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.

 

Advertisements

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.

 

 

 

 

 

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.

 

Why your savings and pensions are at risk

The fractional reserve way of creating money means a lot of people are at risk of losing all or part of their savings and pensions.

If there is too much money supply in the economy then we have inflation and people with savings or pensions lose some of their purchasing power and those who owe money benefit because they repay their loans with less purchasing power.  Now you know why governments and the people who speak on their behalf promote mild inflation.  This is at least unauthorized taxation if not theft.

pexels-photo-2105902If you have deflation, then people who are owed money win because they are repaid with more purchasing power than they loaned.  The borrowers lose because they have to repay with more purchasing power.

To be fair to everyone we need to manage the economy so that just the right amount of money is available at all times.  At a time when the economy is on a down trend, this is very important as too much money puts us in danger of hyperinflation.

Getting this amount right has long been a challenge to central banks although the common sense answer is fairly simple.  The money supply should vary with the quantity of goods and services we want to exchange and it should be flexible up and down.

The wrench in the simplicity is the fractional reserve way of creating money.  When banks make loans they must (or should) keep a fraction of the amount on reserve for when the depositor wants his/her money returned.  As the amount is only a fraction banks are at risk of a “run” if depositors lose faith.  And because of the fractional reserve there is a multiplier effect involved.  Does not this sound like a set up for a crisis?  The mechanics of this process are a little complex although I have always found it easy to understand. To figure it out I suggest you Google “fractional reserve” or look at my free e book Funny Money: Adapting to a Down Economy or look at the essay Going to Market on this weblog.

The other end of the wrench is  that interest is charged on the loans made by the banks.  Mainstream economists have given little or no thought to the consequences of this. Because all of our money is created by the making of loans, if all the outstanding debt were to be paid off at one time there would not be enough money to repay it all because of the interest.  The charging of interest on the debt/money means there is never enough money available to repay all outstanding debt. Inflation is built into the fractional reserve way of creating money.

The system works only so long as the economy and the money supply continues to grow.  An upset in either means crisis of which we have had many.

The relationship between money supply and economic output is expressed in a formula, MV=PQ, some times known as the quantity theory of money.  Money times the velocity at which it circulates in the economy is equal to a price index times the quantity of goods and services produced.

I get ticked off because this is frequently taken to mean there is a direct, proportional relationship between the money supply and the inflation rate or price level.   Can’t people see there are four variables in this formula?  Total output is an important part of this formula.  If it should happen to go down something needs to happen to another variable.

Our society has a strong commitment to economic growth and a need to keep it growing so that people will not suffer from unemployment.   Some desperate people are trying to stimulate growth by increasing the money supply. This may increase inflation but it will not lead to growth unless we can find inexpensive energy and mineral resources to support it.  I suspect the new American president has  his eye on parks and reserve lands to encourage more economic activity.  He will probably succeed in the short term to be followed by a major economic collapse.

This blogger thinks we need some major economic reforms, not only in our financial system but in our commitment to economic growth.  We need to minimize our production and exchange of goods and services so we are using fewer energy and mineral resources.

A lot  of people operate on faith in our financial system and ignore suggestions we need reform.  I think the risk is so great that prudent people will at least give some thought to these issues.  It is your savings and your pensions and your future that is at risk.

 

 

Please help promote this weblog

Please send the link to this post to your friends and social media.  Promoting a weblog can be difficult.  I get some referrals from LinkedIn.  I used to get quite a few from Reddit but I have been “shadow  banned” for linking to my own weblog.  Self promotion (and free speech?) are serious offenses on Reddit. I figure my strength is in the thinking that goes into the posts and I thank you for helping.  (r/economics   r/libertarian   r/economiccolapse  r/Degrowth )

Regulating those evil payday lenders

Here is a link to an article from the Mises Institute opposing regulations for the American payday lending industry.

This simple proposal to regulate short-term lending raises important questions about how we treat poor people, about the role of money in our economy and how we regulate business activity.

This writer believes we should have a collective responsibility to ensure every one has the opportunity for the same standard of living as most other people.  Probably the best way to meet this responsibility would be a universal basic income scheme.  Such a program would not stop everyone from mismanaging their finances but it should eliminate the need for a lot of short-term credit.

Money can be an instrument of exploitation and is based on the debt created when banks make loans.  Debt is a path to slavery, especially for poor people.

We need a radical revision of the way in which we create money.  We treat money as a commodity which has its own intrinsic  value.  We would be better to treat money as a tool to facilitate the exchange of goods and services.  As a tool rather than a commodity there would be no need for interest.  Also the total amount of money available needs to be flexible up and down as the quantity of goods and services we need to exchange expands or retracts.  This guy has written extensively on this topic on his weblog and in his book.

As much as possibly economic forces, competition, should be used to regulate business activity. The more competition the fewer profits and the less need for regulation.  Regulations tend to restrict competition, allow greater profits and increase the demand for more regulations.

This writer is not enthusiastic about supporting the payday loan industry but does recognize that in our society there is a need for short-term credit.  I also believe there is a need to reform our financial system and the reforms could reduce the need for credit from all of us including the poor.

Why we should be sceptical of economic data

The following was posted as a comment on Paul Krugman’s blog on distrust of data.

I am one of those who distrust economic data because I see two problems with it.  One is that I do not always agree with the economic theory upon which data collection is based and the other is the difficulty in accurately and totally counting economic activity.

There are a great variety of economic theories and date collection represents the theory of the collectors which may or not be correct.  For example, money is usually defined as currency in ciruclation and bank deposits with several definitions depending upon what deposits are included.  I prefer to think of money as a tool to facilitate the exchange of goods and services.  How does one count or measure a tool?

Counting economic activity is another problem because it can only be recorded if there is a monetary exchange.  How do you measure housework or the many small things we do for each other.

When I worked as a journalist I realized there are two types of figures.  One we photograph and use to sell newspapers and the other put things into perspective.

Power of individuals and the universal basic income

Proposals for a universal basic income are bringing out lots of arguments which show a lack of understanding of the UBI and the nature of money. Here is an example in an article from  The Independent.

The author of the article claims a UBI will open the door for increased government control over people’s lives. This blogger figures the opposite will be the case and an income scheme will be a tremendous transfer of power to individuals.

The first and most important thing to say about a UBI is that it needs to be a part of a radical overhaul of the way in which we exchange goods and services and the way in which we create money.  Probably the current economic crisis is the result of our having used up the most easily accessible of energy and mineral resources.  There are lots of these left but they require lots of energy to extract.  The fractional reserve way of creating money also has lots of problems and needs to be reformed.

There are lots of people who want to tell others how to live and those of us who value Independence will always have to be vigilant and assertive.  This is separate from the UBI and will be an issue regardless.

Money represents purchasing power and giving it to people empowers them in that they can make purchasing decisions according to their values. This is different from food stamps in that stamps are for specified products and can hardly be the equivalent of money. A UBI will be a tremendous transfer of power to individuals and one would expect a lot of people to object to this.  Some of those who object will likely be the bankers whose power derives from creating fractional reserve money.

Another UBI issue is dependency.  Some people including the author of the reference article fear it will make us more dependent upon the state. I beg to differ because we should think of the UBI as an inheritance.  We can have it because we have such large agricultural surplus which is based on hundreds of years of agricultural and technological development.  We should all have a right to a share of the agricultural surplus.

The universal basic income will lead to a revolutionary change in the way we exchange goods and services.  Many of the issues are discussed in my book Funny Money: Adapting to Down Economy.  I encourage  you to have a look at it.  Details at the top of this blog.

%d bloggers like this: