It is not all about money Alan, some activists keep telling me, when I try to explain why we are being overloaded of renewable energy projects in our natural environment... or how changing the economic system will allow us to stop doing activism as a firefighter and start becoming part of the hollistic transition we all claim but struggle to define.
If uneconomic growth is the reason why we have a civilization crisis, and money is the medium by which we organize our economic activity, we need to explain the monetary conditions for a steady state economy, or how money works in a economy that does not grow.
This monetary system should be define in a way that does not need permanent economic growth, priting money to back up debt payment, costly inflation or unfair risk sharing to thrive.
This post is about the changes in our monetary system that are required to reach a steady state economy, or the maximum wellbeing for sufficient people the maximum amount of large but finite time.
Current Context: Money Expansion, Interest rates and Inflation
How do countries justify the creation of money or changing interest rates?
Our current monetary system is not backed by physical assets such as gold in the past, but rather by institutions such as the FED in the US or the European central bank.
Officially, central banks are the only ones who can print money or change interest rates (cost of borrowing money) with those motivations:
- have moderate levels of inflation
- ensure there are smooth business cycles
- sustain economic growth
The first one is obvious, inflation have costs (adjustments take efforts, normally there are winners (debtors) and lossers (savers)). The causes of inflation could be multiple. The price level of a good could increase because the demand increase, the supply goes down, or last but not least there is more supply of money and a fixed amount of goods. It seems reasonable that the price of certain products fluctuate, but there are little reasons to stay in favor for permanent inflation.
The second & third one maybe obvious for keynessians, which mainly focus is to maximize employment at any cost, including uneconomic growth, but not for common /non keynessian thinkers. Printing money devaluates the money we have and makes saings less interesting. It is telling people that in hard times you must consume, to keep employment high or growth.
It sounds more reasonable to save and consume less superflous things specially with the current uncertainty with energy and expected climate change shocks. Expanding money supply postpones the inevitable, in an finite planet with finit resources, the economic metabolism should stop growing if collapse is to be avoided. Last but not least, increasing the money supply, given a fixed amount of goods and services (a lower growing rate of them) leads to inflation, and hence a contradiction wiht the first valid goal of moderating long term inflation.
What about the cost of money or interest rates? Centrail banks can handle risk taking or the amount of debt taken by changing interest rates. This can be used for inflation management or to reduce investments overall. Higher interest rates makes borrowing more expensive, so less projects are taking place and hence demand goes down, which ultimately pushes down inflation. Low interest rates on the contrary make more appealing debt, specially in the context of inflation, as debt payment is easy and will get easier if inflation stays. Low interest rates and inflation are a good recipe for boubles, as we have seen in the housing industry. If inflation is bad, but too low interest rates could lead to too much borrowing, should we aim for high interest rates and low inflation?
This looks like a dead end to me. Note that in sacred economics we explain how high real interest rates pushes for growth and this is the reason why only high return projects that monetize life are taken (https://alanfortunysicart.blogspot.com/2022/02/sacred-economics-draft.html). What should we do then?
We need to take that into little steps (please follow along so you have a clear answer after the second part of this post).
First, nationalize money
In the current system, it is not fully true that only central banks create money, as private banks can lend money at interest that they do not have (because they are only asked to keep a small proportion of the deposits as a reserve). That means that each times a bank lend money at interest to someone which exceeds the amount of deposits they are profiting privately from lending a money that we all pay in the form of money devaluation.
This is key to understand the current excessive financialization of the economy, and that the banks have become too big to fail, as they are owning assets several times bigger than the real economy (the actual amount of wealth from savings).
So, despite the fact that 100% reserve banking will limit the amount of credits given by banks, it will give back to the original authority, the central bank, the unique power to create money out of nowhere.
Increase reserve requirements cannot be done in one day, but it is important to legislate to bigger requirements for banks with the ultimate goal of nationalize AGAIN money (despite the current discoure money is a societal invention and common, kidnapped by a few as we speak).
Second, review the conditions for money expansion
Is it economic growth or full employment and end goal or our civilization purpose?
Should not be wellbeing, resilience and freedom the ultimate goals of a well functioning society?
Printing money to force money holders to consume and the whole economy to grow uneconomically is wrong, technically and morally. Full employment is not a mandate with sufficient aggregate income, strong communities and safety nets for all. Which economy do you prefer?
- An economy that does not have full employment (or redistributes working time) but that it is resilient to energy, water, food shocks... that offers dignity to all citizens and regains space for the non-monetize relationships of our communities (via care, open source, free culture, education, health services)
- A growing economy with full employment but with an individualistic, monetized society where everyone works and everything is scarce
Employment, as well as growth are means to an end, nor an end to itself. Monetary policy should analyze the wellbeing and its distribution within planetary limits and not the amount of throughput or labor as poor proxies of wellbeing or income. Given the complexities of implementing a full tax reform in a timely manner (due to tax heavens, lobby resistance...) it could be still interesting to consider monetary expansion, but note:
"Priting money could be a rather inefficient but still effective way to finance essential projects to transition the steady state economy":
- investing publicly on the preservation of the remaining natural spaces - creating a national reserve
- nationalizing energy and house provisioning or at least ensure affordable prices in a public/private setting - ensuring public access to the commons such as energy or land
- ensuring a minimum safety net for all to emancipate from the prision of poverty - via universal income / health / education
As the cost of printing money is heavily and disproportionally harsher on the poor (they do not have the economies of scale, know how or support to manage their money to beat the inflation), a direct taxing on bads (pollution, speculation, rents, superfluous consumption) instead of good (organic food consumption, organic products, culture, education, labor...) seems more reasonable to finance the transition of the steady state economy.
It is therefore suggested that as much as possible, the supply of money is kept fixed and only increased to finance urgent policies as the ones mentioned before. This exclude of course the current subsidies on fossil fuel industries, private banks, car industry, large infrastructure with little social return (fast trains, airports) ... those increase total throughput with little benefit for current or/and future generations.
A tax reform is much more interesting to limit the total throughput /metabolism of the economy, internalize cost and build reslience as we will show in the next post. Let's go first to the third monetary policy block.
Third, Audit debt
In a nongrowing economy without the possibility to print money to pay the debts with positive interest rates, necessary needs to review the debt payment conditions. Current debt spirals with limited or no growth are not payable. (https://www.statista.com/statistics/269684/national-debt-in-eu-countries-in-relation-to-gross-domestic-product-gdp/)
There are no scenarios where we all win, as we can either:
- Keep printing money and "enjoy" a permanent future of inflation, to end up cancelling the debt after a long period of uneconomic growth and increased social unrest as wealth dedicated mainly to service debt.
- Stop printing money, renegotiate debt and assume so part of debt will not be paid. This will affect the savings of many (more for those who save the most, with savings closest to the financial sector and less on physical assets). Big creditors will hardly accept this, but history show some successful debt repudiation cases but also some countries ending up in war, coup d'estat or invaded by other countries claiming some global democratic defense nonsense.
Option one is a cost of everyone but massively for the ones with little or no savings (the so call 99%), and those countries with more expousure to climate change.
Option two is mainly a cost for creditors, large and small, as many savings accounts are linked to this debt. That has some benefits that we cannot claim for option one:
- Achieving a steady state in throughput means a lower lilkehood of economic collapse and less climate change impacts.
- The load of the debt repudiation is proportionally distributed for those who have more capital and have been benefiting for a long time of rents from lending money.
As with any system, a smooth transition is key for the system to adjust with as little disruption as possible. The problem is that as years pass by, the debt keeps pilling (https://tradingeconomics.com/european-union/government-debt) , we are facing a life support system overshoot (https://news.mongabay.com/2022/04/freshwater-planetary-boundary-considerably-transgressed-new-research/) , at it is getting just harder to produce sufficient food, energy and other basic services for all. Time is passing, and the later we do that the harsher the transition will be.
There is a fourth step, which is the tax reform. We need to apply a system to cap the size of our througput, taxing bads, subsidizing goods, and give sufficiently market signals to economic agents to engage into the transition of a steady state that thrives and spread long lasting prosperity. I will cover that in the nex post : Steady State Macroeconomics : The Tax Policy of the Steady State.
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