Compassionate economics

Are the words compassion and economics compatible?

Absolutely. If we were to exchange goods and services without interference from legislation which restricts competition we would have an economy with a high degree of equality, fairness, environmental sustainability, peace and compassion.


Major evidence for this comes from the hunters and gatherers who used to inhabit this planet and especially the bushmen of the Kalihari Desert who lived a peaceful and sustainable lifestyle for close to 200,000 years


This writer has come to this conclusion after a lifetime of interest in current affairs and relationships, through a first class degree in economics from the University of British Columbia and lots of informal reading in economics, economic history, history, ancient history and anthropology.


That I feel it necessary to start this book with this question indicates how poorly so many people, including economists, understand economics and money. At least since Marx many people have equated economics with the evils of the current economic system and shut off whenever the word economics is used. This is sad because economics is about the relationships involved in the exchange of goods and services and most of us have to exchange with at least a few people. Money is a tool to facilitate this exchange. Both economics and money involve a lot of distortions of the truth which makes it easy for some people to exploit the rest of us.


team-spirit-2447163_1920As we work through compassionate economics the issue of the resource base hangs over us and makes life difficult for all of us.

Economics professors often start their lectures by drawing a simple x graph on the black board. One line represents the physical side of the economy and the other line represents the financial side of the economy. This is a very important distinction as ignoring it diverts our attention from the reality of economics.

As we mostly discuss economic problems in terms of money we ignore the physical side of the problem. For example, pensions are very important for most of us but we always talk about saving enough money rather than having enough energy and mineral resources. Two things could and probably will happen to most of the money people save for their retirement – inflation or bankruptcy. Our standard of living in retirement will depend upon the quantity of goods and services we are capable of producing relative to the number people making demands on that production. A key factor in this ratio will be the energy and mineral resources we have. There are still lots of these on the surface of our planet but we have consumed the most easily accessable.Those that are left will require a lot of energy to extract and may not be feasible.


The cost of solar energy has recently been falling quickly and has some potential. I also like that solar has the potential for each of us to make decisions about adopting it. It is great that individuals can make these decisions instead of bankers. The down side is that most of our money supply is based on debt and will disappear if a lot of loans have to be written off. I fear a lot of our money is based on loans made to support petroleum.


We need to exchange goods and services because we are social creatures. It may be this is what distinguishes us from animals. In some circumstances it may be possible for an individual to live alone but for most of us we must live with at least one other person and this means living in a relationship. On the Canadian Prairies the early explorers found they needed a female partner for survival because the division of labour was too much for one person. Later the settlers found that during harvest labour requirements were such that they needed to help each other and took turns at several farms. Now, with modern equipment one person can seed, fertilize and harvest up to 7,000 acres. But he still needs a huge support staff of suppliers. These he pays in cash rather than return labour. Economics is about how we exchange goods and services and the relationships which are a part of these exchanges.


Decision making is an important part of compassionate economics. When we make decisions for others we can and often do make those decisions by what is best for us rather than them. As there is no place for exploitation in compassionate economics we should as much as possible exchange goods and services so that individuals can make decisions for themselves. In capitalism bankers and government make decisions about what and how much is to be produced. In socialism bureaucrats in the form of central planners make those decisions. The only way I know to allow individuals to make economic decisions is the perfect competition model upon which the formal study of economics based.

At least since Marx economics has been defined as either capitalist or socialist. Both of these are very vague terms which is good for people who want to control or exploit others but meaningless for those of us who want to understand how we exchange goods and services. The main feature of capitalism as we know it is that governments pass legislation which restricts competition and we call it a market economy. The main feature of socialism is a matrix known as central planning and they say it is “by the people and for the people”. Both concepts are the idealogical equivalent of the stuff through which one would walk if one visited a cattle feed lot.

For four years this guy lived on a British Columbia coastal Indian reserve. One evening a old timer told us about the time consuming process his people used to make themselves a sweet treat,

“Do you still do this,?” I asked?

“No,” he replied. “It is a lot easier to go to Dairy Queen.”

These people did most of their hunting at the local supermarket but they still fished and they still had a few of their old traditions. One of these traditions was the sharing of fish and we had a lot of salmon, halibut, crab and oolichans (a very small, oily and smelly fish.)

It appears that in a lot of hunting gathering cultures sharing mostly with family or clan members was the predominant way of exchange. This is a major difference from our culture where it is assumed the exchange of goods and services should yield a profit. I would like us to plagiarize the hunters and gathers and make sharing the key concept in our economy. This is somewhat radical and would open the door to some major changes in our economy – a guaranteed income policy, a new way of creating money and a zero growth economy. All of these are important for resource and environmental concerns. All of these are important if we are to have a compassionate economy.

One of the major issues we have to deal with is the incompatibility of economic growth and environmental issues such as global warming, pollution, mono culture agriculture, health and overpopulation. The need for economic growth is sold as a fix for unemployment although its main purpose may be to further increase the wealth of the one percent. As compassionate economics is based on sharing rather than profits there is no need for further economic growth. With a guaranteed income scheme people will not need jobs to survive and we can deal with environmental concerns. We will also no longer need to support the greatest of all make work schemes, the arms industry. Lets opt for peace and sharing with all peoples. The goal of compassionate economics is to get the population to a sustainable level and live in peace.

Compassionate economics will allow us to replace our commitment to the work ethic with a commitment to a leisure ethic. In future we should get our self identity from the leisure activities in which we engage whether they be acting in a play, writing a book or even drinking beer.It is relatively easy for me to sit here in a comfortable chair and a nice view out the window and think out solutions to economic problems. But economics involves people with emotions and special interests. A lot of people will find it difficult to see the need for changes and those with special interests will be very vocal in protecting themselves. However I believe the future of most of us is seriousl

It is a pity that so many people shut off when they hear the word “economics.” A few years ago I read a book on green economics which promoted small businesses. I laughed and cried because economic theory is based on the concept of small businesses. One of the key assumptions of economics is that no firm is large enough to influence prices by restricting production and by restricting the quantity purchased.

A key feature of a true market economy as described by economic theory is that there are no profits. If there are profits to be made in an industry new firms will enter until prices drop to the point where there are no more profits. Firms can make wages and a return on investment (maybe) but there will be no profits. Thus a perfect market economy with competition is what is needed for a compassionate economy. A lot of people need to be studying formal economics.

It is relatively easy for me to sit here in a comfortable chair and a nice view out the window and think out solutions to economic problems. But economics involves people with emotions and special interests. A lot of people will find it difficult to see the need for changes and those with special interests will be very vocal in protecting themselves. However I believe the future of most of us is seriously threatened and we must at least try for compassionate economics.

 

Economic growth, sustainability and degrowth

A lot of people realize there are problems with the economy but few if any understand what is happening. Therefore we have varied reactions. Many people cling to faith in economic growth, some are exploring the concept of sustainability and a few are looking at “degrowth”. This blogger thinks of the three approaches as points on the ray of a matrix.

Predicting the future is difficult although the shorter the term the easier it is. Economists are little help because most are paid directly by business people or indirectly through government. Very few people get away with telling the whole truth to the people who pay them. Most economists find it expedient to say what their employers want to hear and that is mostly that the economy will continue to grow and that there will be continuing profits.

Nor can we expect the truth from political leaders as their positions depend on maintaining the support of the people. It is hard to think of any government leader telling us we will have to tighten our belts and remaining in power. Are citizens mature enough to listen to that? It would be interesting to see a political leader try.

trafficOur recent economic memory is based on a tremendous use of energy and mineral resources. Not only have we fought two world wars we have also had the resources for an incredible standard a living in which the rich have grown richer and the rest of us have done okay. The result is we have a strong committment to economic growth and a belief that it will continue forever.

Many economists are fond of regression analysis because it assumes constant economic growth. It is a mathematical formula which takes a series of data points and calculates the best fitting straight line through them. It is generally assumed this line will angle up.

This guy thinks we would get a more truthful picture of what happens in the economy if we were to use fractal analysis. Fractals are series of ups and downs each with a subseries of ups and downs within them. The sea coasts are often used as examples. The mathematics of fractals is not as clear as regression analysis but there are some useful concepts. I am fairly certain those people who do “black box” analysis of stock markets are using fractal analysis. They are apparently having some success. The concept of fractal dimension can be calculated (two minus the Hurst exponent) and changes indicate a change in direction.

If we were to apply fractal analysis to economics it would be easier to see and accept ups and downs in the economy and easier to develop mechanisms to deal with them.

The word “sustainable” as applied to economic growth is a buzzword in some circles but I find it challenging as its meaning is not clear. I suspect it is mostly a cover for continued economic growth.

To the extent that some people use fewer energy and mineral resources it is good but I suspect that sustainable development maintains a committment to economic growth. Sustainable to me means going on forever and that is what a lot of people believe about economic growth.

The reality is that the quantity of goods and services we can produce and exchange depends upon the quantity of energy and mineral  resources we have and can retrieve with a reasonable expenditure of energy. The concept of sustainable development is probably 100 years too late.

Our committment to economic growth is so strong I am not aware of any career economist having thought about what happens when the economy goes into decline. This is unfortunate as the economy regularly goes into recession and this time it may be extended.

This blogger figures current economic problems are because we have used up the most accessible energy and mineral resources. Sure, there are lots left but they require massive amounts of energy to retrieve them. Solar may help but not yet. I fear that we will be forced into degrowth.

If so the challenge will be to figure out how do distribute fairly the goods and services we have, how to cope with leisure, how to create money that will not disappear during a crisis and how to not fight over the available resources.

Money will be a special problem as fractional reserve banking works only in times of economic growth. When growth stops and banks stop making loans  the money supply goes down and because it is fractional reserve the money supply goes down with a multiplier effect. Ouch. A super big ouch.

There are lots of anecdotal evidence from around the world that we are going into a down economy. This could easily be an explanation for a lot of the negative news, both economic and non-economic, to which we are becoming accustomed.

If we could get away from our committment to economic growth we could focus instead on happiness. This concept is impossible to measure although there is some evidence that people do not need a lot of material things to be happy.

What ever happens and wherever humanity ends up it looks as if we will experience a lot of human suffering. I would like for us to minimize the suffering and maximize the happiness.

 

 

 

 

 

 

 

 

 

 

 

 

 

Let’s put some ‘civil’ in civilization

Over the past few weeks I have been reading some anthropology about hunters and gathers and have decided these so-called primitives are really the most civilized Peoples of all times.  I absolutely do not want for myself or anyone else to go to that life style but I do think we should evaluate their cultures for ideas we could adopt.  We need to put the civil in civilization.

In this post I propose to look at some of the things that make our society uncivilized and contrast these with what we know about hunters and gathers. A lot what makes us uncivilized are sources of in justice –  overpopulation, forcing people to do things according to the values and morals of others and exploitation of people and resources.  Generally these injustices are not a part of the lifestyle of hunters and gatherers.

59889This guy used to think that violence was a natural part of human nature and we  just have to live with it.  After reading about hunters and gatherers I am not so sure.  These people are generally known for being peaceful and non-violent.  One group, when threatened by some war-like neighbors just disappeared into the forest.
It would be interesting if an anthropologist would do a detailed study of this aspect of their lives.

Hunters and gathers must be expert psychologists as they have to teach their young to kill animals while remaining non violent in their human relationships.  There often appears to be a spiritual aspect to their hunting.  Apparently a lot of social control is with verbal tactics such as teasing or ridicule.

In contrast most civilized countries maintain standing armies, sometimes used for social control of populations and in some places it is acceptable for agents of the state to execute innocent people who happen to be in their way. Some people claim the right to force others to live by their values and morals and are often very successful at getting state support in the form of legislation.  Our civilizations are also very tolerant of psychological violence. In spite of all the feminist propaganda we hear, women are very skilled at this type of violence.  Violence is so pervasive in our societies that very few people get through their lives without experiencing some of it.

History tells us that so far all civilizations have failed although many people believe our own will last forever.  As so many civilizations have failed this is a major issue.  One theory is that previous civilizations have failed because they have depleted their topsoil.  If this is true we need to proceed with caution as a lot of our food supply is dependent upon adding chemicals to the soil.  We need to put a lot of effort into studying agriculture.  It is too important to leave to people who make their living from it.

This blogger believes the major threat to our way of life is that we have used up most of the easily accessible energy and mineral resources on the earths crust.  Yes, there are lots of resources left but cost of extracting them is such they are mostly useless unless we have some major technology breakthroughs.
In  contrast there is archeological evidence that the bushmen of the Kalahari desert have maintained their civilization for up to 200,000 years.  They did this by living hand to mouth, seldom  having more than a day or two of food on hand and not over exploiting resources.

A significant feature of hunting and gathering is that most decision-making is by individuals.  Leadership is low-key and individuals can easily move from one small group to another. The bushmen’s  time came to an end when their territory was taken over by farmers and herders with the help of modern technology such as boreholes to provide reliable water supplies.

It is not clear if there was a natural transition from hunting and gathering or if farming and herding developed independently.    What is significant is that the latter made for different social dynamics in that some people could make decisions that affected others.  As these other types of food provision involved food storage they also led to residence mostly in one location, more and more complex tools and a more material lifestyle.  This was probably the start of the decline into our uncivilized history.

Probably the most important of all freedoms is the right to make decisions according to our own values and morals. In our society this is a complex issue with many limits.
The first limitation, shared by hunters and gatherers, is the need to provide ourselves with food and shelter. We must spend some time on this although most hunters and gatherers devote far less time to this than we do. Anthropologists have found that a lot of them devote only 15 to 20 hours a week to this basic activity. The rest of the time they spend socializing, performing rituals, doing crafts or sleeping and being lazy.

The rest of the limits on freedom to make decisions follow from our economic organization often with religious sanctions. Modern technology and the use of oil in agriculture probably means we only need to work two or three hours a week but the work ethic requires us to work 40 to 60 hours a week. If one does not do this much work one is a deadbeat on not doing ones share. This is great for those people who want others to support their empires but not so great for the environment and the resource base and our right to decide for ourselves what we want to do.

Possession of money gives us freedom to make decisions but the way in which it is created is a limitation. Most of the money used in our exchange of goods and services is created when banks make loans in what is known as fractional reserve banking. This is a complex but easy to understand process that is fully explained in many places on the FunnyMoneyArtPowell-finalinternet including this weblog and the e-book by this writer, Funny Money: Adapting to a Down Economy. As money is created by bankers they determine who gets it and what projects are undertaken. Creating money with an income scheme and national exchange trading scheme as proposed in my book would mean a major transfer of decision-making power to individuals.

Another limit on our ability to make independent decisions is the extensive use of marketing techniques by major corporations. I have often thought the best psychological insights come from marketing people and they do not hesitate to use their knowledge to influence how people think and what they do. Sadly, we have got to the point where a lot of people consider exploitive marketing to be normal, legitimate and even desirable. Some major Canadian companies have recently made the news because of the pressures put on their sales people, like to sell expensive internet or phone services to people who will never use them.

It is amazing how easily so many people get hooked into agendas set by others. It is easy to avoid being influenced by the marketers; just avoid television and social media. It is also easy for me to say that as I left home before my parents bought a television.
Not only are hunters and gatherers known for their peacefulness, they are also known for their equality. If people are not trying to aquire lots of material things, then economic equality becomes natural.

In our own culture we are aware of increasing inequality as more people suffer from the falling economy but we do not know how to change things. I believe everyone should have the opportunity to have the same standard of living as everyone else. It is painful to see people homeless and having to rely on food banks.

This writer believes inequality could be corrected with an income scheme and a true market economy. One of the features of a market economy is that competition wipes out the profits that allow some people to become rich.

The books I have read say little about sexuality but it appears most hunters and gathers are casual and accepting. Nor do they appear to have the sexual problems which plague so many people in our societies. It could be that we have something to learn from them about sex .

The key to what we call civilization is the agricultural surplus which is the food production in excess of what the producer needs for his own survival. Generally hunters and gathers do not have an agricultural surplus because once they have enough food for a day or two they stop working knowing that more is easily available when they need it.

The agricultural surplus is a two-sided coin. It releases people from food production to do other things some of which are positive and some of which are destructive. It can be the start of the decline onto the slippery slope into uncivilized behaviors,
The agricultural surplus presents a people with two questions; what to do with it and who makes the decision. These questions open up opportunities for people whose personality is to tell others what to do. This writer believes each of us should have to right to decide how his/her share of the surplus should be used.

Some economists like to tell students consumers control the economy in their spending decisions. This is correct so long as we make the right decisions. Many people want to go off the grid and live the simple life in the bush but that is not easy to do. The people who create the money want the rest of us to work at their projects rather than our own.

We have good material standards of living because our economy has been labor intensive and the demand for bodies has allowed us to extract from the elite a nice portion of the agricultural surplus. As technology increases and robots do more and more of the labor we are losing our bargaining power. The rich get richer and more people become poor. Frightening and uncivilized.

There is a slight ray of hope in our two or multi party electoral system. Some politicians are realizing tha to get votes they have to allow voters some share of the agricultural surplus.

There are lots of anecdotal evidence that our economy is on a down trend. Lots of people are suffering and lots more are likely to suffer. There are many unknowns in the future and most of them are frightening. Our goal should be to minimize the suffering and maximize the enjoyment of living.

We are unlikely to ever get consensus on how to deal with this situation as many people have a strong vested interest in the status quo. However, if we do not try, there will be no progress.

I once heard an engineer say, “If it is working, it is not complex enough.” I was not impressed with his engineering and I do not want to apply his principle to economics. Let us keep it simple. The challenge is to get the best out of technology without the technologists telling us how we should live to meet their goals.

This post has focused on some of the negative features of our civilization. I want to continue to enjoy the positive things, like being able to write this weblog, but I also want to correct some of the injustices and uncivilized behaviours. Genius is 90 per cent plagiarism and we should look for good ideas wherever we can find them.
The hunting and gathering lifestyle appears to be a lot simpler than what we have and it also appears to be a lot more civilized. Let’s put the civil back in civilization.

Note: Once upon a time this blogger took a course in Economic Anthropology and since then I have frequently read books on anthropology and especially economic anthropology. Prior to writing this post I read the following books:

Affluence without Abundance: The disappearing world of the bushmen, By James Suzman, 2017.

Hunters and Gathers: History, Evolution and Social Change, Edited by Tim Ingold, David Riches and James Woodburn, 1988.
Politics and history in band societies, Edited byEleanor Leacock and Richard Lee, 1982

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.

 

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.

Answering concerns about an income scheme

A discussion forum on the Canadian Broadcasting Corporation website brought out a number of concerns about proposals for a basic income scheme. There were more than 2,000 comments.  Here are answers to some of the concerns.

How do we pay for a basic income scheme?

There are two answers to this question.  The first is that it would replace a range of existing social welfare payments and would make these payments with more efficiency.  Employing fewer people this would increase the need.  Also I believe subsidies should be given to consumers rather than producers so this would release a lot more money for an income scheme.

For the second answer we have to focus on the agricultural surplus, the excess production by each agricultural worker which allows food for people to do other things. Without the agricultural surplus we would not have civilization as we know it.

Until now the agricultural surplus has been distributed via employment but the current level of technology is making this more difficult.  Thus the interest in a universal basic income scheme.  We should note that the agricultural surplus is based largely on petroleum and could be somewhat precarious.

As most of the technology that has gone into the agricultural surplus has been developed over the last 2,000 years and most if not all of us have ancestors who worked on that, we should consider it a part of our inheritance. We are all entitled to a share.  We should have a collective responsibility to ensure everyone has the opportunity for the same standard of living as most other people.  The amount of payments should depend upon the population and the quantity of goods and services we are able to produce.  If this ratio goes up then the payments should go up and if this ratio goes down then the payments will have to go down.

I believe there are some serious problems with the way in which our economy creates money.  As an income scheme involves money this would be a good time to deal with that problem.

How do we stop people from smoking dope all day?

The simple answer to this question is that we do not. We do not need everyone to work all the time to maintain the agricultural surplus.    We no longer need a work ethic.

A basic income scheme would be a tremendous transfer of decision-making power to individuals (from governments and from bankers who create money via the fractional reserve banking system) and we have to allow people to make their own decisions and to take or benefit from the consequences.  The agricultural surplus should give us all the right to decide what to do with our time.

An income scheme would be communist.

This blogger dislikes the isms because they tend to be mostly meaningless.  As I understand communism it involves treating people humanely and government control of the economy.  It seems to appeal to people who wants to tell others how to live their lives.    I believe we should try to treat people humanely and I do not want others telling me how to live my life. As decision making power goes with money an income scheme would be a transfer of power to individuals.  It is difficult to think many communists would want that.

A guaranteed basic income scheme would help with a lot of social and economic problems but such major changes would go against a lot of vested interests.  Even people who would benefit the most are likely to fear the unknown.  Therefore concerns need to be taken seriously.

This blogger has just published an eBook Funny Money: Adapting to a Down Economy which discusses a lot of these issues. The price is only 99 cents.  I encourage you to have a look at it. Until April 19, 2016 you can get a free copy from Smashwords.  Use the link and code at the top of this weblog.

Some concerns about the Swiss money creation referendum

The Swiss are going to hold a referendum on a proposal to change the way in which money is created by transferring this function from private banks to the central bank.  The more I think about this the more I see it as an attack on banks by people who do not really understand what money is and how the financial system functions, or should I say by people whose understanding of money is different from mine.

I believe there are some serious problems with the current fractional reserve way of creating money and anything which might lead to reform is to be encouraged.  However, I would like to see some debate rather than letting those who would tell the rest of us how to live win by default.  I want to see a libertarian reform in which decision-making is by all individuals rather than a select few.

Here are two links to information about the referendum. One, two.

Money is a tool to facilitate the exchange of goods and services and is backed by the agricultural surplus of which we have a huge amount although its continuation is somewhat precarious.  The fractional reserve way of creating money gives great power to bankers who create money each time they make a loan.  The Swiss critics are right about that. Money represents purchasing power for people who hold it and those who create money can decide to whom they will transfer that purchasing power. Transferring the money creation function to the central banks would be transferring power from one small group to another. I am not certain bureaucrats would be any better at making decisions in the public interest than private bankers.

A more libertarian approach would be to combine monetary reform with a universal income scheme and to call money agricultural surplus credits.  This is explained in my just released ebook Funny Money: Adapting to a Down Economy.  The book also talks about the problems with fractional reserve banking. (You may get a free copy of this book from Smashwords until March 19, 2016. See previous post.)

In reforming the way in which we create money two other factors need to be considered.  The total amount of money available needs to be flexible up and down as the quantity of good and services exchanged varies. If it is not flexible we should expect inflation or deflation, both of which rob people of their savings.  The Swiss proposal says the central bank would use its statistics facilities to help in this.

The other concern is interest.  I believe the charging of interest on loans is a Ponzi scheme which leads to periodic financial crises.  This too is in the book. I did not see anything in the proposal to indicate how interest would be handled.  It could be the people who crafted the proposal do not see that interest is a problem in money creation.

I fear that not too many people truly understand how money works in the economy and how the fractional reserve way of creating money is a serious problem.  Reforms are needed although I can not see that transferring money creation from one small group to another small group will be a satisfactory reform.

Free Funny Money

Here is a free promotional giveaway of the new ebook Funny Money: Adapting to a down economy.  This book is now available on Amazon Kindle and Smashwords.  The next step is for me to make some formatting corrections so Smashwords can distribute it to a number of book stores.

FunnyMoneyArtPowell-final

Smashwords allows authors to create coupons for discounts and free giveaways.  I have made a coupon to give this book away free for about two weeks. The code is HS63E and it expires on March 19, 2016

The book is available at: https://www.smashwords.com/books/view/620310

The book is also available at the Kindle book store at http://www.amazon.ca/gp/product/B01CH1LF6W?*Version*=1&*entries*=0  

at the regular price of 99 cents. So far as I know Amazon does not allow the free giveaway for the publishing option I have chosen.

This book is critical of some aspects of economics and endorses others. The author, who has also read history and anthropology, questions economic growth and the fractional reserve way of creating money. He has come to terms with the market economic model as a set of guidelines for economic policy. The current economic crisis is resource based in that we have used up the most easily accessible of energy and mineral resouces.  We need a guaranteed income scheme and a new way of creating money.

Hiding from the economic crisis

Why are interest rates so low?  It’s a question which has apparently been occupying a couple of North America’s top economists but this blogger sees the discussion as a screen hiding some very important economic issues.such as the root cause of the economic crisis and values which will guide us in trying to  find a solution.

On the surface the answer is simple.  Interest rates are the price of money and are determined by supply and demand.  They are low  because that is where the two balance.  They appear low because we are used to high returns on our investments and are reluctant to give them up.  There is no reason why interest rates could not be zero and maybe they should be.

To understand the root cause of the economic crisis we need to go into a macro economics classroom and watch the lecturer draw his basic diagram on the blackboard.  It is in the shape of an”x” with one side representing the financial side of the economy and the other the real or physical side.   This is important.  As we measure the physical part of the economy in financial terms it is easy to forget the distinction and analyze economic problems only in financial terms.  We need to ask what is happening to the physical side of the economy because it could be that is where the problem is.

This blogger figures the problem is with the resource base.  There are lots of energy and mineral resources left on this planet but we have exploited the most easily accessible.   Those that are left take a lot of time and energy to extract and this is causing a lot of economic problems.  It could even force us into negative growth.  This is a much more serious problem than why interest rates are low.  It is also an extremely difficult problem because it challenges some deeply held beliefs and values.  It’s a lot easier to talk about why interest rates are low.

Some ideas about how to fix the economy are included in the essay “LETS go to market: Dealing with the economic crisis” on this weblog.  A major feature of that essay is a proposal to change the way in which we create  money.

The emotions surrounding money make it a such a difficult subject that few people understand the economics of money and banking. This is unfortunate as money is so essential to how we exchange goods and services.  I encourage you to take a look at the essay.

While I prefer to see low interest rates as a symptom rather than the problem here are  some observations.

Money should be considered a tool to facilitate exchange rather than as a commodity with a value of its own As the quantity of goods and services we want to exchange varies up and down  so does the amount of money supply we need,  If there is too much money there will be inflation and if there is too little money there will be deflation.   Some people believe there should be mild inflation but this reduces the value of savings and should be  considered theft.

Quantitative easing has been an attempt to stimulate economic activity by increasing the money supply.  It has resulted in a rising stock market but has done little for the real economy.  That has to be a sign of a serious problem which has not been identified.

The way in which we create money, known as fractional reserve banking, is a heavy-duty problem because it is based on loans on which interest must be paid.  If all debts had to be repaid at one time there would not be enough money in the economy.  It is a Ponzi scheme on a grand scale and it is no wonder we experience frequent financial crisis.  For more on this topic see these previous posts on this weblog.

I believe we are facing a serious economic problem in that it is not clear there can  be a return to economic growth.  Dealing with this will require some major changes in our way of life.  It is disappointing that two of our most well-known economists are protecting us from having to deal with this with a frivolous argument. It’s as if they are playing in the turkey poo on animal farm and producing gobbledygook.

If you liked this post your are invited to comment, press the like button and/or click  one of the share buttons. If you disagree you are invited to say why in a comment.  While I like the idea of sharing this platform, my personality is such that I don’t reply to many comments.

The future of money: inflation, deflation or disappearance into thin air

The future of money has been getting a little attention lately.  It could go one of three ways – inflation, deflation or part of it could disappear into thin air.  Concerns about money probably reflect concerns and uncertainty about where the economy is going.  Frequently behind these concerns lurk people who want a fixed money supply such as gold or bit coin.

This blogger figures money should be defined as a tool to facilitate the exchange of goods and services.  I do not like definitions that make it a store of wealth or a measure of value because these give money an intrinsic value which it does or should not have.  Money should only have value as a tool. 

One of the most important features of money should be the amount available  in the economy needs to be flexible.  It should be able go to up or down  with changes in the quantity of goods and services we want to exchange.  If the money supply is not flexible then as we change the quantity of goods and services then either prices must go up or down or the velocity, the rate at which money changes hands will change.  It is dangerous to assume there will be only growth.

Inflation happens when the money supply increases faster than the rate of economic growth and deflation happens when the money supply goes not keep up with the rate of growth.    Inflation is good for borrowers as the can repay their loans with money which has less real value.  This is one reason governments and their agents want to see mild inflation.  Deflation is good for lenders as they will be repaid with money which has more value.  The ideal should be price stability so nobody loses.

Our understanding of inflation and deflation has been distorted by the long period of economic growth we have just experienced. Most inflation has happened along with growth and most deflation has resulted from banking authorities trying to restrict the amount of money available.  This happened in the 1930s and todays central bankers have sworn to never again let that happen.

There is some evidence that our time of economic growth has terminated.  It is unclear how this will affect prices.  Quantitative easing which is an attempt to increase the money supply has not led to high inflation.  Past hyperinflations have occurred when governments have increased to money supply faster than the economy was capable of growing.  It appears the money created by quantitative easing has led to inflation in the financial markets rather than consumer markets.

Economists generally understand how fractional reserve banking works to increase the money supply but I am not aware of anyone who has thought out the opposite process.  Money that can be created out of thin air can just as easily disappear into thin air.

In fractional reserve banking banks are required to keep a portion of their deposits as reserves for protection against runs. The rest is loaned out and redeposited with the new deposits subject to the same fractional reserve.  The result is that a large proportion of our money supply is  somewhat precarious.  This blogger and many other people on the internet have explained the process.  Just search “fractional reserve banking.”

Central banks can add money to the system by purchasing financial instruments or by changing the reserve requirements.  The could also reduce the money supply by selling financial instruments or by changing the money supply although it is unlikely they will do either under current conditions.

Another way the money supply could be reduced is if the banks suffer large losses.  Any loans the banks have to write off will directly decrease their available reserves.  (The technical term is high powered money.)  This means they will have to decrease their outstanding loans with the same multiplier effect as the money supply was increased.  We will hear about it as a contraction of credit.

So if the banks experience unusually large losses there could be a drastic decrease in the money supply which could have dire consequences.  ( I have read that a number of Canadian and British banks are highly exposed to the energy industry with unsecured loans.)

If a large part of the money supply were to disappear into thin air in the short term a lot of economic activity would come to a screeching halt.  People have in the past used playing cards or candies as a substitute for money.  In the long term the level of activity would depend upon the physical resources available.

People who talk up monetary reform often want a return to a gold standard or facsimile (bit coin).  It is not clear that either of these would correct the problems inherent in the fractional reserve way of creating money.  Nor would they provide the flexibility that is needed in the total amount of money available.

We all think we know everything there is to know about money.  That is a part of what our parents teach us. However, it is a complex subject which few people understand and there are a lot of unknowns, especially if we have to deal with an extended period of low or negative growth.

Why we have financial crises

I believe the root cause of financial crises is in the fractional reserve system of creating money.  Therefore the way to avoid future crises is to change how we create money.

Dear Reader,  This post requires you to understand how money is created by the banks.  I’m feeling too lazy to write that up now so if you don’t already know I encourage you to figure it out.  Google “fractional reserve money”  or look at my essay “LETS go to market: Dealing with the financial crisis” or these other posts on this weblog.  It may appear complicated and overwhelming but if you think it out it should be easy to understand.  I think very few people understand this process which is unfortunate because we can not reform something people don’t understand.  There is a lot of emotion when dealing with money.

There are two aspects to the economy – the physical and the financial.  It’s a distinction which is easily forgotten because we measure the physical side in financial terms.    Both of these can cause economic crises and solutions probably require knowing where the problem originates.  A complication is that a physical problem can and usually does trigger a financial problem.  I believe our current economic problems are largely physical in that we have used up the most easily accessible energy and mineral resources.  There are lots of resources left but they are becoming more and more difficult to extract.

The big problem with fractional reserve money is that  interest is charged on the money created by the banks.  But the process does not create money to cover the interest.  So long as the economy and the money supply continues to grow there is no problem.  However, when growth ceases and the money supply contracts there just isn’t enough money in the economy to repay all the loans with interest.  It’s sort of like a Ponzi scheme.

Fractional reserve banking is about increasing the money supply but to the best of my knowledge not much thought has been given to when the process unfolds.  Just as money can be created out of thin air it can just as easily disappear into thin air.  This is a problem because money is essential in our economy for the exchange of goods and services.  Even a small reduction in our money supply can cause severe economic hardship because losses on bank loans come out of the reserves.  Thus losses are high powered money or leverage in reverse.  A run on the bank would also be a loss of reserves if the money is put under some mattresses.  If the money is transferred to another bank then there would be no loss of money supply to the economy although it would take some time for the adjustments to work through the system.

During the crisis of 2008 I figure the losses to the banks reduced the money supply forcing a slowdown in the physical side of the economy.  During the crisis people talked about a shortage of credit and the need for banks to start lending.  As our money supply is based on loans this is the same as saying we didn’t have enough money to facilitate the exchange of goods and services.

The U.S. officials dealing with the crisis were aware of the danger to the economy. They were also aware that a large part of the economy was sound and that the banks had to be saved so as to not have a complete collapse.  They were in a bind because saving the banks appeared to be saving people who did not deserve to be saved.  To have let the banks fail would have hurt all of us.  That is the power of the banks.  They are too important to fail.

The financial intermediation industry is focused on the double  R – risk and rewards.  The great  profits and bonuses of the industry are based on maximizing the rewards and passing the risk on to others.  As a general rule the higher the risks the greater the rewards.  In an ideal world the rewards would go to the people taking the risks but bankers have ways of grabbing the rewards while leaving the risks with the depositors.

The first thing they do is that their  marketing focuses on expected returns.  The risks involved are seldom mentioned so that customers don’t demand the rewards to go with the risk they are taking.  Governments try to protect savers with deposit insurance schemes although the real reason is to prevent runs on the bank.

The second trick is leverage.  If you did your homework you know that banks are required to keep a fraction of deposits on reserve for people who want to withdraw their deposits.  The smaller this reserve requirement the greater the leverage and the more money they can create and the larger the profits.  Regulated banks are told how much they must keep on reserve.  Unregulated financial institutions can get away with greater leverage – until things go wrong and they cannot repay their depositors.

The third profit-making stunt is to finance long-term loans with short-term deposits.  As short-term interest rates are generally lower than long-term interest rates this increases the spread/margin for the banks.  Some people claim this conversion of short-term deposits into long-term loans is a great accomplished of the financial system.  In fact it is a very dangerous practice and through the centuries many bankers have lost their businesses, if not their shirts. (But the profits were great while they lasted.) This is because when there is a crisis people will refuse to roll over their short-term deposits.  With no way to call in their loans the banks become bankrupt even though most of their outstanding loans are good.

If banks were to match the terms of their deposits with the terms of their loans their business would be financial intermediation rather than speculation and the risk would go to depositors  who are carrying the risk in any case.

I hope you can see from these notes that there are serious problems within the financial industry and the fractional reserve way of creating money.  Money is such an emotional issue and the interests of the financial industry are so strong that I believe it will be impossible to make reforms.  

 

If you liked this post your are invited to comment, press the like button and/or click  one of the share buttons. If you disagree you are invited to say why in a comment.  While I like the idea of sharing this platform, my personality is such that I don’t reply to many comments.

Why we have unemployment

We have unemployment because our agricultural surplus is such that we don’t need for everyone to be “working”.  More important issues are who decides how to use the surplus and how is it distributed.

This post was prompted by a question on Reddit asking why we have unemployment.  It’s an important  question because unemployment can be devastating.

The agricultural surplus is the food produced by workers which exceeds their own needs.   This surplus means some/many people can do things other than produce food.  In our society we have used this surplus to produce a wide range of goods and services which have themselves become a part of the surplus.  Unemployment is an indicator of how rich we are.

Think of a small group of hunters/fishers and gathers on a small island where the living is so easy food and shelter requires only and hour or two a day.  By our terms these people would have a high unemployment rate.  Distribution of food would probably not be a problem as they would probably share their produce but they would have to decide what to do with all the spare time.

This model could get  complicated if they had lots of children and increased their population to the limits of the available food.  It would still take only an hour or two a day to harvest the food even though there wasn’t enough for everybody.

In such a small society distribution of food would be by sharing.  I know an anthropologist who did his field work in such a society and he said you could not buy food there.  Whatever one needed was shared.  What to do with the “free” time would probably be up to individuals with collective activities partly by consensus.

Modern technology, especially that applied to agriculture, gives us the same magnitude of surplus.  We too could be approaching the limits of our ability to produce food.

We too have to decide how to share the produce and what to do with the time. So far these decisions have been influenced by our commitment to the work ethic.  Everyone should spend most of their time working and their share of the surplus should come in the form of wages.

As our exchange of goods and services is facilitated by money the decision-making goes with the money.  To the extent that a person has money one can decide how the surplus will be used.  So the more equally money is distributed the more decision-making will equal. The ancient Egyptians did not use money and it appears the pharaohs decided the surplus would be used to build burial chambers.

In the industrial economies we do not need full employment but we do need a more equitable way of distributing the surplus.  With the ups and downs of the economy full employment may not be a realistic goal.  There are lots of things people could do that would be satisfying but which do not contribute to gross national product.

I believe a universal income scheme would give us a more equitable distribution  of the agricultural surplus.  If we are approaching the limit of our ability to produce food, it might provide a more equitable way of dealing with shortages.   It would also spread the decision-making among more people.

Unemployment can be financially and psychologically  devastating for the people who experience it.   But it is not the real problem.  The urgent problems are an equitable distribution of the agricultural surplus and how it is to be used.

 

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Wealth, money and inequality in the twenty-first century

How much capital there is in the twenty-first century may not be relevent to our prosperity.  What is likely to be more relevant is the resource base and our capacity to create money.  Taxing the rich would be one, hardly original,  way to deal with inequality.  Another way would be to increase competition so that there are fewer profits to tax and to introduce a basic income scheme which would reduce the supply of workers.

These thoughts are prompted by all the hype about the book Capital in the Twenty-First Century by Thomas Piketty.  I must state I have not read the book.  For this post I have relied on several articles in The Economist.

As I understand it this guy has collected a lot of data which shows how inequality has been increasing.  One of the big criticisms has been that some of his data may be inaccurate.   So?   There is a lot of anecdotal evidence that the rich are getting richer and the poor are getting poorer.

One of my concerns is with the word wealth because I think it may be misleading.  The word wealth derives from the part of the definition of money which says money is a store of value.  But the store of value does not always hold.  Wealth can sometimes be lost a lot quicker than it can be earned.  Inflation, the failure of enterprises or government haircuts can very quickly rob people of their savings or wealth.  All of these have happened and are likely to continue.

Piketty says we have inequality because the return on capital tends to be higher than growth.  But  wealth may not be relevant for economic growth.  Much more important are the ability to create money (the availability of credit) and the availability of easily accessible energy and mineral resources.  It may be that people with some “wealth”  have easier access to the credit which is necessary for economic projects.  One of the reasons for the current economic downturn may be that we have consumed the most accessible energy and mineral resources.  What remains is difficult to extract.

A while age I enjoyed reading about the building of the pyramids because this was done without money.  The Egyptians may have stored some materials but most of the work was done “in real-time” without capital.  Our own economy may work in a similar way with money representing “real-time” purchasing power.  When one invests money one is transferring current purchasing power to somebody else.  The money supply or the supply of credit is more important than wealth or capital because what is needed is purchasing power to facilitate economic activity.  Purchasing power which has been transferred will not always be returned intact.  It can be reduced by enterprise failure, inflation or a government haircut.  Money or the supply of credit is created when the banks make loans.

Apparently a good part of this book is statistics to show the concentration of wealth in several industrial countries.  But inequality is a two-sided coin.  It may be that inequality is increasing because there is less income going to workers and this is because wages are falling from changes in the supply and demand for labor.  During the industrial revolution and the recent golden age of prosperity there has been a steady demand for workers and wages have risen.  With the recent improvements in technological productivity and the economic downturn the demand for workers has fallen and so have wages.

The rich are getting richer because they operate in fields where government legislation restricts competition and because they are good at working the system to exploit others.  During the golden age of prosperity when there was abundant production and wages were high this wasn’t a problem for the rest of us.  Now that the economy is on a down trend the inequalities are becoming more noticeable.

Piketty starts his analysis of inequality with the industrial revolution but I have it in my mind that inequality has been a feature of most large-scale civilizations through the millenia.  A longer-term analysis might give a  different perspective.  I suspect the a high degree of inequality is the norm and we have recently been through an abnormal period.

Piketty proposes to deal with inequality via taxation of the rich. Some other ideas might be to increase the amount of competition in the economy which would reduce profits or to introduce a universal basic income scheme which would work to decrease the supply of workers and thus bring up wages.

So far as I can see the main accomplishment of this book is to generate some economic hot air and to divert some “wealth” to its author.

Some reasons economists don’t get it.

What is wrong with economics?  Through the years a lot of people, including the current group of students have recognized there are problems.  This blogger figures there are two types of problems –  problems with human nature and problems within economic theory and understanding.

Most of us most of the time think and act in our own short-term interests,  Some people won’t listen to things that contradict their interests.  This can be a problem for economists as their paychecks often depend upon telling business people and politicians what they want to hear.  It is likely some of the students demanding changes in the way economic is taught will have to come to terms with this.

The other human nature problem which interferes with economics is that some people like to exploit others – sometimes deliberately and sometimes because they believe it is their right.  Using money as a tool to facilitate the exchange of goods and services allows us to have economic relationships with strangers from many parts of the world..  It also makes it easier for some people to exploit others. I am currently reading The Big Short by Michael Lewis in which he details the people who foresaw the subprime mortgage bust and profited from it.  It’s sort of interesting to see the exploiters being conned although I  believe that for relationships to be satisfactory there needs to be a more or less equal two-way exchange.  Another interesting thing is that most of the players on either side came out of it rich.

Neither of these human nature problems is likely to be resolved by changing the economic curriculum or the way the subject is taught.

It may be that for economists to tell their employers what they want to hear the economists have to be blind to some realities.  Here are four examples.

One of the greatest of economic myths is that growth can continue forever.  Economists occasionally talk about scarce resources then assume that there never will be scarcity.  Yes, we still have lots of mineral and energy resources.  However we have used up the most easily accessible of them.  What’s left is difficult and takes lots of energy to extract. This is a diversion of energy from other uses.  From history we know that all previous civilizations have collapsed.  Some people talk as if we will be the exception.

The second unseen reality relates to free market competition.  The problem with competition is that the more competition the smaller the profits.  In large parts of our economy competition is restricted by government legislation and regulation.  Licenses, patents, copyright, tariffs all allow firms to make profits they wouldn’t get with full competition.  It also means consumers pay more than they would otherwise.  When we talk about a market economy we ignore how governments work to restrict competition.

Sometimes economists distinguish between the real economy and the financial economy.  It’s an important distinction and we lose some understanding when we forget it as we often do.  My favorite example is with pensions.  Most people plan their pensions in money terms.  But there are three things that can happen to one’s pension savings:  inflation, failure of the firms in which savings have been invested and a government mandated haircut.  For most of us our standard of living in retirement will depend upon the ratio of goods and services produced to the number of people making demands on those goods and services.  If we experience a major drop in production, it will not matter how much pension money one has.  It might be prudent to plan for retirement at least partially in terms of the physical economy. How about a large garden?

The complexities of money creation and the deep emotions associated with money make it the most misunderstood and problematic  aspect of economics.  A number of posts on this weblog have dealt with the problems of money.  I believe that in the fractional reserve method of creating money economists have ignored the fact that interest is charged on the money created.  This feature makes the fractional reserve money into a Ponzi scheme. This explains the regular financial crises our economy has experienced.  If more people understood how the banking system creates money and the problems, we would probably be demanding changes which would take away from the profits and powers of bankers. How many economists would even dare to think that?

There appear to be lots of problems within economics.  How we exchange goods and services and the relationships involved in these transactions are an important part of our lives. It may be that some people can  benefit if most of us don’t see these relationships clearly. However, I think we would all be happier if we did.

 

If you liked this post your are invited to comment, press the like button and/or click  one of the share buttons. If you disagree you are invited to say why in a comment.  While I like the idea of sharing this platform, my personality is such that I don’t reply to many comments.

The gold standard, printing money and getting the right amount

A return to the gold standard and the printing of money to provide a social dividend have recently been suggested on LinkedIn and Reddit as ways to deal with the economic crisis.  The gold standard and the printing of money have been both tried with disastrous results.  To the best of my knowledge the social dividend has not been tried but I see it as a guaranteed annual income and I believe it has a lot of potential – subject to paying attention to the amount of money in the economy.

The problem  with the gold standard is that it can cause recession because it limits the amount of money to facilitate the exchange of goods and services.  The problem with printing money is that it can lead to inflation which wipes out people’s savings.

The key to financial economic nirvana is to have just the right amount of money for the quantity of goods and services a society wants to exchange.  Too much money leads to inflation and too little money leads to deflation and a curtailment of economic activity.   The amount of money needs to be flexible to follow the ups and downs of economic activity.

At several times during their history Americans have tried to follow a gold standard.  Generally the result was depression.  In the 1930s the monetary authorities tried to restrict the amount of money in circulation and the result was depression.  The exception was during the gold rushes of the late 19th century when the newly discovered gold allowed the money supply to increase along with economic growth.

Following the first world war the German Weimar republic had lots of financial obligations.  As the external obligations were requiring gold the government met its internal obligations by printing money.  As the money was printed faster than economic activity increased that country experienced inflation which became hyperinflation.  The result was that the savings of most people became worthless.

The social dividend proposal was a feature of Social Credit which had its origins in England in the 1920s and prospered in Alberta and British Columbia.  At least in British Columbia the social dividend was forgotten and the party became a right of centre business coalition.

To the best of my knowledge the social dividend has not been tried.  I think it should be so long as the amount of money in the economy is close to the amount needed.

Money is something we all use and we teach our children at an early age how to manage their money.  However,  very few people understand the economics of money and especially how money is created. I believe that if we are to resolve economic problems we have to understand the economics of money and banking.  The essay “LETS go to market: Dealing with the economic crisis”  talks about how money is created, some of the problems with fractional reserve money which we currently use and proposes an alternative way of creating money based on Local Exchange Trading Systems.  Also a number of posts on this weblog have dealt with money.  Here they are.

Money is a highly emotional issue in part because our culture has raised us to believe that our future depends upon our having adequate savings.  As it is so important one would think people would be wanting to understand it and be prepared to consider reforms as there are such emotional costs to losing it.

I believe the fractional reserve way of creating money is a Ponzi scheme and has built into it a mechanism for forcing a continuous increase in the money supply regardless of increases or decreases in economic activity.  As a part of money creation reform we should look at incorporating a social dividend or universal income scheme.

However the money process is reformed an essential feature is that the money supply should be flexible up and down according to changes in the level of economic growth or degrowth.

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