize the value of scrip, in the modern US where there is if anything a surplus of circulating cash, I don't see that it is particularly useful in that traditional function. On the other hand, it can provide a useful way to help people in a local area see themselves as an economic community, and possibly knit them together more closely both socially and economically.

This seems to have been the case in Ithaca NY (see and there are numerous other examples.

I know nothing about solari, but from reading the links, they seem primarily to be about trying to assert local control over the structure and priorities of local economic institutions.  That seems laudable, but I don't really see how it addresses overconsumption.  Perhaps you can explain how that would work.

Yes, one of Bernards key points in his books it that complementary currencies can be designed to achieve local social goals; it's not entirely about [inter-]national economics.
There was a lecture by a german professor at the 2004 ASPO workshop in Berlin. He exactly described the negative role of interest in the money system and menntioned several times Silvio Gesell.

It is indeed the interest which compells us to "grow" our economy and which rewards accumulating money instead of spending it. At the end of the lecture he said, we are in danger and we have to be aware, that money systems will always come to an end, as long there is the exponential growth factor interest. That's certainly true.

He didn't mention the link between this currency problems and the peak oil theory, but IMHO it seems clear that endless growth will not continue forever, especially in a economy which is based on abundant and cheap fossil energy.

In the last years, there have been several new regional currency systems evolved which are based on Silvio Gesell's ideas. I don't know if they are succesful, even the local money here in the burrough of Berlin where I live.

Without interest (and depreciation) it would hard to assign an average cost per unit of windpower and solar photovoltaics. Supposedly this enables comparison with fuel burn technologies  but that is a whole 'nuther problem.

Another approach to the forest cutting problem is that of an 'intergenerational flows'. To max NPV using bank interest rates the solution may be to  harvest sooner than later but we might conserve in order to get the same harvest in 20,40,60 etc years time.

Excellent post on some sorely neglected ideas. Something could also have been said about Major Douglas and his original Social Credit movement (which later became just another political party in western Canada).
Ezra Pound's economic essays are well worth reading.
I think long-term thinking goes down as social capital goes down. And since social capital is plummeting in the US, what do you expect?

Also, proles with no long-term thinking are more profitable to the ruling class than a socially cohesive and thoutful yeomanry (which is what the founding fathers originally planned for).

It's interesting that at this late point in the discussion, "social capital" should be mentioned.

The great forgotten fact is that economics is a social science, NOT a physical or technical science like physics or geology.  

In other words, and this is IMPORTANT BEYOND BELIEF, it is the participants in the game who set the rules and goals of the game.  I have often wanted someone to do a very involved analysis of economics as sport.  Compare to baseball:  There is no TECHNICAL reason that the game has four bases and the playing area is a diamond.  It could have been three bases arranged in a triangle, of five arranged in a pentagon, or two arranged end to end (think cricket)

With economics, the single most important aspect is VALUE.  One great financial advisor once said "Before you invest that first penny, ask, what do I want the money (referring to the interest or gain on the investmet) for?"  If you can think of nothing you want to buy, why take the chance of investing?  You must have something in mind that YOU VALUE as much or than money, because you are being asked to risk money you already have to get money you don't yet have, the exactt opposite of "one in the hand is worth two in the bush", when you are investing at say 10%, you are saying "one and a tenth of one in the bush is worth more than one in the hand" (!!!)  It goes against prudence and common sense UNLESS you think think there is going to be something out there to buy worth more than the money you have.

What would that something be?  It could only be one of a few things in the big picture:
*It may be something that you want now, but assume that the money will not be worth enough to buy later (the inflation fear)
*It may be the things you buy now, but that you are afraid you cannot make enough money to buy in the future (the retirement reason for investing
*It may be the protection and security you feel money can bring, through good insuranse, and reserve money so that you can continue to buy the things you buy  (the security reason for investing)

Wait, notice something odd here?  Most of the PRIMARY reasons to invest are simply to be able to continue to buy the things you buy now, and know you will, clothing, shelter, medical care.  It is a form of CASUALTIY AND SURITY investing, to be ready for old age, illness, etc.  The only way you could do without interest increase is if everyone in the culture agreed to insure you, and charge you no more than you could afford for you life needs.  You know intuitively that is NOT going to happen, and by the way, has virtually never happened in history (there are some exceptions, but as much as people hate to admit it, they are usually religious ones).

Beside Casuality and Surety, what are the reasons for investing?  It can only be one of two things:
To increase EXPERIENCES or to increase POWER.

Humans, like all life, are prone to enjoying increasing variety of experience.  It is why we want to grow up...."Boy, one of these days I will be old enough to (insert favorite desire), drive, chase men/women, fly an airplane, sail a boat, drink booze, go to the casino, travel to Europe, collect rare books, collect rare paintings, even be a philanthropist and build free libraries....the list is endless.

The history of the social art of economics is the long development of monetizing experience.  In the ancient world, experience was limited, and dangerous. It pretty much involved war, crime, and sex, with only the very wealthy able to engage in the higher pursuits.

 (By the way, this is the lure of the automobile that is almost impossible to overcome, but I have dealt and will deal with that another time.  Suffice it to say here that the automobile became the vehicle (pardon the pun) of human desire for wider and faster experience, for danger and embodied even the asthetic artistic pursuits, and brought them to the common masses)

From the worlds oldest profession, right down to Disney World, economics is and will always be the selling of experiences.  (Alvin Toffler's BRILLIANT understanding of this, and of the age of design and quality and merchendising in sales, and the future of economics as EXPERIENCE is groundbreaking, indicating a whole new way of considering wealth)

The ultimate experience is POWER, and it's associated and in many ways even more important force, STATUS.  

What can be said about the amount of money that is spent on Power and Status that has not already been said?  More people know the names Rolls Royce by factors of thousands than have ever seen one in person.  And yet, it is "only a car".  Houses are built that consume at least 80% of the expense of building them (and the bulk of the energy needed to live in them)  in features that provide only STATUS.  Many people who would have no need to make risky investments to afford a small frame home in a working class neighborhood must take GREAT CHANCES and get GREAT RETURNS own status house in THE nieghborhood.

What has this discussion demonstrated, to what possible point could we be hoping to arrive?  Only one:

IT'S ABOUT THE GOALS.  Say it very clearly, it's about the goals.  And the goals are decided in a social/cultural context.

Let us close with an example, the idea of "reverse snobbery".  This has never been studied enough, and is one of the most fascinating economic phenomenons in history.  It has occurred many times throughout history.  Take for instance, the Volkswagen Beetle.  Many upmarket "stylish" types and beatnik and counter culture sons and daughters of America bought them in the 1960's and 1970's just because they were cheap, were low rent, down market, etc., which made them "proof" of an enlightened mind, and real cultural sensitivity.  They were the rage among people who could afford to consume simply because THEY CONSUMED SO LITTLE.  In some ancient cultures, people are given STATUS by how much they give away.  They know that as long as they GIVE, they will be taken care of by the culture, which is obligated to give back to them when they need it later.  The whole thing is held together purely by social bonds.

Whether we know it our not, all economic systems are held together by cultural bonds above all others.  This is why a baseball pitcher is much more highly rewarded than a physics professor, or a race car driver can make much more money than a thermodynamics engineer.  It is a culturally agreed upon set of values.  It is about an involved set of cultural values that include not only the PHYSICAL FACTS of existance, but much more are about values of experience, variety, entertainment, and embodyment of ancient cultural imagery.  Just as people could starve to death while gazing on ancient Greek temples, or lovingly admiring the Renaissance statue of David (which could be used to FEED NO ONE), so it is now possible as a culture to decline into penury in the presence of Ferraris and Porsches, in the shadow of multi hundred million dollor sports stadiums and franchises.

ECONOMICS is a cultural invention, and therefore, has always been rule by mob "fiat" from it's very beginning.

Here's the important part:  No "utopian" planner will ever be able to change this. The good fight is in guiding tastes, souping up the cultural ideas of "reverse snobbery", that is the only way in which you may have even a tiny say in how our economic system consumes and rewards.  Do not underestimate the power of cultural art, communication, media, and "popular taste" in this fight.  It means much more than the interest rate tables or the Federal Reserve.  The real economic fight is ALWAYS down at street level, whether it be on the curb or in the SUV at the stoplight.  It is all about TASTE and DESIRE.  Let me ask you...if all of a sudden women started seeing men who drive big SUV's as real out of touch dweebs, how long do you think they would keep selling, no matter what the price of gas was  ($1.00 a gallon or $4.00 a gallon)?  If your friends at the country club shook their head in sad pity when you rolled up at the club in a Navigator, or if your wives friends quit calling her rather than be embarrassed by having one in their driveway?

The Goal is EVERYTHING, and it is your culture that sets the RULES.

Roger Conner  known to you as ThatsItImout

ThatIstImout -

Excellent post and an excellent thread in general!

A few days back I was expressing some vague misgivings that some of these economic concepts, such as the time value of money, that we accept as 'economic laws' are not laws in the same sense as the laws of physics, but rather more an embodiment of deeply held assumptions and cultural biases.  Now I see that I was on the right track.

I was hardly aware of such things as alternative monetary systems, but I now see that  a considerable amount of thought has been given to this idea. The subject looks fascinating, and I plan to learn more about it.

A theoretical question: What type of economic system would be best able to cope with a steadily shinking population and an associated steadily shrinking level of manufacturing and commercial activity and to do so in the most stable and least painful manner?  

Roger: I just read your post complaining about people downplaying the USA and promoting China. In regards to cultural goals, I think what you are missing is that China's culture is far more consumption, wealth and power oriented than the USA. Persons who do not like these characteristics of the USA circa 2006 are not going to enjoy the planet under China's leadership.


To your sentence:
" In regards to cultural goals, I think what you are missing is that China's culture is far more consumption, wealth and power oriented than the USA. Persons who do not like these characteristics of the USA circa 2006 are not going to enjoy the planet under China's leadership.

First, I absolutely agree with you.  As I reread the text of my post about China, I notice that I did not judge the "characteristics" of the Chinese either way, and instead go with the assumption that act pretty much like we wuold in a similiar set of circumstance and conditions (that should be scary enough right there, shouldn't it?!)

My point was that the Chinese face all the same problems we do, and several more to boot, and on an even bigger scale.

They do have one advantage, in that much of their infrastructure is not yet built (or at least wasn't a week or two ago, I don't know about now! :-)

Several technical and planning types have over the years pointed out that if China built low consumption design and renewable/alternative in from scratch, they would have an advantage in not having the vested and built structural system centered about fossil fuel as the "mono" source fuel base.

Frankly, China has disappointed on this front.  For every mile of subway it builds, it builds ten or twenty times that much in new highway.  One poster made the point that they are planning 30 nuclear plants.  Are the Chinese an exception to the price of nuclear power plants, the concern over uranium supply, the safety issues, and the  waste disposal issues (not to mention the risk of terrorist attack?)  The dam projects should have been considered a natural development, much like our giant western dams and the TVA of the 1920's and 1930's.    Like the U.S., China could have a situation where the electric power grid is relatively safe and stable but still suffer very badly from a liquids fuels and transportation crisis.

And we are skirting the issue of CO2, which if you take seriously or take Al Gore as a source, will keep us from using the fossil fuel and coal we can develop even if we can develop it (barring some great breakthrough in carbon sequestering)!  And by we, I mean THE WORLD, not just the U.S, China, Asia or Europe.

So again to agree, "China's culture is far more consumption, wealth and power oriented....", but, due to the rising expectations of their people, geology and technology, equally as limited (perhaps more so) in their abilty to gain consumption, power, and wealth as the rest of the world.

Roger Conner  known to you as ThatsItImout

A relevant story (IMHO) about goals & values & stereotypes.

You may need to sign up for the Washington Post to view (I am unsure).


I didn't have to sign up for the Wash Post to view the story, and let me extend a BIG Thank You for the link!  What a piece of cultural anthropology!

It should be used in every high school Cult Anthro class to put some life in the subject, it is a fantastic read in cultural values, iconism, totem, ritual, hero worship rites in cultural unity, the way in which value is shared in an agreed set of cultural contexts.....myth and religion attached to the above.....on and on and on.  What a touching, interesting, in many ways bittersweet and sad, but so human story.  What a great read.

Roger Conner  known to you as ThatsItImout

There are a large number of subtexts as well.  

The desperate actions of the community to preserve a needed educational institution and raising $50,000 in donations within a couple of days via word of mouth from an impoverished community.

The story of Arnie Fielkow, General Manager of the Saints at the time of Katrina.  Well thought of in the NFL for turning a profit in a small poor city with a losing team.  He lost his ~$1.5 million dollar job for going against the owner and trying to keep the Saints in Louisiana.  He could have gotten a million dollar job elsewhere in a "nice city", say Seattle or Miami.

But he chose to stay here (with all the discomfort that comes with that),in a city he had lived in for a half dozen years.  He ran for a $40,000/year city council position instead.  He went for the open City wide city council seat against the strongest incumbent city councilwomen. He and she ran an incessently positive issues campaign talking about their plans for the future (true also of the mayors race and 5 of the 7 City Council races) and he won.

He said that he came to love our city and we believed him.

We are lucky to have him.

This is a city full of "totems" & rituals.  Mardi Gras with all of it's Krewes and Mardi Gras Indians and marching clubs is quite unique.  The streetcars are a common connection as well (note the extraordinary efforts to get SOME streetcar rolling), as is our music, history, food, art and architecture.  One can create their own web of connections with the threads of personal choice fairly easily here.

And now there is a change in social ranking.  Those that contributed to the community have always been honored (see the Times Picayune Loving Cup) but the change in status is palpable now.  Civic action and effort is simply expected of everyone with any status.  Each in their own way, but DO SOMETHING !

New Orleans parties are unique (in several ways :-) but one way is that you are not asked what you do for a living.  However, today a common question is "What are you doing for the recovery ?"

And I have heard only one comment of bitterness from those flooded out towards those that were not flooded.  Reaching out and helping our neighbors has kept the community together IMO.

For those interested, This story is NOT behind a pay wall.

a very good story it was.

For a long period where money was worth a bit more every year, consider the dark ages, a millenium of falling prices (and knowledge). Everybody saved, nobody spent, because it would always be cheaper tomorrow. Healthy inflation did not bring about the Renaissance until after Columbus, when Spanish treasure ships brought back tons of new currency from central and south america.  This even indirectly enriched england, bitterly resentful that spain had the bit with precious metals, suddenly able to sell their products to spain and others.  And, they learned how to directly tax the spanish treasure ships.  

The internal and external trade that was financed by the (inflated) currencies, gold and silver, led to higher standards of living and, mostly, expanding populations world wide (omitting, of course, the slavery and new diseases transmitted tn the americas and other locales.) Increased wealth allowed gentlemen researchers the time for thought and experimentation; this progress led to better understanding of the world we live and, of course, further improved living standards and life expectency.  

Of course, none of this had anything to do with cheap oil. BTW, those unhappy with the feds should consider the many deep recessions in the 1800's when we were under the gold standard, and therefore had no way to adjust prices and output.

One more data point to consider: From the time of the American Revolution until the founding of the Federal Reserve there was an incredible increase in the wealth of the average American without a general and persistent inflationary trend.

The dark ages weren't the dark ages because of a lack of growth in the money supply. Likewise although Spain experienced a most impressive infusion of hard money in the 16th and 17th centuries and did not in the end become the dominant country in Europe.

If inflation was the key to economic bliss, Argentina would not have declined from being one of the wealthiest countries on on the planet in 1930 to where it is today.

The fall of argentina from no 6 to whatever was on account of the perons and their socialist policies, combined with the usual S american corruption.
There is nothing good about high inflation, as germany relaized post ww1. BUt, deflation is no better, except perhaps that it discourages consumption - maybe useful in a peaking world - as japan has noticed recently. Realizing this, the much maligned fed does its best to shoot for 1-2% inflation.
Nobody said wealth creates dominance - look at SA. It can create opportunities, which is why spain was feared until the armada showed their war technology to be inferior. And, luck always has a role, not least at critical points. Think of the US and our first president, who could have been George I, a position GBII is trying to assume.
If he has exacted usury Or taken increase -- Shall he then live? He shall not live! If he has done any of these abominations, He shall surely die; His blood shall be upon him. (Ezekiel 18:13)

It's interesting to see how modern Bible translations handle this verse.  The idea of modern translations of the Bible, of course, is to remove the archaic terms of the translation commissioned by King James in the early 1600s which was practically the sole English translation for over 300 years and in some churches is still the only accepted translation.  Usury certainly seems to me an archaism if ever there was one.  "Charging interest" would seem to be the most obvious update for the term usury.  Yet it seems not many Bible translators have the cojones to update this verse into plain English.  They hide the blunt message of this verse by preserving the archaisms or by softening the verse to something far vaguer.

The most popular modern English translation, the New International Version keeps the archaic term "usury" and felt the need to add the term "excessive" onto interest:

He lends at usury and takes excessive interest  

The New King James Version takes the 1611 text of King James and spins it into modern language without really consulting the original Greek and Hebrew texts.  The idea was to keep the beloved King James Version for people but remove just enough of the archaic language to make it modern.  Yet "usury" apparently was not considered achaic enough:

If he has exacted usury or taken increase

The Message (a paraphrase) skips over the issue entirely with the vague phrase:

exploits the poor

The New Life Version, also employs the use of paraphrasing away the sting of the original passage:

And he makes people pay back more than they owe him

Hats off to the New American Standard Bible (one of the most literal translations available) for translating it fairly bluntly:

he lends money on interest and takes increase

There are some Christian groups that still take the ban on usury seriously, e.g. the Amish.  Also I have read about elaborate money making schemes for devout Muslims who want to make money off of their money without directly charging interest.  Another tactic used by such people is lease-to-own contracts.  I.e. buy a house by paying, for example  $1000 a month.  Your "rent" is $700 while the remaining $300 is credited to you as a payment on the house until you pay for the whole value that the house had when the contract began.  

Excellent points! I have a number of Bibles, just for the reasons you state. My scholar friends chuckle and say I should learn Greek, Hebrew and Aramaic, but life is too short . . .

The Bible condemns CONSUMER loans and makes specific prohibitions, such as that a cloak cannot be pledged as colateral. Why? Because if you lose your cloak you may die in the cold.

Now business loans are another matter entirely. Business loans are taken out by people or businesses with good credit ratings in the expectation that both parties will benefit--the owner(s) from profit and the bank (or whatever) from interest income.

Consumer loans, with a few exceptions such as home mortgages and a moderate amount of debt to finance higher education are, IMO, a bad idea.

When Humpty Dumpty falls off the wall, excessive consumer credit-card debt is going to be a splattered yolk.


Hm, really? Which passages from the Bible assert that it's OK to charge interest on business loans but not consumer loans? Did they even have such a clear divide back then?
No, of course not. But religious texts are traditionally interpreted according to the convenience of the influential. For example, the biblical injunctions against usury were interpreted so as to forbid Jews only from lending at interest to other Jews, exacting usury from non-Jews being allowed. When even that restraint was found too onerous, a variety of evasions were invented by which interest could be taken from Jews as well.
And because during the Middle Ages lending was STRICTLY forbidden to Christians by the powerful Church (reinforced by state) authorities, Jews came to monopolize lending. They have continued to flourish in finance (along with the Chinese) because they have a cultural heritage of literally thousands of years in handling money. Also, the reputable Jews and Chinese have a better reputation (at least among themselves) for honesty and integrity. Christian lords and kings, of course, defaulted on loans made to them by Jews whenever they felt like it--which was fairly often.
Here is the passage in the Catholic "New American Bible"

lends at interest and exacts usury--this son certainly shall not live. Because he practiced all these abominations, he shall surely die; his death shall be his own fault.

Let me once again recommend to everyone "Frozen Desire: The Meaning of Money" by James Buchan.
Mike, just want to say thanks for writing this.  Great stuff.  There's a lot of discussion among peak oilers of how unsustainable our current economic model is, but no one seems to have any idea what to replace it with.

And Paula, thanks for the Wörgl Stamp Scrip link.  Especially interesting because it was done locally...which will probably be the only way to do anything.  Reforming the global economy from the top down seems an unsurmountable task.    

Reforming the global economy from the top down seems an unsurmountable task.    

Depends how far you want to go ;) Maybe I should write another post on that topic. Well not for now, it is too hot here to do anything productive :)

I wanted to post a few things that seem to me to be issues with the demurrage currency idea as it would be applied to a modern economy.  It doesn't seem to me it would work on any scale.

Firstly, the distinction between "money", and other assets is actually extremely hard to make in any sensible way at this point.  We are used to thinking of money as a thing - actually we generally use a "substance" metaphor with money as a liquid that flows from one place to another, except occasionally when we store it in an illiquid form.  Thus we think there's a quantitative amount of money.  Obviously when money was gold, this was true.  When money was gold + banknotes this was also true.  However, at present I don't think it's any longer coherent to think of money as a quantity of something, the total amount of which can be measured in the economy.  I think it's more useful to think of money strictly as a system of units.  It's no more sensible to say "the total amount of dollars in the economy" than it is to say "the total amount of inches in the country".

The reason is that there are now too many forms of dollar-quantified electronic accounts which can be used for transactions.  Besides checking accounts (in M1), savings accounts (in M2), we have credit card and other unsecured credit accounts, margin accounts with stock/bond/commodities brokers, the stock/bond/securities balances themselves, paypal accounts, real estate backed credit lines (which are like using your real estate asset as a form of money), REIT balances, etc, etc.  In each case, these are things that can be used to make a transaction in a heartbeat, and transaction flows in or out of them can certainly affect the demand for goods and services in just the same ways as things more traditionally thought of as money.

So now, which of these things is the demurrage to be charged on?  If all of them, then nobody will invest in anything (since the return on investment will always be negative).  But if the demurrage is only to be charged on some kinds of electronic asset balances, then people will rapidly figure out to only use the other kinds as a store of value.  Since those will still pay interest (at least as long as stock and bond issuing companies would like to attract any investment), in effect nothing will have changed except a shift in the exact kind of asset balances people like to maintain (and some corresponding repricing - downwards for asset types subject to demurrage and upwards for those not).

Could be, could be.

I haven't personally arrived at a conclusion about this yet. I mostly wanted to raise awareness of alt economics ... based on my own experiences money is largely some Matrix like thing that people just accept as part of reality, and don't realise that some of its rules can be bent, and others can be broken. That was certainly my own experience before learning how it works.

Most proponents of demurrage advocate it within the framework of complementary currencies. That is, they are promoted as specialist tools designed to reinvigorate local communities rather than act as national or international currencies. So they see currencies with these kinds of properties existing alongside bigger and more traditional currrencies.

I have never been entirely sold on this idea ... it seems to me that if an idea doesn't scale up to the international level there must be some flaw with it that just isn't apparent when things are simple. I can't tell if that's a bias I've brought across from the world of software engineering or whether it's a real economic concern.

The reason is that there are now too many forms of dollar-quantified electronic accounts which can be used for transactions.

I'm not sure I agree with your argument - value can be stored in many kinds of dollar denominated accounts but they aren't all equally desirable. I don't know many people who would want to immediately convert all their wages into stock just to escape the demurrage costs, because stocks are inherantly more volatile than hard currency is.

Likewise whilst real estate is not that volatile it's also not that liquid - you can draw dollars on a credit line backed by your house but that credit must be repaid somehow and selling the house is the most awkward way to do that.

Of course we can always twist the mirror and look at it another way - perhaps if demurrage cannot be applied to modern economic systems due to their complexity then those systems are too complex and should be simplified?

it seems to me that if an idea doesn't scale up to the international level there must be some flaw with it that just isn't apparent when things are simple

According to Douthwaite, money has several distinct roles to play, including: easier barter, measure of value, and vehicle for long-term savings.  And he says that no single money system can serve all of these purposes well.  Thus he sees the need for 3 or 4 parallel money systems, ranging from the local to the global.  The latter he thinks should be tied to units of energy, and definitely not be anybody's national currency.

"To say people cannot have work because there's not enough money, is to say a highway can't be built because there are not enough inches" - Major Douglas.
A key issue is the nature of the monetary system being used.  Unlike in physics, where measurement units are simple and completely defined, in economics/finance, money - one of whose functions is unit of account: a measure used to set prices and make economic calculations - has very different properties depending on the monetary system in place.

Below I'll 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, the economic system must be on the way up to Hubbert's Peak.

By "soft" monetary system ("funny money" in gold bugs' jargon) I mean one which is not PURE precious metals-based.  By that in turn I mean one in which circulation consists exclusively of bullion or at most of certificates thereof issued by "100% reserve" banks.  

So, funny monetary systems comprise:

  • the fractional gold standard, which was inherently unstable (because a fractional reserve banking system demands a lender of last resort and the gold standard prevents the existence of one), was suspended during any major upheaval (such as Napoleonic War, American Civil War, WWI) and was definitively abandoned during the Great Depression, and
  • the fiat money system, both in its universally adopted fractional reserve banking flavor and in the theoretical-domain 100% reserve banking flavor (Simons 1934 and Fisher 1935).

Of note, the biblical prohibition of interest was issued when the monetary system in effect was pure precious metals-based.  And it applies to that system.  So it is legitimate to earn interest from the current funny money system.

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

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?), dropping to 0.05 % during the Middle Ages, to rise to 0.59 % during the XIX century and to 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 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.  Of course, the correlation of higher rates 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 and for precious metals), 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, 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)

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, MV = Py, assuming constant V.)

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.

As an aside, Colin Campbell has become increasingly aware of the financial and monetary implications of Peak Oil.  See:
The Dawn of the Second Half of the Age of Oil (Feb 2005)
Financial Consequences of Peak Oil (May 2005)
What is Money? (May 2006)

Herman Daly <> described how discounting the future (NPV calculations) is the result of current exponential growth, embodying the assumption of infinite resources and preventing the economy recognising impending limits:

The second problem is that the future profit must be discounted to its present value. The investor has the alternative in an expanding economy of depleting now and investing the short-term profits in another line that will earn the expected going rate, which will be close to the growth rate of the economy. The discount rate he applies to future profit is the same as the rate at which he would expect his reinvested short-term profits to grow. This expected rate is determined largely by the current rate and by recent changes in the current rate. The result is that high and increasing current growth rates, based on high and increasing current depletion rates, lead to high and increasing discount rates applied to future values. The last condition in turn leads to a low incentive to conserve, which feeds back to high current depletion and growth rates, high discount rates, and so forth. Present value calculations thus have an element of positive feedback that is destabilizing from the point of view of conservation. Financial prudence usually advises depleting now and investing short-term earnings in depleting some other resource. The presumption again is infinite resources. There will always be more material and energy resources available to feed the march of compound interest, with its consequent discounting of future values and disincentive to conservation.

This is one of the best posts EVER in the peak oil blogosphere.

Will post more later.


note I hit the semi colon button accidentally, was not trying to wink at you mike.



Gosh, you flatter me :)

-a guy who got started by reading

Hello all.  First post; I just couldn't resist this topic.  Too bad I'm getting in late.

Bernard Lietaer's book, The Future of Money, really is a well written and thought provoking book.  I recommend it highly.

Anyway, I have had a project brewing (sadly, for years now) around the concept of "negative interest".  (There is a haphazard and outdated collection of information about it at [])

In a nutshell:

  • Credits devalue with time.  It may be easier to think of it as a "demurrage" fee.  One tenth of a percent per day, for example.
  • To prevent the money supply from dwindling to nothing over time, the total amount of devaluation (or demurrage fee) is redistributed equally to every person.
  • There is a quiescent equilibrium at which the total money supply is equally distributed, all people having the same amount of credits.  Personal accounts will always move toward this amount in the absence of transactions.
  • As a social enhancement to this redistribution, a fixed percentage of the redistributed credits are directed to a special social funds account.  Each person can has such an account to which they can transfer only to entities that benefit society in general.  (Scientific research, arts, charity, open source, etc)
  • Of the three major functions of money; a medium of exchange, a measure of value, and a store of value, Nubux aims to fulfill the first two, but not the last.

Unsurprisingly, the hardest part about implementing a new currency is gaining a large enough user base.  My idea in this regard is to present Nubux as a marketing tool for businesses, in the same fashion as a coupon.  They would accept Nubux as a discount on purchases.  Coupons are a familiar concept for most people, and the fact that they are only valuable for a limited period of time is accepted.  The difference from a traditional coupon is that it still maintains value to the business after it has been accepted as a discount to a purchase.

I'll close with a few general observations...

The negative interest system is inherently stable, whereas positive interest is not.  I mean this in a mathematic sense, but the terminology fits the general sense as well.

Inflation is a form of devaluation, but the devaluation is not distributed equally.  There is a time factor involved in the inflationary effect, such that new money (from central and large commercial banks and government) enjoys full value, but as the new money works it way through the system, the devaluing effects of inflation takes its cut.

There should be no inflation if the money supply is kept constant per capita.  (At least from a monetarist point of view)  So prices should remain constant given the same demand levels.  This would provide more recognizable price signals, since inflation adjustments would not need to be made (or fudged).

Centrally created money is authoritarian (bank or government), whereas the distributed money injection is inherently egalitarian.

Using the Nubux concept of social accounts, Government could be operated without tax collection.  (Although I personally think that resource usage such as land should be taxed)  So long as the government's spending is equal to the total devaluation over the period, the system remains stable.

In a capitalist society, it seems reasonable to tax capital.  (Maybe it's just me)

A common misconception is that negative interest discourages saving.  It certainly will discourage saving currency, but not saving other forms of wealth.  One could easily use precious metals, even stocks or bonds.  Life would go on pretty much as usual.  There would just be a necessary paradigm shift that money is not real wealth, it is only a human construct.  Money should be an effective means of trading things of real value, that's all. (IMHO, of course)

I've probably gone on too much already.  I'd love to discuss this more with anyone interested.  Thanks to everyone for the great site!

That's a very interesting idea. I need to ponder it more though.