Only a few weeks ago I was confident that government take-over on the banking and financial front was going to halt the downward spiral of the financial crisis. Now that I have watched the fabulous documentary Money as Debt [update: I absolutely disagree with the conspiracy theory advocated towards the end, but the beginning is still great at explaiing how money come about], I am convinced that the fall will not stop short of a global monetary (and thus economic, and thus social) collapse. Here’s why.
I already mentioned that one’s money was someone else’s debt, and that when the someone else becomes insolvent, money loses its value. What I (and probably you) did not know is that today’s money is highly leveraged debt. Which means that the banking system essentially turns one thousand dollar of debt into roughly ten thousand dollars of money. As soon as there are doubts as to whether the debt will be paid back, the whole pyramid of leverage collapses.
Do you know the famous pyramid-scheme ? This century-old con consists in talking several people into giving you one dollar each, and then send them forth to do likewise with any number of fresh recruits they can trick into the scheme. In an infinite world, this scheme is great and endlessly concentrates money up the pyramid. In a finite world, however, the scheme always ends up collapsing when the bottom levels of the pyramid realise they will never get their dollar back from nonexisting lower level recruits, and understand they have been tricked by the upper levels in the pyramid.
This is exactly what is happening to the financial world (and economic world too, because let’s face it: there is no such thing as a financial vs real economy separation). People have been selling leveraged debt, and the scheme was holding only because the sky was the limit. As long as there was the promise of always more, as long as we could count on sustained exponential growth, paying back a debt with a new debt was nothing to be worried about. The runaway race of leveraged debt was sustainable as long as there was somewhere to runaway to.
I believe that the bursting of the housing bubble is just the first symptom of something far more ominous: the planet is becoming insovent. For centuries or even millennia, the world had relied on the fact that there was always going to be more tomorrow than today. More production, more commodities, more people, more money. The housing bubble burst when the commodity markets had given very clear signs that we were running out of planet to rape. The fact that oil production was peaking sent oil prices skyrocketing. For the first time in a long while (who remembers peak whale oil or peak seal fur?) the planet was sending a signal of exhaustion down the economic pipes. Where everything in the economic world was based on the bet that things were going to be ever cheaper, ever more abundant, now came the news that there was not going to be more oil. This is called a shock, and something had to break somewhere. The economic fabric had to give and it gave where it was weaker: hence the bursting of the housing bubble.
I believe it is not going to stop there, whatever the government bail-out initiatives. These initiatives are merely an attempt at preventing the middle of the pyramid from melting by transferring more debt to the bottom (government guarantees are taxpayer’s children’s debt). Now that everybody realizes that the planet is bust and that there is far more money (and stocks, and bonds, and such like) around than stuff to buy with it, money that was engineered as a bet on an ever expanding future will just vanish, and we’re in for a complete and global monetary collapse.
The collapse can take many shapes, and a historian of economics will be able to depict at least half a dozen. The smooth option is by way of double-digit inflation over a decade. The hard option is by a complete collapse of corporate, then state credibility worldwide, with the very rich trying to be the first ones to jump ship with anything they can snatch from the people down the third class deck.
There is no liberal take on what should be done. Letting the pyramid fall is not a option. Just think what happens when the guy working for the electricity or the water distribution company stops working because he has not been paid in months (remember the collapse of the Soviet Union?). If I was the king of the world, I’d take the following measures:
- tell the rich the game is over - all savings accounts (i.e. the debt weighing down on the future generations) are reset. After all, if I have been saving money, it means I did not need it all that much. This amounts to telling all those who thought they were investing money that they had in fact been donating their surplus to those who needed it more. This measure will guarantee that the people can keep their homes, the contractors can keep their tools, the bosses can keep their factories. Otherwise, we’d see creditors diving from the sky to liquidate everything and put everybody out on the streets and out of work to get money back that’s not worth anything anymore because the economic system would be completely broken as a result.
- tell everyone that there is going to be less for everyone. There should not be job cuts to protect the wages for the few who stay aboard: everybody should cut their wages, possibly work part-time. Otherwise you you just precipitate the fall. Because the crisis will gnaw at people’s purchasing power, there will be economic niches that we must drop (airplanes, probably automobiles), but then we must reallocate the workforce like Roosevelt did with the Civilian Conservation Corps to mend the planet while we still have time.
- Encourage all local economy initiatives. The world’s financial fabric is giving because it was based on trust and that trust has been abused by financial markets. You cannot rebuilt that kind of trust overnight. However, you can still trust your neighbor. Reinventing the economy from the gift stage and the barter stage takes some time. Everyody had better start right now.
- Rebuild a monetary world that does not send the planet on another runaway race, otherwise we’ll be like a fly bouncing forever against the glass ceiling. Interest lending intrinsically leads to the concentration of wealth and exponential growth. There are many wise alternatives to the kind of money we have grown used to. In the thirties, people have had successful experience with local, evaporating currencies: you had to use your money as quicly as possible if you did not want to see it evaporate. This looks like organized inflation, but the prices and wages remain constant, leading to more psychological stability. This removes the temptation of hoarding, hence the tendency of money to concentrate. After all, if money is debt, there is no reason why it should not come with a date limit. If my grandfather gave a hand to your grandfather fifty years ago, you’d find it awkward if I came to you and demanded a payback right now.
Only money that goes out of date like a newspaper, rots like potatoes, rusts like iron, evaporates like ether, is capable of standing the test as an instrument for the exchange of potatoes, newspapers, iron and ether. (Silvio Gesell)
What’s the good side of the recession? It will probably achieve the CO2 emission cuts that give a chance to our children. After all, it’s only fair to say ‘game over’ to the ones who did not play nice with the planet, and not those who come after them.
If you think I am just nuts and that everything is going to be all right, I am glad. Especially if you can come up with convincing data and arguments against these guys, who were my inspiration.
[update: there is another fabulous slide-show that you want to watch to get to grips with the big economic / environmental / monetary picture.]
