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Economic reform for sustainability

Written By: - Date published: 9:00 am, January 30th, 2011 - 50 comments
Categories: Economy - Tags:

Continual growth in the use of resources is not possible. Society and the economy has to be structured to allow a steady state economy where resource use is within sustainable limits.

Our present monetary and economic system relies on growth to work.

Having a tangible product such as gold, power or boulders as a basis for a currency is not necessary to gain a steady state economy. All of these are just a means of ensuring faith and confidence in the value of a countries money.

The real basis of money is the amount of goods and services you can buy with it. If there is more money than the goods and services available you will have inflation, eventually, whatever the basis of monetary value. And vice versa of course with deflation. Borrowing is a charge on goods and services (work) to be done in future.

Those of us saving for retirement with monetary investments such as Kiwi-saver should consider, unless we invest in future productivity and efficiency of production, including efficiency in energy and resource use, we will simply cause inflation when we spend those savings back into NZ. That is, if our savings haven’t disappeared into a US market failure.

It will not be the big investors, insider traders, who will be left standing when the musical chairs stop.

Some commentators have mentioned the idea of a money hockey stick.

The growth of debt interest owed is exponential and now far exceeds the ability of any possible future production of goods and services to service the debts.

US debt now is far in excess of any possibility of repayment with any estimation of the future earning power of the USA. (China is already investing as much of their US dollars in tangible assets as possible before the inevitable inflation makes them worthless). So much money has been paid into inflating financial instruments that have no relationship whatsoever to the productive economy. The finance industry is extracting a greater and greater share of the real economy, 90% of the price of all goods is now owed to financial firms. A Ponzi scheme, as some have mentioned.

A reasonable level of inflation under our present system is mostly beneficial. The owners of large amounts of financial capital would have us believe that it is always bad because it erodes their wealth. The same people do not seem to have a problem with excessive inflation in the price of necessities and their own return on capital.

In fact inflation benefits young working age borrowers, provided wages keep pace. It is a natural regulating mechanism against owners of capital taking too large a share and the expansion of the money supply inherent in money as a commodity.

For us to exist without exponential growth in the use of resources we have to stop exponential growth as a requirement for a functioning financial system.

This means money must become a means of exchange only.

We must remove the time value of money. No interest, no financial derivatives and no charges for use of money.

Remove the means of using money to make money. Accumulating more wealth can then only happen if you work or buy something which has value in the future. A productive business, education, health, (Future labour force) land, energy or other resources. Not through owning money.

This is a big step and very hard to do politically and unilaterally.

The protests from banking interests and those who have managed to accumulate most of our wealth will make the last 30 years of fight back from the financial burglars seem like a playfight.

We can take some steps towards a steady state more sustainable economy on our own though….

Expanding Kiwibank to undercut private banks and start to take back control of our money supply from private banking is a logical first step. Reducing the capital hemorrhage.

Support Government that has not been bought and paid for by international corporate interests. From one that is only interested in extracting as much wealth as possible from us, before it is all gone, to one that has a vision for the future.

A financial transactions and/or capital flows tax to discourage money speculation and offshore currency speculation.

Capital gains taxes . Can be rebated for the family home and for local productive investment. Make investing in NZ more attractive than overseas securities or local finance scams.. Prices of speculative investments will probably drop leaving some people with negative equity. Banks as one of the contributors who profited from the situation should be made to bear the change in equity along with other investors.

A genuine emissions tax which can be made economically neutral by spending on energy and resource efficiency in New Zealand, or by giving it back as a general tax rebate.

Change the RBA away from the current single focus on inflation, allowing our dollar to drop to a natural level against overseas currencies, helping both exporters, job creation and manufacturer’s within NZ. (Fighting inflation with interest rates is like fighting a fire with petrol. Works briefly and then there is an explosion.).

Increasing equality will make such solutions more politically acceptable as there will be less pain to the majority in the transition..

Refuse to enter trade agreements that constrain what NZ can do on its own.

An expanding population also requires growth. Increasing the standard of education of women and free contraception are both proven, ethical and non-coercive answers to increasing population.

Government can spend money into the economy for sustainable energy and efficient resource use. (Invest in the future of New Zealand) There is no reason why we cannot borrow against ourselves as an investment for our kids future, instead of paying interest to a private bank. Such spending is no more inflationary than borrowing from an overseas bank. There is plenty of spare capacity in our economy at present.

KJT

50 comments on “Economic reform for sustainability ”

  1. ianmac 1

    “Remove the means of using money to make money. Accumulating more wealth can then only happen if you work or buy something which has value in the future. A productive business, education, health, (Future labour force) land, energy or other resources. Not through owning money.”
    That would go down well with the current Government! Especially the PM. Yet it would make good sense.

    • johnm 1.1

      Hi ianmac Yes your 100% right making unearned,not worked for money because you have money is a real evil of Capitalism.

    • Deadly_NZ 1.2

      Jezuz talk about pissing in the NACTS sandbox. But yes it makes a lot of sense.

  2. Salsy 2

    Speaking of sustainability, I heard JK mentioning using the $$ from selling our renewable energy companies to fund irrigration in canterbury? He’ll have a serious fight on his hand there..

    • Rosy 2.1

      Isn’t that where Key and David carter have (had) dairy interests? Isn’t that why they sacked Ecan?

  3. johnm 3

    We have reached the end of growth (Refer Richard Heinberg’s book coming out this year) because Oil is now beginning its supply decline arc. World extraction of all resources has reached maximum destructive overshoot, e.g. The Oceans have been overfished so that 90% of the largest fish have disappeared. The supply of credit based on growth the collateral assuring repayment is in deep crisis as the World Economy has not yet and will not recover from the 2008 Oil Spike of U$147 a barrel and now climbing again towards U$100 a barrel,which may cause another dieback in the World’s Industrial growth machine.
    We don’t have the option of a Steady state economy because overshoot has used up all our natural capital we are facing relentless contraction for ever.The “Growth is Madness” mad hatters were right! They advocated a steady state World Economy:hard to do with relentless population increase.
    However the rich elites will continue to grow their wealth by taking from others a larger share of the static or declining pie: Tax Cuts, Privatization etc.( Refer the JKeyll and Hide Love Affair!) This will lead to increasing inequality and social destabilisation.
    Refer link for a very interesting discussion of oil decline between Max Keiser and James H Kunstler:

    http://maxkeiser.com/2011/01/29/ote94-on-the-edge-with-james-howard-kunstler/

    • ZeeBop 3.1

      “””Continual growth in the use of resources is not possible.””” True until a new cheap energy source where we can recycle all the garbage in our garbage dumps globally! But it would have to be significantly cheap and plentiful.
      Not sun light, but sun power here on Earth.

      I totally agree with the observation that there is too much money in the system and its too easy to make money from money by distorting efficiency into inefficient unsustainable and unresilent processes and lifestyles. The fact even as oil is supposed to be starting a decline, my neighborhood is raked with noisy cars burning the stuff with abandom noisy shockwaves of pulsing poorly performing mufflers. Raising the cost of private car use would be the priority for any Green government I hope, as well as a capital gains tax, and a bout of rapid inflation to wipe out the existing cash horders and bring down inequality.

      But then this is the implicit policy of the US, essentially printing money means that inflation is assured. So its not about if, its all about when it happens. The hope in some maybe that we will increase non-renewables to match the loss of cheaphigh density oil and so growth will come from the about of extra alternatives capacity available (and savings in energy, and cutting of private car use). As we are seeing in North Africa, countries whose population can’t afford the food will riot, and if the state is incapable of redistribution enough wealth they will cost the wealthy of those countries huge wealth loss (and foreign owners). So this seems to assure us that National will continue to support the welfare state.

      If Key sells off any state alternative energy asset he should be charged with treason in my opinion. We can sell the energy from the state asset for five years, but to sell the asset is just plain crony capitalism.

      • Draco T Bastard 3.1.1

        But then this is the implicit policy of the US, essentially printing money means that inflation is assured.

        But the US money printers at the Fed are just giving all that printed money to the money hoarders which results in little to no inflation.

        • ZeeBop 3.1.1.1

          Watering down the value of the US dollar by printing more of it is inflation. Unless you argue that the US didn’t print enough in the past and some how printing now is making up for deflation of decades??? The US value comes from the oil being traded in US currency, so we all know oil is becoming pricer and then will nolonger be a commodity (run dry), that energy will shift from a international trade to local production. So the wealth of the US in thirty years is going to be very much lower (from an international trade position) than now, surely? So does that not mean that printing US dollars while the markets readjust to a nodal world economy than a internetworked one is a reflection of the ‘real’ shear size of the US economy in the future. US will still be a power house to itself. EU will. China will. Eu may well be the biggest block with Russia toward the end of the 21st century (depending on a little ice age happening). Look I don’t know, I guess if the US gives finance all the cash and leaves mortgagees to pay and pay then we’re looking at a feudal future in the US. Maybe a house of Lords to replace the Senate.

          • Draco T Bastard 3.1.1.1.1

            Watering down the value of the US dollar by printing more of it is inflation.

            Only if it goes into the economy which it isn’t – it’s going to the already very wealthy who are hoarding it.

            The US value comes from the oil being traded in US currency,

            Yep, the delusion that there’s such a thing as a “reserve currency”.

            So the wealth of the US in thirty years is going to be very much lower (from an international trade position) than now, surely?

            Oh, most assuredly.

            So does that not mean that printing US dollars while the markets readjust to a nodal world economy than a internetworked one is a reflection of the ‘real’ shear size of the US economy in the future.

            um, what? I read that a couple of times and it still doesn’t make any sense.

            US will still be a power house to itself.

            Perhaps but, as there’s going to be a very large desert in the middle, I suspect that you’ll find it’ll split into a west/east dual nation state.

            Look I don’t know, I guess if the US gives finance all the cash and leaves mortgagees to pay and pay then we’re looking at a feudal future in the US.

            It’s pretty much feudal now it’s just that the majority of the people don’t realise it yet.

            • Deadly_NZ 3.1.1.1.1.1

              And if you really don’t want your economy tied to them when they go tit’s up. And they will, they cannot keep on printing money willy nilly.

              Better to have a diverse economy with agreements right across the world.

            • M 3.1.1.1.1.2

              ‘Perhaps but, as there’s going to be a very large desert in the middle, I suspect that you’ll find it’ll split into a west/east dual nation state.’

              Yes Draco, but I also see a north-south split too as a load of good ole boys consider it their moral dury to keep them uppity niggers in check.

              ‘It’s pretty much feudal now it’s just that the majority of the people don’t realise it yet.’

              Very accurate observation. With so many jobless debt serfs it can only be a matter of time where they are herded into camps after being made homeless and told where and when to work and for how much as a means to work off their debt.

              Perhaps they will get to work in the GOM or the nuke disposal and storage industries.

  4. Lanthanide 4

    “This means money must become a means of exchange only.

    We must remove the time value of money. No interest, no financial derivatives and no charges for use of money.

    Remove the means of using money to make money.”

    What you’re saying doesn’t actually make sense.

    If money is a means of exchange, ie you can buy things with it, that means it has value. If it doesn’t have value, then it ceases to be a means of exchange. As long as it has value, someone will want to buy it. You buy money with money. Because it makes no sense to pay $110 to get $100, the only way to buy money is to take a lump sum now and pay a greater amount back over time, in the future, which is called interest.

    If you decide that “interest is illegal”, then you’ve effectively stopped banks and the like from lending money for which they have no immediate use to those who don’t have money but need it.

    • Draco T Bastard 4.1

      If money is a means of exchange, ie you can buy things with it, that means it has value.

      No it doesn’t. It means that it represents value but doesn’t have any value itself.

      You buy money with money.

      Nope, you “buy” money by producing value.

      …the only way to buy money is to take a lump sum now and pay a greater amount back over time, in the future, which is called interest.

      Why would anyone want to pay $110 for $100? Paying interest is irrational.

      If you decide that “interest is illegal”, then you’ve effectively stopped banks and the like from lending money for which they have no immediate use to those who don’t have money but need it.

      And?

      Government prints money @ 0%, spends it on community projects and even gives it to business startups, this money will end up in the hands of the people who will spend it making it circulate, government taxes to maintain a constant “level” of money. Accumulation of money is not rewarded as it is now meaning that it’s highly probable that the business cycle will go the way of the dodo (I’m still thinking about it but, IMO, the business cycle is caused by the accumulation of wealth into the hands of the few).

    • satty 4.2

      The Islamic law (sharia) doesn’t allow interest (usury), but there are Islamic banks and as far as I know they are doing very well without interest.

      More information on how they work can be found on Wikipedia.

      • Dismal Soyanz 4.2.1

        Sorry to burst your bubble but sharia banking still makes money from money. Regardless of how it is cast, banking is by definition making money from money.

      • Dismal Soyanz 4.2.2

        Sorry to burst your bubble but sharia banking still makes money from money (ETA: which the original poster was saying should not happen). Sharia banking is not “not for profit”. Do a google search on Murabaha.

      • Lanthanide 4.2.3

        I thought someone would mention this. Islamic banking appears to simply be ‘interest under a different name’ – the ultimate result is the same, in that the bank enables someone to buy some property, and charges them a premium for doing so.

        From wikipedia:

        “In an Islamic mortgage transaction, instead of loaning the buyer money to purchase the item, a bank might buy the item itself from the seller, and re-sell it to the buyer at a profit, while allowing the buyer to pay the bank in installments. However, the bank’s profit cannot be made explicit and therefore there are no additional penalties for late payment. In order to protect itself against default, the bank asks for strict collateral. The goods or land is registered to the name of the buyer from the start of the transaction. This arrangement is called Murabaha. Another approach is EIjara wa EIqtina, which is similar to real estate leasing. Islamic banks handle loans for vehicles in a similar way (selling the vehicle at a higher-than-market price to the debtor and then retaining ownership of the vehicle until the loan is paid).”

    • KJT 4.3

      Fractional reserve banking and interest are a big part of the problem. To pay back the $110 for the initial $100 borrowed it means that an extra 10% increase in resource use, work or economic activity has to occur to pay back the interest. As interest growth is exponential an exponential growth is required to allow the financial system to work. The problem is exacerbated by the banks ability to lend out money on the basis of the expected repayments even if the borrower becomes bankrupt and cannot pay. Making money from nothing.
      Not to mention banks ability to pay themselves. 60% of GDP is now financial services even though they add nothing to the real economy.

      This is just one idea of how money can work as a means of exchange only. I am open to others.

      If the State lent at 0% based on the likelihood of repayment as “responsible” lenders do now. You borrow the $100 and pay it back with $100 in goods or services as they are earned. If the borrower cannot pay it back then that money is written off as no corresponding economic activity can take place. Money supply matches the economic activity.

      Before you say this is just printing money ask about the US Government lending to banks at )% which they then use to buy USA bonds at 3%. Presumably so they can use the difference to buy more US bonds. Or the total dollar value of the US derivatives market.

      • Lanthanide 4.3.1

        Yeah, I understand fractional reserve banking, I’m just pointing out that the statements you said there don’t actually make any logical sense.

        The problem with disallowing interest, is that there is no-longer any incentive for someone to lend their money to someone else – they don’t get any benefit out of it, so why do it? So now instead the government gives money out to everyone, and then people pay the exact same amount back. But where’s the incentive to pay the money back quickly, and what is stopping the government from lending out huge amounts of money to everyone who came asking?

        By making loans interest free, you’re also encouraging reckless behaviour as there is much less risk involved in making business investments – the federal reserve holding the official interest rate so low for so long after the tech bubble in 2001 in the US is credited with a large part of the housing boom and bust.

        • Draco T Bastard 4.3.1.1

          The problem with disallowing interest, is that there is no-longer any incentive for someone to lend their money to someone else..

          There’s no need for them to do so.

          But where’s the incentive to pay the money back quickly,

          The contract where it says that it must be paid by.

          and what is stopping the government from lending out huge amounts of money to everyone who came asking?

          The piece of legislation that says that they can’t have any more money in the system than X amount to the defined Renewable Resource Base. The economy is a zero sum game.

        • KJT 4.3.1.2

          What stops the banks from lending out huge amounts of money to anyone who comes asking?
          In fact interest gives them an incentive to do so.
          You should not be able to make money from lending out money to someone else. That is the root of the problem.
          Holding interest rates low was not the problem it was the availability of bank made money.

          What is the brakes now on someone who simply wants money to bid up house prices. food prices or any other speculative investment for individual profit?

          With money supplied by a central bank, only, how it is allocated could be decided democratically.

          As we have seen with student loans the requirement to pay it back constrains the number of people who take out loans despite the lack of interest. People do not borrow money unless they expect future earnings to pay it back.

          Interest does not stop some people from defaulting on loans now. We just paid out 1.7 billion to cover loan defaults.

          Many good entrepreneurial ideas do not see the light of day now because to start a business under our present system you already have to be rich.

  5. Draco T Bastard 5

    Change the RBA away from the current single focus on inflation, allowing our dollar to drop to a natural level against overseas currencies, helping both exporters, job creation and manufacturer’s within NZ.

    I always find it interesting when someone advocates a stable state economy and then, in the same piece, advocates policies that would grow the economy.

    We need to go to a stable state economy that exists within the limits of the renewable resource base. The first thing that needs to be done is to define the renewable resource base. ATM, it seems that our ministries have looked at how much land we have and how many farms we can squeeze into that space without taking into account the need for the land to renew itself and so our forests have been cut down, artificial fertilisers are used which then wash into the streams killing them. Water is sucked away from the streams, rivers and other aquifers putting even more strain upon them.

    Gold, iron and other minerals are mined from the Earth and sold overseas with no thought of the future. Recycling is barely contemplated. The profit driven free-market must result in the use of all resources as fast as possible so as to make a few people richer. It will destroy everything in it’s path. Eventually we will run out and then our descendants will be wondering why we threw everything away. Was the money worth it?

    The one reality that nobody wants to admit is that, to be sustainable, we must control population. As population grows resource use also grows. This cannot be altered as the amount of food and other resource use increases as population increases. We can make a TV more efficiently but we can’t change the human body.

    • KJT 5.1

      Draco. I was enumerating things we can do now unilaterally, both economically and politically, to progress towards a stable state economy. Not the necessary components of the economy we are aiming for.

      Helping manufacturers in NZ of say, wind power, become internationally competitive is a step in the right direction. More production of necessities locally is another.
      Helping export industries more that use sustainable resources, such as sustainable composites, and discouraging those that do not, such as coal mining is another such step. In the world as it is we have to replace the export income from coal mining with something else.
      In the interim we do have to work within the reality of the current system and political possibilities.
      The whole world is not going to change magically just because it needs to. People have to see the need for change before they will change.
      NZ is in an almost unique position of both being wealthy in renewable resources and small enough to change.
      Our population is close to being steady state already. Expansion now is mostly due to immigration.

      • Draco T Bastard 5.1.1

        Our population is close to being steady state already. Expansion now is mostly due to immigration.

        Which is the reason why I keep saying that immigration needs to be stopped.

  6. Is National’s election strategy to sell Solid Energy to chinese and australian mining giants in an election year that is also around the same time as the climate coference in South Africa…?

    as usual the flip-flopping is amazing (especially for someone as unfit as Brownlee):

    ‘Mr Palmer is not an elected official he’s an appointed chairman and if he wants to go making those sort of announcements on behalf of the Government he should stand and get himself elected to parliament,” he said.

    Palmer said earlier today that the mining company should

    Solid Energy chairman John Palmer views did not reflect the Government’s position after Palmer publicly advocated the partial privatisation of the state-owned miner.

    Palmer said this morning that Solid Energy should be partly privatised to meet up to $10 billion
    ——————
    Conviently since the CEO was in China for a mining conference last year a Chinese company* with exactly $10 billion has turned up….

    Mom and pop – Mr and Mrs _ _ _ _ _ _


    * Qinghua’s joint venture partners Greywolf Gold-mining, incorporated in March this year, are spearheading project analysis, saying Qinghua has $10 billion to spend in New Zealand in 2011.

  7. KJT -perhaps a steady state economics conference could be organised for this year to follow on from the Ecological Economics conference that was held in Wellington.

    A sort of Green Jobs summit that is every thing the last Jobs Summit that was in Auckland wasn’t.

  8. Jum 8

    ‘Support Government that has not been bought and paid for by international corporate interests. From one that is only interested in extracting as much wealth as possible from us, before it is all gone, to one that has a vision for the future.’

    ‘Refuse to enter trade agreements that constrain what NZ can do on its own.’

    Has Labour promised not to sign the TPPA?

  9. Phil Goff is pro Free Trade – Cunliffe might have the spine to shift labour’s neoliberal trade policy, and look at steady state economics, green jobs and so on, to make a real break from consensus with National.

    Russel Norman seems more social democrat than Goff.

  10. mikesh 10

    It seems reasonable for interest to be paid on consumer items since in that case the interest paid doesn’t feed into production costs and thence into prices. But consumer loans would have to come, in this case, from existing money and not from fiat money. At any rate it would seem dictatorial to to not allow a willing lender to lend at interest to a willing borrower.

    I feel somewhat ambivalent about lending for purposes of production. It seems to me interest does have a role in allocating scarce credit. Perhaps if lending came from a state owned bank the proceeds from any interest charged could be used for the benefit of everybody.

    • Draco T Bastard 10.1

      At any rate it would seem dictatorial to to not allow a willing lender to lend at interest to a willing borrower.

      Make it so that no one has to borrow (which is how it should be) and it’s no longer dictatorial – it’s just not going to happen.

    • KJT 10.2

      The ones who are likely to pay it back can borrow from the Government.
      If private lenders can compete they are welcome too. Pretty hard to compete with
      zero cost though.
      Even loan sharks cannot lend money unless it is already earned by work, as no other money exists.

      I have no problem with somebody with a business idea that uses resources more efficiently getting free public finance. As now, if he/she fails he does all his/her dough and, unlike now, any money that cannot be paid back no longer exists in the system. Reflecting the fact that the work to be done to pay it back now is not happening.
      One of the big problems with the present system is anyone with a good entrepreneurial idea has to be already wealthy to carry it out, while those who want to borrow for asset speculation, including monetary assets, can easily borrow.

  11. mikesh 11

    “Make it so that no one has to borrow (which is how it should be) and it’s no longer dictatorial – it’s just not going to happen.”

    This would only be possible if the loan was fiat money. But fiat lending, if not for the purpose of increasing production, would be inflationary.

    • Draco T Bastard 11.1

      If no one has to borrow to buy “consumer goods” then there’s no loan made by printing money and thus no increase in the money supply, ergo, no inflation.

      BTW, our present money is fiat money and most of it’s created by the private banks for non-productive purposes. They’re incentivized to print more and more money because they get to charge interest on it. Now that really is money for nothing.

  12. mikesh 12

    ‘If no one has to borrow to buy “consumer goods” then there’s no loan made by printing money and thus no increase in the money supply, ergo, no inflation.”

    Obviously. In fact, almost a truism.

    I think we have to assume some people will have to borrow.

  13. mikesh 13

    “any money that cannot be paid back no longer exists in the system.”

    This is not true. The borrower presumably has spent the money, so it is still circulating.

    • KJT 13.1

      The money he would have paid back is gone. More properly the work the borrower would have done to pay back the money has gone.
      The money spent still has had work done for it. E.G. If the money is spent on building a factory for the borrower the work has still been done.

      • mikesh 13.1.1

        “The money he would have paid back is gone. More properly the work the borrower would have done to pay back the money has gone.
        The money spent still has had work done for it. E.G. If the money is spent on building a factory for the borrower the work has still been done.”

        As I understand things, the system is that a borrower borrows, spends the loan on this and that, later pays it back. At his point the loan is cancelled and the money disappears. However its disappearance is matched by the disappearance of his product form his market as he would have had to sell his product in order to pay back the loan. So product available for sale and money to buy it with remain in balance.

        If his business fails he may not have a saleable product, and in this case, as the loan is not paid back, money remains in circulation, and money and product are out of whack.

        Of course, if there is a building to show for it, then that may be sold and the loan paid off from the proceeds. But that’s a different story.

  14. mikesh 14

    “Fractional reserve banking and interest are a big part of the problem. To pay back the $110 for the initial $100 borrowed it means that an extra 10% increase in resource use, work or economic activity has to occur to pay back the interest. As interest growth is exponential an exponential growth is required to allow the financial system to work.”

    Interest growth is exponential only interest received is relent. In all probabability interest received will be spent in paying the bank’s staff, office expenses, dividends to its shareholders etc.

    • KJT 14.1

      I should say lending growth plus interest is exponential to make it clearer.
      Interest received mostly goes to the banks depositors, where most of it is relent. “The miracle of compound interest” Miracle is right! Under our present system a financier can lend money purely on the assumption the expansion of the money supply will supply enough wealth to pay back the loan plus interest. Infinite growth. The
      This is just betting that future work will be sufficient to pay it back. At present borrowings far exceed the amount of possible future work as most has been spent on bidding prices up rather than future productive efficiency.

      Presently you can see the exponential growth in the rise of prices of derivatives and other financial investments which have no direct relationship to the productive economy.

  15. bjchip 15

    We’ve done this to death over on Frogblog.

    http://blog.greens.org.nz/2011/01/18/whats-the-matter-with-fractional-reserve-banking/

    Succinctly…

    1. Money is a representation of work done.
    2. It has to follow the laws of thermodynamics ( Can’t come from nothing , entropy rules )
    3. It is most conveniently (but need not be) backed as KWH of work.
    4. It can be loaned at interest if the money already exists.
    5. It cannot be created at interest (as FRB does now)
    6. Pursuant to (2) it should have demurrage unless held in the central bank.

    Interest growth is exponential only interest received is relent. In all probabability interest received will be spent in paying the bank’s staff, office expenses, dividends to its shareholders etc.

    All the money in an FRB system is backed by debt. It matters not at all what it is used FOR, only that it must be borrowed to create it in the first place. Therefore it attracts interest. Therefore it demands exponential growth.

    As my 11 year old asked me. If interest is to compensate the the lender for the time value of money, and the bank didn’t have the money in the first place, how come you have to pay them interest for borrowing it? After all, it is your signature on the paper that created the money.

    Clever girl.

    respectfully
    BJ

  16. mikesh 16

    “All the money in an FRB system is backed by debt.”

    Not all of it. Some may be spent into existence by the bank, in the process of paying expenses, or paying dividends to its shareholders. Also, some may spent into existence by governments.

    It doesn’t actually “demand” exponential growth. I have shown elsewhere that an FRB system may be consistent with a “steady state” economy.

  17. raf 17

    I think what Bj meant to say was that “all the money in a FRB systems IS DEBT”. There is some cash ($4bln in NZ) but that’s a tiny %.

    It is created as debt and therefore perpetuates the cycle of new debt money required for interest payments on the old debt (as money for the interest does not actually exist).

    And yes governments or sovereigns can (and should) create their own money, debt and interest free, thus creating a “real” and lasting supply of money.

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