Daydreaming reform: basic income, money and work ethic

To say we face an economic crisis is hardly controversial but the crisis is so severe that the reforms needed make Karl Marx look a part of the establishment.   The changes needed are radical beyond the comprehension of many people as they require more than just tweaking what we already have.

The basic problem is that we have used up most of the easily accessible energy and mineral resources.  Those that are left require so much energy to extract that they are almost useless.  There have been other times in economic history when humans have had to cope with resource shortages but these were temporary as more resources were waiting to be discovered.  This time the problem is not knowing where the resources are located but the cost/energy required to extract them.

The three basic changes are a basic universal income, the way in which we create money and overcoming the work ethic.  To accomplish anything all three reforms will be needed at the same time.  As there are so many conflicting vested interests this will be an impossibility.  Prove me wrong.  While these appear to be radical ideas, this writer did a degree in conventional economics at the University of British Columbia and has a strong commitment to a market economy.   The radical comes from wanting a market economy when a major feature of the current economy is that competition is restricted by government legislation.

The basis for an income scheme is the agricultural surplus resulting from all the technology which has developed at least since a farmer discovered he could produce more by using a collar on a horse rather than a harness on an ox.  Through the centuries the elite have confiscated most of the surplus with the use of force. Since the industrial revolution psychological tactics such as legal restrictions on competition,patents, copyright and the work ethic have been less messy.  The need for labour to man the empires has allowed workers to claim a share of the surplus.  As robots replace workers it will be interesting to see what happens to the agricultural surplus – and workers.

This writer would like to see the agricultural surplus treated as an inheritance to be shared equally by all the people of the world.  The way to distribute this inheritance is with a basic income scheme.  Some ideas as to how to do this are in the free e-book, Funny Money: Adapting to a Down economy, available from this weblog.

One of the advantages of an income scheme is that individuals would be able to take action on social and environmental issues related to their employment.  Workers would no longer have to work for exploitive employers and people who disagreed with a firm’s social or environmental policies would not have to bite their tongues for the sake of a pay check.

There is an old saying that money is the root of all evil.  When I studied the economics of money and banking I decided it was the lack of money that is the root of all evil.  I now think the way in which we create money is the root of all evil.

In most of the world’s economies money is created when the banks  make loans and because banks are generally required to keep a fraction of their deposits on reserve most loans become additional deposits in the banking system.  This is called fractional reserve money.  It is a problem because loans that have to be written off reduce the amount of money available, with a multiplier, and because interest is charged on the loans.  A sudden reduction in the money supply is the most difficult of all economic crises.   If all the loans outstanding had to be repaid at the same time there would not be enough money to repay the principle and the interest.  We would recognize the problem as a financial crisis.  This is why I titled my book Funny Money.  I encourage you to get a free copy from Smashwords for an explanation of this problem.

Money is useful because it is a tool which facilitates the exchange of goods and services especially when a lot of our exchanges are with strangers.  We have traditionally used gold or other material items as a basis for money.  Some people still talk about the gold standard although fractional reserve money is based on faith rather than gold.

A few small groups around the world have established what they call Local Exchange Trading Systems.  These people base their exchanges on credits.  You get a credit when you sell a good or service to another member and use credits when you purchase something.  I like this system because the credits are a form of money without the problems of fractional reserve and interest.  In my book I propose we adopt a national exchange trading system and combine it with credits from a guaranteed income scheme.  This would be using money as a tool rather than a commodity.  See the book for more details.

Adopting this system would be revolutionary because it would be a transfer of decision making power from bankers to individuals.  Under fractional reserve bankers get to make decisions about what projects get funded and who gets to do them.  A National Exchange Trading System would allow individuals to make these decisions as they decided what to do with their share of the agricultural surplus.  Some of us would use our share to vote for zero economic growth and more leisure activities.

Many people feel guilty if they do not work continuously.  The work ethic and a distribution of the agricultural surplus via employment are the main motivators that keep our economy going. But the truth is that we do not need everyone to work full-time to provide foods, shelter and entertainment to everyone.  Most of the work people do is work for the sake of work and to maintain the empires of the one per cent.

The bushmen of the Kalahari desert in Africa are/were known for not being interested in material things and for not working hard.  But as hunters and gatherers they had no need to store food.  Any day of the year they could go out and collect the food they needed for that day.  When our ancestors moved to agricultural pursuits, they had to store food and this meant working at least at some times of the year.  We have now taken this need to an extreme.

One of the reasons work is so important is that most of us get our self-identity from our employment.  To save our resource base and to preserve the environment we will have to get our self-identity from other activities.  How about a leisure ethic which encourages people to perform operas, write poetry, write economic weblogs or many other useless things.

This blogger keeps by his computer a little statue of the Laughing Buddha to remind him not to take life too seriously.  Most of the time it works but when thinking about the current economic outlook it is hard to laugh.  Most of us think and act in our own short-term interests as opposed to the long-term in interests of our selves or our communities.  So long as that holds true the outlook is for a lot of human suffering.  But  what does it matter.  To quote a famous economist, in the long term we will all be dead.

 

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The next economic crisis: financial or real?

A few people are prepping themselves for the next economic crisis and speculating about what will cause it.  This blogger thinks there are several possible causes.  It is about 99.99 per cent certain there will be another crisis.

Even if somebody does make an accurate prediction it will probably do no good because there are so many vested interests there will be no consensus about the cause and about what to do to prevent it.  However, for some of us there is some fun in trying to think out economic problems and we might be able to improve our understanding of economics.  So, here goes.

The possibilities are for the cause to be within the financial system or for the cause to be within the physical or real side of the economy.  As the two are interconnected it may be difficult to determine just what is happening.

Problems within the financial system relate to money. Either there is too much money or not enough.  Ideally the available money supply needs to be just right for the quantity of goods and services exchanged and as this varies it needs to be flexible.  When there is too much money available there is potential for inflation and this is a problem for people with invested savings as they lose some of their purchasing power.  Deflation is a problem for lenders as the money they have loaned out will have less purchasing power when it is returned, if it is returned.

The really serious problem comes when there is not enough money as this curtails economic activity.  Most of the money supply is based on loans made by the financial industry and involves a multiplier.  When the industry has to write off a large quantity of loans, as with the recent subprime housing crisis, the money supply goes down, again with a multiplier effect.  Without money the exchange of goods and services becomes difficult and lots of people lose their jobs. Big time suffering.

Currently it appears there is lots of money floating around the economy.  Lots of firms are reported to have piles of cash on hand and are probably unable to see investment opportunities.

On the real side of the economy, many people assume there are lots of energy and mineral resources available and therefore no physical restraints on the exchange of goods and services.   This may not be true.

A common argument is that as resources are consumed higher prices will bring on a greater supply which happened with oil and lots of minerals.  The problem is that they also require more energy to extract which reduces the energy available for other activities and at some point the value of the energy exceeds the value of the resources.  This blogger figures there are lots of energy and mineral resources available on the earth’s crust,  but the cost of getting them makes them useless.  This could be changed by technology and the decreasing cost of solar energy will make the high cost of oil irrelevant.

Children, workings in a vegetable garden.

However there may be some economic  disruptions in the transition.  How much oil infrastructure will have to be written of and what would that do to the money supply? Also there are all the other minerals for which there are no clear cheap substitutes.

This guy fears the greatest threat to our economic well-being is from resource restrictions on the physical side of the economy.  An even greater threat is that too many people will not see the problem because they analyse problems only in financial terms and will be looking for solutions on the financial side.  Changes in how much money is available or even in the way in which we create money will not add to the resource base or make it cheaper to extract them.

I fear for the future of my grandchildren.

 

 

 

Recycling is not enough

In this corner of the world recycling is almost universal.  Plastics, glass, metals, compost and drink containers are separated from the rest of the garbage.  Some people also take their own shopping bags to the supermarket.  The exceptions are that we have not mastered the technology of recycling energy and most of us continue to drive a lot

Unfortunately we are still experiencing environmental degradation, inflation and unemployment.  Recycling is not enough.  Its main function is to allow us to feel we are doing something. It allows us to ignore the real issues –  population levels and values.

I believe the most important way in to protect the environment is to reduce the number of people trying to live on this planet.  There are just too many people and I do not like the idea of saying some people should not have the same standard of living as others.  Who is to decide who gets shorted?

I also recognize it is a near impossibility as we cannot tell people not to have sex and not to have children.  What are the consequences of not taking action to reduce the population?  When the Europeans came to North America they brought with them some new diseases and close to 90 per cent of the native population died.  I understand there is some archaeological evidence that there was a similar population reduction in the Mediterranean some millenia ago.  If these precedents hold for us, then there is likely to be one hell of a stench.

We also need to get over our fear of death as so much energy and resources go into prolonging life.  Quite a few years ago The Economist reported that 80 per cent of health care spending is in the last six months of life.  I do not want to go into the 80 per cent and I hope that when my time comes I and those close to me will be able to accept it gracefully.

The other big challenge to protect  the environment deals with values many of which are a part of our committment to economic growth.

According to anthropologist James Suzman who recently published the book Affluence without Abundance, the most successful and long-lasting civilization was that of the Bushmen of the Kalahari desert.  These hunters and gatherers “worked” only ten to 15 hours a week.  As they relocated up to ten times a year they had little interest in material things and their society had high equality.  We cannot all go back to being hunters and gathers but we can choose some of their values and apply them to our daily lives.

If we really want to protect the environment then we should have fewer children, live in place, live a healthy lifestyle, have fewer and smaller toys, drive less, go easy on the travel and work as little as possible.  Recycling may make us feel we are doing something but it is not enough.

 

 

Trade, foreign exchange and big hamburgers

Foreign exchange and trade is hardly a sexy subject and it is one most of us would prefer not to think about. However, when people get excited about globalization or fear their jobs are threatened by trade, then we need to take it seriously.

Foreign exchange involves the financial transactions which go with trade with other countries.  Economics is a social activity and involves relationships even if some are very fleeting.  For any relationship to be satisfactory there needs to be a more or less equal two-way exchange.  This applies to trade with people from other countries.  Trade should be a two-way.

In analysing economic issues it is important to distinguish between physical transactions and financial transactions because sometimes the physical analysis gives a clearer picture than the financial analysis.  If this world had a perfect market economy each physical trade with a foreigner would be matched by a financial transaction.   Changes in prices would reflect changes in supply and demand and would be signals to producers to increase or decrease production or to even stop producing an item. This is true for domestic trade as well as international trade.

As exchange rates are based on supply and demand for currencies, financial only transactions distort the exchange rate and therefore distort prices. Not good.

An interesting approach to foreign exchange is the Big Mac index created by The Economist. I like this because it is based on a physical item, the big mac hamburger,  sold around the world.  If we had international perfect competition and everything were equal a big mac would cost the same in each currency.  The Economist compares the costs at current exchange rates to determine if a currency is over or under valued.

Obviously the world is not equal. Different countries have different values, different resources and different access to energy and mineral resources.

What happens if money is loaned or gifted from one country to another.  If the recipient uses the money to purchase goods or services from the first country, then the money becomes a part of the foreign exchange calculations.   If it is kept in foreign currency reserves,  it is removed from the money supply of the first country until it is used. If the money is exchanged and used to purchase local goods and services, it distorts the exchange rate.  If the money is kept and used to purchase local goods and services, it adds the second country’s money supply and subtracts from that of the first country.

Another complication is that a lot of people speculate about what will happen to the price of one currency in terms of another.  These transactions will be financial only in that they do not match exchanges of goods and services.  It could be that speculation smooths out fluctuations or they could distort prices.  It is hard to know as we do not know which transactions are speculative.  We do know that the volume of foreign exchange trades is massive. This writer suspects that if all financial transactions matched physical trades there would be little fluctuations in exchange rates as changes would take time.

This blogger has spent a lot of time and effort in trying to understand the economics of money, including a degree at the University of British Columbia.  Foreign exchange and trade are difficult probably because there are problems in the way in which we create money.  For more on this please get a free copy of my e-book Funny Money: Adapting to a Down Economy.  One of the problems is that our way of creating money gives some people a lot of power and control over others.  Vested interests are difficult to deal with.

 

 

 

 

 

Retirement, the future and The Economist

The editors and writers of The Economist news magazine must be ageing and not seeing things too clearly.  That is my conclusion after reading their recent special report on the future of elderly people.  Another option is that my view of the future is incorrect.  The Economist is much more optimistic than I am, I hope they are correct.

I disagree with them on three issues – the future of the economy, the work ethic and financial issues.

Most of their readers probably have a vested interest in continued economic growth and to prosper the magazine needs to support this. And they do.

This blogger figures the current economic problems are related to energy and mineral resources.  We have used up the most accessible of these and those which are left take so much energy to extract they are worthless.  If this is correct the outlook for the future is rather grim.  We can anticipate a lot of human suffering as we have to adapt to a down economy.  So far retirees have largely been exempt from this but our time may be coming. Trump, Brexit, Saunders, Corbyn and Macron could all be symptoms of this problem.  Lots of people recognize something is not right but do not know what it is.

In recent years The Economist has come up with a number of cute cures for the economic crisis.  This time we are going to save ourselves by getting people to work further into old age.  This commitment to the work ethic may be good for those whose fortunes and status depend upon getting other people to work for them but if the above analysis is correct increasing economic activity will use up more energy and resources and bring forward the timing of a complete economic collapse.  Rather than promoting the work ethic we need to be pushing a leisure ethic  in which people get their self identity from doing non economic things such as music, theatre, art or writing a weblog on economics. The Economist talks about a longevity dividend.  Should this dividend be more work or more leisure?

One of the features of money is that it gives a person control over resources.  Financial obligations left over from the era of prosperity mean some older people have a greater  command over current resources than the young.  Older people are going on luxury cruises in which a waiter from a third world country puts the pepper on their food while their grandchildren are struggling to find jobs and homes.  When the crisis hits pensions and other savings the cruise ship operators will be lobbying for the release from prison of a famous Italian captain so they can put him back to work.

This blogger tends to be pessimistic about the economic future.  I figure I was very lucky in the time and place in which I was born and have lived most of my life (1941 and western Canada).

Why debt is a huge problem

Generally accepted wisdom tells us that excessive debt is a serious problem although some people question why government debt to a central bank is problematic. After all what is wrong with one government agency owing money to another?  Why not just let the debt build up?

In this case the generally accepted wisdom is probably correct because debt is an important part of our money supply.   If we were to lose our money supply our economy would be in big trouble.

Money is a complex part of our economy and I suspect few people, including a lot of economists, really understand how it works.  Fractional reserve banking is complex but I have found it relative easy to understand.  I have explained it in the essay  LETS go to market: Dealing with the financial crisis on this weblog and there are numerous explanations that can be found with any search engine.  I encourage you to figure it out.

About 90 per cent of our money supply is based on the debt created in fractional reserve banking. This is a problem for three reasons.

The first is that the money supply needs to be flexible up and down.  The amount of money we need to facilitate the exchange of goods and services must be proportional to the quantity of goods and services we need to exchange.  I know economists like to model the economy on a least squares regression formula which gives an upwards line with a steady slope.  However, the reality is that the economy behaves like a fractal which means there are a series of ups and downs and more ups and downs within each trend. The amount of money needed varies with each up and down but fractional reserve money can only keep on increasing.  This sort of works when there is continuous economic growth but if growth slows or reverses, then there are problems.

The second problem with fractional reserve banking is that interest is charged on the debt created. This adds a purely financial demand for more money in that it is not needed for exchange of goods and services.  If all outstanding debts plus interest had to be repaid at the same time there would not be enough money in the economy. From time to time this feature of fractional reserve banking catches up with us and we call it a financial crisis.

The third problem is that when there is a financial crisis lots of people lose their savings.  The need to save for a rainy day, or retirement, is a part of our psyche and fully exploited by the marketing arm of the financial industry but there are three ways in which we can lose our savings: a financial crises, inflation or a major economic downturn. these are more likely when the economy is not growing or declining. With the current economic climate most of us would probably be better off to live for today and worry about tomorrow when that day comes.  The best way to secure one’s future is probably a market garden.

These are real problems and from time to time they cause havoc in the lives of most of us.  Therefore we are right to worry about excessive debt.  The good news is that there are other ways of creating money and the bad news is that money is such an emotional concept that most people are not prepared to consider other ideas.

One of the other ways of creating money is discussed in my ebook Funny Money: Adapting to a down economy which is available free from the link at the top of this weblog.

We tend to take money for granted so long as the economy is working but it is such an important concept that we would do well to try to understand it and make changes.  I cannot see that happening so in the meantime we should remember the advise of Shakespeare: Neither a lender nor a borrower be.

 

The theology of being good or mean

Do we need religion to tell us to be kind to others or do we need religion to give us permission to be selfish and inconsiderate of others?

This question follows from an article which outlines some of the scriptures used by some North Americans to justify policies which some of us might think are mean.

Shortly after leaving high school this guy came across a book called The Panchatantra which is part of the wisdom literature of ancient India.  One of the verses which has stayed with me through the years is:

Forget you prosings manifold,
the moral law is easily told,
to help your neighbour, that is good,
to hurt him, that is devilhood..

This simple verse is straight forward and one would think  it, or something similar, is all people need for moral guidance.  How ever , at least in our culture, some people follow it some of the time, some people ignore it all the time and some people follow it all (or most) of the time.

It would be interesting to know if this applies to all cultures or are there some in which all people follow the  principle all  the time.  To answer this one would probably have to spend several reincarnations doing field work in anthropology.

Reading the above article I note that almost all the scriptural references provide justification for being mean to others.  Could it be that if one wants to be selfish or nasty one needs divine assistance?  A lot of our economic culture is based on exploiting and taking advantage of other people.  If you are a part or nearly a part of the one percent your fortune and your status depend upon others working hard.

I think we should make a distinction between economic well-being and theological salvation.  It may be that we alone are responsible for our salvation, but people should not have to go hungry.

This blogger believes the technology which allows us to produce so much with so little effort should be a part of our collective inheritance.  The benefits should be shared equally rather than going to  few people.

Regardless of what Christian or other scriptures say, I think we should expect people to follow ancient Hindu moral law.

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