Debt

So, we’re all fairly sure that the current economic crisis is something to do with the banks lending money to people who couldn’t finance their debts. We’re reasonably sure of this because we’re quite certain that the American Sub-Prime mortgage market was where the problems started and that if they’d not lent money to those people then we’d all be fine now and would be enjoying the same level of economic growth as before. How true is all this ‘knowledge’ though?

Money is debt. The available pool of cash with which to do things comes from each of our promises to finance our debts. The money you paid for your house with almost certainly doesn’t physically exist anywhere. Unless you’re in the minute minority of people who paid for their house from their earnings, then you got out a mortgage, the majority of which would have been created ex-nihilo. It exists as a string of 1s and 0s on a computer. As you pay/paid your mortgage off most of the money you gave back disappeared. It had never truly existed in the first place. The only money which didn’t disappear was the interest and the reserve deposit equivalent. That is the amount they have which they can lend from. The ‘real’ money that allows them to make fake money out of nothing more than your promise to repay. Their reserve ratio could be as high as 24:1, they could be able to loan out 25 times the real money they have.

Okay, so the bank can lend out more money than it actually has, but this fake money it creates is destroyed as it’s repaid, leaving only the real money and the interest. At a reserve ratio of 9:1 (as I understand it, a fairly low, reasonably common rate) they can collect interest on a £10,000 loan while only having £1,111.12 of real money. The interest on that £10,000 loan is theirs to keep and they only need to recover £1,111.12 to get their initial investment back, the rest of the £10k will be destroyed once repaid anyway. Of course, that £10,000 loan will be deposited somewhere once the loan’s been used for whatever it was intended for. The £10,000 loan, once deposited, can be then used to make a further loan of £9,000. That £9,000 loan can then be used to make a further loan of £8,100, and so on until we’re approaching £100,000 of loans (and the interest payments on those loans) for a £1,111.12 initial deposit. If there were only one loan made then the bank could only collect on the £10,000 initial loan. However, with dozens of smaller loans after the initial large loan the bank can collect on £100,000. Lending to lots of people wanting smaller quantities makes the bank a lot of money from nothing.

So the banks can make the huge loans that large businesses want, then use those to make medium loans that medium businesses want, then use those to make loans that small businesses want, then use those to make loans that consumers want. All of the loans made with the same initial deposit by the central bank. And the interest collected on all of the loans can then be used to make more loans and collect more interest.

Of course, no bank would get the deposits from their own loan from every stage of this process, but since the banking system is a closed system, it effectively means that, since each bank gets some deposits from every other bank’s loans, it works out to the same thing in the end.

So, the total amount of money in the system and the total amount of interest the banks can ‘earn’ is entirely dependent on the demand for debt. If you can find a way to give money to everyone demanding debt in such a way that you can get your money back in some way, with some interest, then you will. Capitalist greed demands that we do everything possible to get that extra penny of profit. It doesn’t matter if your business model is that you lend money to people to buy houses, knowing they will probably be unable to pay, because you’re gambling that their house will be worth enough to cover that by the time you come to repossess it, you will do it, collect your profit and sleep sound at night. Ethical considerations are not part of a capitalist system.

That’s a lot of explaining to essentially say that the sub-prime market was good for the economy, until the housing market started to shrink instead of grow. Once houses were starting to lose value rather than gain it the system stopped working, the gamble turned sour. Our long, sustained growth period was thanks in no small part to the extra money generated by the sub-prime market. It’s just sad that the means we chose to fend off a small deflationary period will have the effect of causing a massive deflationary period. Cest la vie.

Growth isn’t sustainable. I’ve said it many times within the course of writing entries for this blog, but I feel the need to say it once again. Growth is not sustainable. No level of growth is sustainable. No level of depletion is sustainable. It’s logically obvious that both of these statements are necessarily true. Yet, our culture doesn’t accept that logic. It says that either the conclusion is wrong or that some form of technology will appear to allow us to defeat the conclusion. The amazing tech fix.

We have been lulled into believing in the tech fix because it’s worked for so long now that we can’t perceive a time when human innovation will not provide us with new and innovative ways to continue killing the planet. We even imagine such a situation – where we can’t think of a new way to continue business as usual – as horrific. It would be terrible if we had to deal with the Earth as a partner and not as a slave! Tech fixes have been possible because of easy access to cheap energy. If peak oil strips us of our easy access to cheap energy, will the tech fixes be possible? Probably not if we’ve not done wide scale, serious investment in the alternatives prior to the peak. If, as some people argue, the world has already peaked, then we’re too late. Time to ride the roller coaster.

Exponential Growth

I have previously echoed Richard Heinberg’s question, are we smarter than yeast? I’ve also previously written about the problems of endless growth within a finite system. However, these seem to be two of the least popular (according to my Dashboard blog stats) of my entries. I asked myself why and it seems obvious. They don’t have a happy chapter.

Unlike many dire predictions about the fate of all of us if we don’t change our ways, I don’t believe there is a way to continue ‘business as usual’ and save the planet. A lot of the time we are told that if we just recycle then we’ll be fine. If we reduce and recycle we’ll be fine. If we reduce, reuse and recycle then we’ll be fine. If we reduce, reuse, recycle and invest heavily in renewable energy then we’ll be fine. Business as usual, no worries. Go back to sleep, we’ve got this one sorted.

Recycling requires energy and many, many things cannot be recycled forever. They stop being able to be turned into new things. Even the best recycling in the world will still require influxes of new stuff, new metals, new raw materials. It also takes lots of energy. Machines wear out and will need replacing. Parts break. These are the constants of life. We might make all of the wind turbines, solar cells, tidal barrages, geothermal turbines we need tomorrow, but that wouldn’t be the end of our resource use. We’d need to replace them as they broke. Even if we could get into a steady state with all of the resources we use being reused until they can no longer be reused, we still need more stuff. Even in a non-stone-age, ’steady-state’ society, there will still be the need for more stuff to be dug out and used.

This is assuming that the people who are investing in these things, the governments that are pushing them, the companies profiting from them, are abandoning growth. They’re not, of course. We can recycle, because it creates jobs, but we must grow. We can reuse to a point, but we must buy new as well, we must grow. We can reduce packaging, but not consumption, we must grow. We can invest in renewables, because that creates some jobs, but we must grow. We will invest in nuclear, because that creates tonnes of jobs, and we must grow. The economy must grow, or it will die. The implication of that statement is that the economy is more deserving of life than wild nature, or humans. The economy is master and we are its slaves. We are well-kept slaves (in the UK, US and other ‘Western democracies’, at least), but we are slaves.

As Derrick Jensen says, what we need are stories. Stories to tell our children, to warn them and educate them. Stories which will warn of the dangers of taking a steady state system and building from it a system based on growth. The stories will need to be better than just telling them they can’t do it, or appealing to the dictates of some deity or other. There will need to be a web of interconnected, self-supporting stories, a culture, which makes the thought of starting a growth based economy repugnant, insane. These stories will need to be supported by stories about the wonder of nature, its beauty and value. They will need to tell of the death of nature, massive, massive death, horrible death which a machine based on growth causes to priceless nature. They will have to make clear that the death causers also die from the very machine they use to cause the death. In short, they will have to be the exact opposite of the stories we now tell, of infinite growth being logical, necessary and good. They will also need to form the backbone of every culture in the world.

Every culture in the world will need the same core cultural stories because if any one decides that growth is okay, or good, then every other will fall before them. A growth based culture isn’t better because it wins cultural battles, it’s just more violent, more efficient at casting people onto the fire to fuel it. Its greed leads to its hegemony. Winning doesn’t make it right, it makes it repugnant.

Crunchy Crunchy

I’ve just read David Waddell’s very wise words over on his blog about whether debt is good, bad or ugly. He makes a lot of very sensible points about micro scale economics. In his example of Bob and his new sofas, for example, he’s entirely right that if Bob saved, rather than got his sofa on credit every time, he’d be able to buy more sofas in the long run. Bob doesn’t do this and the economy doesn’t encourage him to because of the very nature of our entire society. The short term is more important than the long term. Governments look no further than the next election. Businesses look no further than the next profit report. Individuals look no further than the next pay slip. There are exceptions to those rules, but generally people live pay slip to pay slip, saving and then spending their savings, putting a tiny amount into a pension and then regretting it in the long run. Businesses may have what they call a ‘long term plan’, but they’re usually only very sketchy beyond 5 years, and 5 years isn’t the long term. Governments are seen as over-stepping their legitimacy if they make too many policy decisions which run for more than their term in office. Etc, etc, etc.

Also, Waddell seems to ignore the fact that our currency is now debt. It’s not linked to anything more tangible than the debt we owe to the banks. If we stop borrowing or they stop lending then we’re in serious problems (hey… spooky). Because we can no longer be paid on demand the sum of £5 in gold, and instead are paid the sum of £5 in £s, we now need banks to keep providing easy to obtain debt and consumers to keep taking out more debt than they can easily finance. Bob may be better off if he figures out that saving will enable him to get more, or more expensive, sofas in the future, but for that to work as Bob intends it to work there needs to be enough other people who don’t realise it so the system keeps working and Bob’s money is still worth enough to buy him a sofa by the time he wants one.

He also overlooks the fact that the interest paid on loans made by the banks becomes available for re-lending. So a sea of consumers taking out loans is a good thing for lending as it generates interest which the banks can then lend out to more customers. Since the banks are able to lend many times what they actually have in reserves, and since the interest is theirs to keep, they can get a lot of money for lending from lending money.

It’s a brilliantly subtle system while it’s working. People believe the money they trade for goods and services is a unit of value. They believe it is worth something, because of that belief it is. If that belief disappears then the money they trade actually has no value at all. They can’t trade in the money at a bank for a thing which has value as a tradeable item such as gold, they can only trade in the money for different money. If they don’t accept the value of that money, where does that leave them? It’s in their best interests that they accept that the 1s and 0s in the bank’s computer which represents their wealth has value as they have no other recourse if they don’t. Belief is what holds the entire economic system together. That and the legal system deems it to be acceptable if someone will only offer to repay a debt they owe to you in the legal currency of the country you’re in, whether or not you believe in that currency’s value any more.

Waddell has a good point when it comes to the three phenomena of self-certification, 6 x mortgages and over 100% mortgages. However, once one accepts that money is debt (rather than value) and that the banks hoover up the money supply through interest payments, it becomes obvious why such things started to happen. The system needs larger and larger debts to finance the interest payments on the debt already in circulation.

There is a finite limit on what credit-worthy people can finance and are willing to finance. So they introduce self-certification to allow those who aren’t credit worthy to get into debt. Since this debt is secured against their house, which is going up in value, it doesn’t matter if they finance the debt or default, the bank makes money, the interest gets paid and the loan has created the money it needed to create for the system to work.

The banks lend money to everyone, even those who on paper can’t pay it back, and that fuels further increases in property prices, which helps the banks out because the defaulters’ homes are worth repossessing. Now, the increase in price starts to mean that people who should be able to finance a house can’t. So the bank increases the amount they will lend, because more people buying houses is good for them, both in interest payments and in house price inflation for future repossessions.

When you’re moving house there is almost always something you want to change about the house you’re moving to. Some small or not so small detail which is wrong. Now, if you’re having to give the vast majority of your pay to the bank so they’ll give you a 70 or 80% mortgage then you can’t make that change right away and may never get around to it. Many such changes will increase the value of the home, such as an extension. The bank wants your house to be worth as much as possible and so starts giving out 100% mortgages, so you can spend that 20% you’d saved on your extensions and remodelling. Lovely. However, word gets around that the banks are now giving 100% mortgages, so people stop saving that 20% and just want their house. The banks still want the house to increase in value by the addition of extentions and remodelling, so they up the percent they will loan to the borrower in the hopes that the excess will be used to increase the value of their home or buy some other retrieveable goods. If the mortgage is financed the bank gets its share. If not then its gets its share by repossession. This works so long as the price of houses is going up.

The reality is so stupid that it seems almost impossible that it would be allowed to continue. A bank shouldn’t be allowed to loan out almost $100,000 on a starting capital of only $1111.12 (part two of Money As Debt), but in effect they can. They can have $1111.12 and collect interest on almost $100,000.

The current credit crunch (God I hate that it got called that) was obviously going to happen. The system makes it inevitable. If we have the fossil fuel energy reserves left to claw our way out of the huge hole we’re in then it will happen again, unless we change the way banks and loans operate. We wont change a thing though because we like the illusion of prosperity that the system creates. We like to buy things today that we can’t afford until next year/decade. We like to have businesses able to operate despite losing £75 million in one financial year. We like these things and these things are what the system provides. There is so little real incentive to change the system that it wont be changed. I can even imagine post-crash societies which still operate this type of credit system. We’re short term animals. We like the benefits today and don’t care if it hurts tomorrow. We like it even more when the benefits are today and the pain might not be felt until after we die (see the way we treat the environment, the problems looming with peak oil and the lack of action, etc).

Food as Not-Food

One of the many options being seriously considered to halt carbon emissions is the use of bio-fuels.

One of the many options being seriously considered to halt the waste of resources represented by over-packaging is bio-plastics.

Two solutions which believe that making food into non-food is a shiny idea. Brazil leads the way on bio-fuels and is proud of this. Brazil also has a lot of people starving who have been bought or evicted off of their land by large agri-businesses so they can change the crops those lands grow into bio-fuel crops. Sounds great, huh? This is the real-time result of food for fuel.

Most people are more than willing to pay more for fuel than they are for food. A field growing bio-fuels is more profitable than any food crop the land could support. So what is likely to happen, when we already have poor people around the world, going hungry, growing cash crops on land that could feed them? These are uneducated people. They more often than not believe the corporate salesman when he tells them that they will be better off selling all of this years crop and then buying their seed for next year’s crop from the company. While they’re at it they might as well use this new fertiliser and pesticide, it’ll boost their production. Since you’re using our chemicals you don’t need to employ any of your traditional land management techniques, these products remove the need to do that. And if they’re boosting their production they might as well buy the seed for cash crop X and thus make surplus money to afford to send their children to school and to buy things they want. Sounds good, we’ll take it.

Then they might get a season or three of great growth and it might seem like they’ve made the right choice. Then they might start to see the effects of prolonged use of chemicals on their land, they might start to also see a decline in the level of growth they’re getting. They might start to think that it’s not actually so great to buy their seeds from the company and so try to save them, only to find they’re terminator seeds and don’t grow a second season, so they’re now trapped in the buying cycle and are unable to save their seeds. So, they stop buying the chemicals, their fields weren’t that bad before, they grew the food the family needed well enough. They then find out that the seed they are now trapped buying doesn’t grow or grows very poorly without the company’s fertiliser and other chemicals, so they’re locked into buying them too. Eventually they’ve ruined their fields, spoilt the environment they rely on and are almost indentured to the company, needing to buy the seeds and chemicals each year to further ruin their fields in order to keep any money coming in. Conveniently the money they may get is also dictated by the corporation which is selling them the means to ruin their way of life.

Rambling? I know. Off topic? A little. Unlikely? No. This happens and has happened for many years now.

Even as they starve, people will still export food for money. It happened during the Irish potato famine during the 1840’s and it happened during the Ethiopian Famine of the 1980’s. During both famines the respective countries were exporting food to Britain while masses of people starved in their own countries.

The invention of terminator technology was such a vile attack on life that I can’t believe it wasn’t seen for what it is. People who use technology for such gross violations of sanity should be considered criminals, not pioneers of industry. Products made to do such things should be illegal, not profitable.

Agri-fuel industrialists will bleat about how the current food prices aren’t their fault because only 2% of the food of the planet is used for fuel. This isn’t the point, honestly. The current food prices are probably because of the sharp rise in the price of oil, since food is oil now, but wanting to increase the amount of food siphoned off for fuel will have an impact on the global food prices. People consider their cars to be essential (often because they live criminally far away from their place of work), while fresh, healthy food comes in second place. Most people will live on cheap beans and cheap bread when forced to choose between fixing, fuelling and insuring their car or eating well. The choice for them is obvious.

Putting pressure on a dwindling food supply by making it into plastics and petrol when 30 countries around the world have had food riots this year alone isn’t ethical. It’s not right.

In a world where oil prices push up food prices, where climate change looks set to destroy more and more crops around the world, where the population overshoot continues apace, should we really be thinking about converting food into not-food?

The Secret Millionaire

I don’t know if anyone has ever watched The Secret Millionaire on Channel 4, but it’s one of my favourite programmes on TV at the moment for the sheer escapism of it.

I watch it and imagine being a millionaire, able to donate thousands of pounds to anyone I wanted. I fantasise about who I’d give the money to and why. I come up with quite a list of people and quite a list of reasons. At the same time I come up with one of the many (many) reasons I’ll never be a millionaire. I’m not frugal or stingy enough.

The guy on the most recent episode quoted his fortune at £77 million. Of which he gave out £136,000 (or near there). Now, I’m sure the receivers of that money were really thankful, but honestly, I have serious grievance with that being considered a really generous contribution. If someone with nothing in the bank and an income of £200 a week were to give £2 a month to charity no one would make a peep about it. No one would even bother to mention it and it would go totally unnoticed. Yet the person giving £2 a month is giving a larger percentage of their money to charity than the millionaire.

There are ordinary people who give £10 or more, every month, to various charities. People who aren’t on much above minimum wage. People who’re hardly ever mentioned in any context. Yet this guy goes along to three causes and gives an amount that is much less than he earns in a year, with a nest-egg built up over 10 years of £77 million behind him and he’s considered a saint.

Maybe I expect too much? Who knows. But his lifestyle clearly does not make use of his income, else he would not have amassed £77 million in 10 years. He could easily afford to donate a few years income and not notice the impact on his life in any way (except maybe having to put a different figure at the start of his estimated wealth). Once you’re over £10 million, and with the job that propelled you over £10 million still, you are unlikely to need any more in the bank.

As I think might be clear, I don’t watch The Secret Millionaire for the generous donations to charity, but so I can fantasies about having that much money and giving it away.

The Premise

Broadly speaking I subscribe to Derrick Jensen’s 20 premises as laid out in his two volume book, Endgame.

The premises in order can be found here.

A somewhat naieve, and perfectly ‘normal’, commentary can be found here.

Why is this a normal and naieve commentary? Basically it does what so many people do when confronted by the fact that a system which is designed to grow (cultures based on agriculture, or ‘civilisation’) isn’t sustainable. It says “you can’t prove that” and “we could transform this system into a sustainable one”.

Economic models such as we use need growth. Without growth our version of economics, the civilised person’s economics, fails. This has been true ever since we developed the concept to describe what was happening within our agricultural societies. A system that needs growth isn’t sustainable.

If you read Endgame, which I highly recommend you do, he lays out a very workable definition of civilisation. Jensen defines civilisation as “a way of life characterised by the growth of cities.”^[1] As he points out, civilisation is often directly linked to the appearence of cities. With this definition and with the subsequent definition of cities, it is impossible to argue that civilisation is redeemable. If you change the fundamental nature of either cities (impossible realistically at current densities, thus impossible without making them not be cities as we would have any chance of recognising) then civilisation might be redeemable, but by changing the nature of what a city is you stop it being a city and thus you’re no longer in a civilisation. You might be in a tribe or a small community, but you aren’t in a civilisation.

The end may not come in my life time. I think it will. However, this is an area I would love to be wrong about. I think what Ran Prieur says in this short clip is actually spot on. As a blob of people, we like disaster movies because they give us the escapism that we would do something if there was a massive disaster and our way of life were threatened. The truth is that we will sit in our air-conditioned, centrally-heated houses complaining about the cost of petrol^[2] or gas^[3] and demanding that the very ‘free market’ system we were lauding just a mere month or so ago should not charge us what it can for goods we have to buy^[4]. If we wanted to control the cost of petrol, gas, whatever, we should have kept nationalised industries in those areas. We didn’t. We invited the devil of free market economics to supper and got pissed that he actually burnt us. I’m not suggesting that we re-nationalise those industries (well, I wouldn’t ‘nationalise’ them so much as ‘localise’ them), but I am questioning the sense of giving those areas to private, profit seeking companies and then being shocked and dismayed when those same companies turn out to be seeking profit for private individuals rather than the good of the community.

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[1] http://www.kewego.co.uk/video/iLyROoafYKjY.html
[2] http://news.bbc.co.uk/1/hi/uk/7527679.stm
[3] http://news.bbc.co.uk/1/hi/business/7533389.stm
[4] http://news.bbc.co.uk/1/hi/business/7534421.stm