Tuesday, 26 August 2014

The New Money Creation Process

The focus of Chapter 7 (Jackson & Dyson 2012) is on the issues surrounding the new money creation process. The first question is who should have the authority to create money (pp. 203-204). Under the current system, only the Bank of England can create physical currency (i.e. notes and coins) but digital money is created by commercial banks or the Bank of England. Under this system, no one group controls the amount of money in the system. Is this a good process? Who should have the authority to create money?

Jackson and Dyson argue that those responsible for the creation of money should not be able to benefit personally from the creation of money. To do so would mean that there is a conflict of interest. In the current system, bankers are rewarded for issuing loans and in the process of issuing loans, they create money. Indirectly, there is personal benefit to the bankers and therefore a conflict of interest.

The proposed system

Giving the responsibility to politicians could see them sanctioning the creation of money in order to buy votes. The proposal is therefore to have a money creation committee (MCC) as part of the Bank of England that has responsibility for the creation of money and to leave the politicians with the decision on how the money is used. This provides a separation of responsibilities and reduces the possibility of personal gain (p 206). It also aims to avoid influence from bank lobbyists.

Jackson & Dyson propose that appointments to the MCC should be ratified by a cross party group of MPs. This avoids the chancellor or government having too much control over appointments and thus gaining a committee that favours government policies. The objective of the proposed method of selecting members of the MCC is to try an avoid influence on their selection however, in my view, there is no way to be totally independent. The selection will be influenced by what are perceived to be the current desirable skills for committee members. This is most likely to include appointing bankers. economists, and business people who are likely to maintain the current direction in the economy. From my perspective, all humans are biased in their decision making and I would expect the committee members to be influenced in some way in their decision making. The issue is how to minimise the opportunity for this to provide personal gain or be influenced by a specific interest group in the economy.

The operation of the committee also needs to be designed to ensure that members of the committee have no personal chance of gain from money creation. It is proposed that the committee be responsible for maintaining an inflation target in the same way as the current monetary policy committee (p 207). As well, they should consider how to maintain an appropriate amount of new business lending and to prevent price bubbles in markets like the property market.

How much money to create?

Estimating how much money is needed in the economy is a difficult task. The proposal is that rather than the MCC trying to estimate how much money needs to be in the economy, they should try to determine how much change is required. Jackson and Dyson say, the MCC needs to “take a view on the likely future path of the economy in addition to reacting to economic events” (p 208). They acknowledge that it is not possible for the MCC to predict perfectly the growth needed in the money supply. What is important is “Who is likely to supply the economy with the 'correct' amount of money”? (p 208). The MCC needs to consider the interests of the national economy.

Accounting and mechanics for money creation (pp 210-211)

This section describes the general principles that should be applied for the accounting for money creation. Jackson and Dyson contend that cash and bank deposits should not be recored as liabilities nor held as assets against liabilities. They argue that “electronic, state-issued money will be an asset of the holder but not a liability of the central bank or the Treasury” (p 210). They argue that there is no need for an asset backing for the currency. The value comes from the willingness of people to exchange it for goods and services.

Money should simply be “a number in an account at the Bank of England” (p 211) and should be electronic tokens held in custody for the owners. Newly created money is a non-repayable grant that is placed into the Central Government Account at the Bank of England.

How money should be spent into the economy (pp 211-216)

The decision of how newly created money is spent should be seen as a government decision and it is expected that it would increase government spending. The government could decide to cut taxes, make a direct payment to citizens, or pay down the national debt. Jackson and Dyson contend that paying down national debt is placing the money into the financial sector when it really should be targeted at the real economy.

As part of the Bank of England's responsibilities is ensuring that the economy does not suffer through a lack of credit. Rather than the bank lending directly to businesses, it would lend the money to commercial banks and it would be recirculated on repayment back into the economy through government spending.

Reducing the money supply (pp 216-218)

Although Jackson and Dyson contend that this is unlikely in a growing economy, any proposal has to consider the possibility that there is a need to reduce the money supply. This is most likely to occur when the growth is limited or nearing zero. In such situations, there is likely to be excess money in the economy causing inflation. It is proposed that the Bank of England could remove money from the government account, sell securities and remove the money gained, not rollover loans to the banking system, or not recirculate the 'conversion liability'.

Conclusion

This chapter has focussed on the mechanisms for money creation and distribution. Under the current system, the Bank of England endeavours to control how much money is in the economy by setting the base interest rate. This is an indirect control over the amount of the money in the system (I am inclined to argue that this can be seen in recessions where the interest rate is dropped but it doesn't immediately stimulate borrowing and economic growth.

References

Andrew Jackson and Ben Dyson (2012) Modernising Money: Why our monetary system is broken and how it can be fixed. London: Positive Money.

Friday, 11 July 2014

Conspiracy or Assumptions

Background

A recent visit to Rockingham Castle and Lyddington Bede House made it obvious that the UK has long had problems with inequality and with the way that it treats the poor. This is further evident looking through the Richmond Castle built during the feudal era of English history. Not only was there are clear difference between the wealth and conditions of those who lived in the castle and those in the Bede house or surrounding town, we were told that those who had access into the Bede house where the respected poor. There was another class of poor that were in even worse conditions.

The Back-to-backs in Birmingham and the alms houses in many towns and cities also reflect the disparity conditions that have existed and continue to exist. What is more the government in its austerity measures take more (in terms of ability to live) from the poor and needy than from the rich, thus continuing to reinforce a system that has existed and continues to exist.

Should we interpret this as a conspiracy designed to continue to enrich the wealthy and keep the poor in submission. Isn't the system being manipulated for the advantage of those who are in power or who control the resources.

In this article, I want to look at what is currently happening particularly economically and try and answer the question of whether this is a conspiracy or whether we are all part of allowing the system to develop because we have taken on board a set of assumptions possibly through our education.

I am going to start by looking at definitions for conspiracy and assumption. I will then look at a number of issues and terminology that are part of the political scene in the UK. I will then conclude by expressing my view on whether we are operating in an environment of conspiracy or faulty assumptions.

Definitions

A conspiracy, according to the Collins Shorter English Dictionary, “is a secret plan to carry out an illegal or harmful act, especially with political motivation” (Mcleod & Makins, 1993, p 239). There are three words that I think are key to this definition and these are secret, illegal and harmful. We need to look at the events and our economic environment to access whether these terms apply to what we see happening.

In contrast, assumption is defined as “the act of taking something for granted or something that is taken for granted” or “an assuming of power or possession” (p 63). The key in this definition is whatever drives the situation is taken as being the way things are. They are ignored by the population because they seem to be what is expected to happen.

Based on these definitions, we need to look at each of the things that we want to change and ask whether what is happening is caused by a secret plan (conspiracy) or whether they are simply the result of the principles that we use in our every day lives.

Signs of Conspiracy

I have already mentioned inequality as an issue and some would argue that it is a sign of conspiracy. In the current context, wealth is moving increasingly toward the top 1% as promoted by the Occupy Movement. Wilkinson & Pickett (2010) have also highlighted the growing gap between the rich and the poor showing that relative to the small percentage of rich, the rest of the population are getting poorer. Their thesis is that a more equal society is a healthier society and that unequal societies are bad for everyone. Mervyn King, while Governor of the Bank of England, in a conference speech said

“Never in the field of financial endeavour … has so much money been owed by so few to so many”
(quoted by Pettifor, 2014, p 71)

The implication is that the few have obtained their wealth on the basis of a debt to the many.

The conspiracy argument is that ex-employees of banks like Goldman Sachs have obtained key leadership roles in other banks. If these actions are about forming a global banking corporate then maybe there is room for arguing for conspiracy but is this what is happening? Those employing the ex-Goldman Sachs employees see them as having the desired skills for the company that they are joining. To some extent, these companies want to mirror the success of Goldman Sachs and one of the ways of doing that is to employ people who understand that culture.

Another sign that could be taken as conspiracy is the way the large corporations argue for laws or trading agreements that protect their ability to trade freely between nations or what they see as their intellectual property. An example of this in Monsanto seeking to have in free trade agreements what they see as their ownership of seeds. Their argument being that they have developed a number of these specialist seeds and if others take advantage of this then they are utilising Monsanto's intellectual property without Monsanto being able to profit from it.

There are clearly differences in wealth accumulation whether between individuals or nations. The question here is whether this inequality or favouring of the few has happened by stealth or secret plan? I would argue that it hasn't. We assume that some people will earn more because of their talent or status in society. We expect people who invent innovative products to be rewarded for their efforts. Our society assumes that there will be people with different financial status and to some extent enforces it. We just didn't expect the difference to be as much as it is. That is what we are upset about.

This assumption and our desire is reflected in the Simon and Garfunkel song “Richard Cory” (1965) that relates a story about a desire to be the person who has everything. That is our desire but the problem is, as the song shows, wealth and having everything doesn't make us happy. We always want more. Yet, we still seek to do better than others and believe we are worth more than others. We just don't like others having the advantage over us.

We favour systems that pay according to work done rather than according to need and then wonder why there is inequality and poverty. Is it likely that the cleaner will accumulate as much wealth as the chief executive. However, this may also be explained by some of the other principles expressed in our society.

Strivers verses Skivers

The strivers and skivers assumption basically promotes the idea that those who make an effort can improve their situation. For this statement to be acceptable, we have to assume that there is nothing to hinder people advancing their position if they are willing to make the effort. Strivers and skivers policy is really based on the assumption that everyone has equal opportunity. Is it true that those without resources to start with really have equal opportunity?

This assumption promotes the idea that inequality is self inflicted since the person hasn't made the effort to advance. Wealth and status are the result of hard work and not something passed from one generation to the next. Poverty is the result of laziness and not the payment of inadequate wages or lack of work opportunities or lack of initial resources.

From this perspective, in order to encourage people to strive, you endeavour to reduce the support for those at the bottom of the economic ladder. This way, they will be forced to cease being lazy and strive for success or accept their position within the economic pecking order.

The strivers verses skivers assumption is part of the philosophy that supports the current environment. Those with wealth support this policy but so do many of the middle class who have worked hard to obtain their homes and assets even though they may recognise that they still have not overcome the need to strive to stay ahead of increasing costs. The emphasis on striving being a way of enslaving the people to the system. As people see inequality, they express dissatisfaction but often do not see a way of resolving the issue.

Market Driven Economy

A free market economy is supposed to deliver to the purchaser the choices that they want at competitive prices. The international free trade agreements are supposed to give access to a wider range and the competitively priced products. The general public are encouraged to support them because they provide competition in the economy and give them plenty of choice. They are supposed to provide the best basis for deciding what is needed or the appropriate price for a product or what is useful or not useful for society.

International free trade agreements are often designed to ensure that the interests of international corporations are not impacted while those of the local producers are often hindered. As well prices are often set based on what the corporations believe will give them the best return. If the market set prices then the consumer would have more room to negotiate. In other words the agreement isn't really about free trade but giving advantage to those who already have power and wealth.

The problem here is that often these negotiations are behind closed doors and although many of the documents associated with the negotiations can be accessed, the general public is not informed of the details. Often support for free markets are stated in terms of the agreement being a win-win for all parties. These expressions of win-win are nearly always from managers of large corporations or from politicians and not from the workers.

Because of the nature of these negotiations, these are often cited as being a conspiracy. However, most of these negotiations are in the open and large percentage of people actually believe that free markets are in their best interests. After all, free markets can deliver products at cheaper prices and cheaper prices are in the best interests of consumers but are they really in the best interests of local producers?

As long as the general public believe that as consumers they benefit from these agreement, they will not question the agreements being put in place.

The market philosophy isn't simply about trade in products and trade agreements. By setting up derivative markets and capitalising loan portfolios, we are driving our society not by the needs of the people but increasingly by the returns on transactions that bear no relationship to what is happening in society and more importantly the needs of people and planet. Commodity markets gamble on the prices of food adversely impacting the price of food and the returns to the producers. Foreign exchange markets gamble on fluctuations in exchange rates often impacting the exchange rate in the process and forcing traders to join the gamble in the commodity markets in an attempt to protect their incomes. Focus moves from production to the financial markets and the return that can be gained through financial gambles. I have just seen an application that is aimed at the financial markets and it uses the term “betting” and not trading. Business is becoming a gamble and not a trade in what is needed or desired for society and planet.

As student loans are capitalised and sold off to the highest bidder, the return on the investment in the student loans begins to dictate what is taught and which students have access to education. Loans also act as a way of enslaving students to the economic system and ensuring that they will take their place as the next generation of serfs. Since students become more focused on the return from future work, they become more interested in the grade than the learning. Instead of the standard of education rising, it falls as everything depends on return on investment. Freedom of thought and challenging society become secondary to being conformed to this world.

Living within their means

This is a phrase quite often used when an economic unit runs into financial difficulty. What this phrase means is that the economic units outgoings should not exceed its income. Ideally, the economic units income should exceed it outgoings. There is a problem with this assumption. In order for one economic unit to consistently have an income in excess of its outgoings, another economic unit must have outgoings that exceed their income.

This is part of a wider assumption that the economy is expanding and we just need to work harder to earn more. The monetary economy does expand during good times but it expands on the basis of increasing debt. Economists like to argue that it is credit saying that all money is an IOU of some form. If we take this view then it isn't wealth that we generate but rather increased indebtedness. This indebtedness under the current system is to the commercial banks who through charging interest on credit that they generate from nothing further compound the debt cycle.

I have called this assumption living within their means but I could have equally called it the growth assumption. Without an assumption of growth and without indebtedness, there is no possibility of living within our means. I can live sustainably by limiting my dependence on the monetary based economic system but in general this is seen as relinquishing the gains of modern society. Yet, we should be asking why we are going into debt to harness the resources that we as a nation already own?

Claiming the Commons

This leads to the next issue. I am not calling this an assumption although in some areas, it could be seen as an assumption. We rightly get upset when companies endeavour to claim the rights to natural resources because in their view, they have enhanced that resource through scientific research and development. I am thinking particularly about seeds and food production.

However, as soon as we endeavour to claim ownership of a piece of land or natural resource because it happens to be on our land, we are making a claim to the commons. Indigenous peoples often understand that land and natural resources are not for personal ownership. They belong to the community and we are simply caretakers of these resources for the next generation. Unfortunately western or capitalist societies see natural resources as something to be exploited for financial gain. This exploitation of natural resources often comes at the expense of their destruction and the destruction of the communities and wildlife.

We want to claim conspiracy when a company endeavours to assert what it claims as its rights to natural resources but when we claim access to natural resources for our own use, we see it simply as our right. We assume that we have some right to claim these natural resources and to dictate to others what they should have access to.

Do not hinder profit / wealth making ability

This leads me to what in some respect is the core problem, a focus on profit or wealth creation. Profit or wealth creation becomes more important than meeting the needs of others and maintaining the planet for future generations. To some extent all of the other issues that I have discussed are subordinate to the need to make profit or wealth creation.

If you read carefully each of the above themes, the underlying story is one of being able to profit from our labours and the goods that we produce. No one stops to ask the question whether it is possible for all people to make a profit (i.e. earn more than they spend). Neither is it asked what are the consequences if we make a short term profit while destroying the resources that are needed for longer term survival.

I have heard it said that modern society is no longer driven by the desire to meet need but rather by the promotion (marketing) of goods that we do no need and are of little value. The result is products built for short life expectancy and replacement products being produced at ever increasing intervals. This needs to be done, not to satisfy the needs of consumers but to feed the profit margins of producers.

For me, the most obvious example of this is in digital technologies such as computers and smart phones. I have been involved in the computer industry for over forty years. Initially, the computer capacity couldn't keep up with demand but I have seen that change to where the new computers are generating the desire of the consumer. However, designers and manufacturers driven by the profit motif cannot stop development or production. The production of products with a long life isn't to their advantage. Cash will cease to flow and profits will decline.

Recyclable products or products that are easy to upgrade with true advances will only occur if these are seen as profitable options. The consequence is a willingness to destroy the environment and add to a cycle of waste and destruction.

Protection of assets

There is an even more fundamental assumption that I believe lies at the heart of our self destructive society. This assumption is that we should be able to retain ownership of the resources under our control and be rewarded for that which we produce or are capable of producing. Not all people are born into society with the same resources available to them. Wild nature isn't in a position to demand money for its destruction or preservation. Wild nature and low income communities are dependent on the generosity of those who control the wealth. Yet at the heart of our economic system and to some extent the nature of money is that it is an IOU for services or goods that have been provided.

Our monetary system had its origins in a system of trust. If I had the resources or capabilities to meet your needs then I would do so in the belief that if I had a need in the future and you were able to satisfy that need then you would reciprocate. This changed when people began to account for whether they had received back the equivalent of what they had provided to the community. This is based on an assumption that I should get from others as much as I have given to them. An assumption of equality of opportunity and ability to participate in the meeting of needs.

The final change in the system to bring us to the current state of affairs is that I should be able to profit from my resources and capabilities. It is no longer enough simply to ensure an equality in meeting of need but it is essential that I must profit from meeting the needs of others.

Could we return to a needs based economy? As long as we are concerned that someone may be gaining more than they are willing to give then I suspect the answer is clearly no. Fear of exploitation lies at the heart of our economy and the self destructive society that we have all had a part in creating. This fear drives many of my own decisions even though I am aware of the problems that it creates. Changing this involves a major change in the way that we think and behave.

Conclusion

In this article, I am not arguing that conspiracy never occurs. What I am arguing is that much of the conspiracy and the direction of economic development in society comes from faulty assumptions. Correction of the way we behave in society can only come through examination of those assumptions and deciding on what basis, we want society and our ecological environment to operate.

References

Mcleod, W. T., & Makins, M. (Eds.). (1993). Collins shorter English dictionary. Glasgow: HarperCollins Publishers.

Pettifor, A. (2014). Just Money: How society can break the despotic power of finance. Commonwealth publishing.

Simon, P. (1965) Richard Cory.

Wilkinson, R., & Pickett, K. (2010). The spirit level: Why equality is better for everyone. London: Penguin Books Ltd.

Sunday, 23 March 2014

Reforming the Banking System

Monetary reform has to deal with a number of issues. There are a number of things that need to change. These include stopping banks creating money but it also involves implementing new ways to ensure the money supply matches demand. I would also argue that we need to change attitudes of people toward money and chasing wealth. However, not everything can change at once so changing the way money is created by stopping banks from creating money is a starting point. This is the focus of chapter 6 of “Modernising Money” (Jackson & Dyson, 2012).

There are quite a few issues that need to be addressed if depositors are to have confidence that they will not lose their money or they are aware of the degree of risk in their investment. It is also preferable that banks can fail rather than being bailed out by the government. How can you set up a banking system so that banks really do become intermediaries and not creators of money.

Positive Money's proposals as outlined in this chapter is through changing the banking system so that there are two types of accounts. These are Transaction Account and the Investment Account.

The Transaction Account

The Transaction Account replaces the current Current Account with the major difference being that instead of the money deposited in a Transaction Account becoming owned by the bank, it remains the property of the depositor. The bank simply manages the transactions for the depositor but otherwise it cannot use these funds. They are deposited with the bank of England.

Under this strategy, banks no longer hold reserves for settling interbank transactions. This isn't needed as the money is already held in the Bank of England. Also if the bank fails then the depositor still has access to their money and can transfer their account to another bank of their choosing. This sounds positive so what are the drawbacks? Banks will not pay interest on these money held in current accounts (no change really) and may decide to charge for transactions. There would be no savings accounts offered as current accounts.

Each bank will hold an account, their Customer Funds Account, at the Bank of England that represents the funds held by depositors in their Transaction aAccounts with the banks. The balance held in this account will not appear on the banks balance sheet.

The Investment Account

The Investment Account is where investors would place their money if the are seeking a return. However, the investor gets to choose the risk that they are prepared to take. The bank may offer some guarantees but these would not be backed by the government. The banking would be from the banks own operational funds. The money becomes the property of the bank and it is able to use it to offer loans to borrowers. The bank can lend money that has been placed with it for investment or from its own operational money that it has placed into the investment pool. The bank is not able to loan money that it doesn't possess.

There is another restriction in that investors are not able to use investment accounts to conduct transactions. They either have to wait for maturity of the investment or if allowed by the nature of the investment give notice of their intention to withdraw investment funds.

To manage the amount of money that the bank has available for lending holds an Investment Pool account with the Bank of England. This account represents the total of the investor investment accounts minus the current loans that the bank has made. The bank needs to manage the funds in this account to ensure that it is able to meet its obligations in repaying investors as their investments mature. If they bank were to fail then investors would become creditors of the bank and have to wait for the completion of liquidation proceedings. Preference in the liquidation proceedings should go to the investors who took the lowest risk.

Other Details

The book chapter discusses the accounts that banks would hold with the Bank of England and the way that these would be used to settle payments and to manage investments. I am not going to deal with these in this blog. If you really want the underlying technical details then I would suggest getting a copy of the book and reading the details.

Does this solve the problems?

The development of the current banking system came about through trying to meet a perceived need for funds to exact business transactions. To ensure that banks and other financial institutions do not generate new forms of money after these reforms there is a need to ensure that mechanisms in place to ensure that adequate money is maintained in the system. Insufficient money in the system would mean that businesses and individuals would look for alternative mechanisms to obtain the necessary funds for business. Excess money would put inflationary pressure on the system.

Consequently, just reforming the banking system is not enough. There needs to be a new mechanism form managing the money supply enabling new money to be created if required and money to be destroyed if excess money is in the system. The next chapter of the book deals with these issues.

Reference:

Andrew Jackson and Ben Dyson (2012) Modernising Money: Why our monetary system is broken and how it can be fixed. London: Positive Money.

Saturday, 8 March 2014

Greed vs. Need

I attended the launch of End Hunger Fast campaign for lent at St Phillips Cathedral in Birmingham on Wednesday afternoon. I am not a big fan of this giving up something for lent since I believe we should always be living with an attitude of “enough is enough” but the issues raised by the End Hunger Fast campaign deserve our attention. In what is claimed to be the seventh richest nation in the world, why do we have so many people relying on food banks for their basic survival? Why is it that the wealthy continue to increase their wealth while the numbers in poverty continue to increase?

A Quaker speaker stimulated my thinking. She talked of Jesus feeding the five thousand (Matthew 14:13-21) without concern for their status or whether they were hungry or whether they had a supply of food. I agree with the emphasis that she placed on the story but it says something more profound to me.

The disciples where concerned that there was inadequate food to feed the people and were seeking for Jesus to send the people away. Get them to go and find their own food. Jesus tells them to feed them but they plead that they have inadequate supplies. However, after Jesus insists, the people eat and the baskets gathered in exceeded what was originally distributed.

The usual assumption in interpreting this story is that there was a miracle in which the quantity of food multiplied. I have another take on the story. The people who sat there including the disciples were all concerned that they may not even have sufficient for everyone and possibly for themselves. They didn't want to share because that would mean they wouldn't have enough to eat. However, once the loaves and fishes began to be passed out, people realised that they needed to satisfy need rather than their own desires and so brought out what they thought were meagre supplies. When it was all pooled together not only was there adequate for everyone, there was an abundance of food.

The story speaks strongly to me about our attitudes especially in the Western world. We are so busy trying to protect what we have and what we think we might need that we are making resources scarce for everyone. Despite what we see in great celebrations of giving, the overall emphasis in western society is hoarding and protecting for self. Even more so by the increasingly small percentage of people who possess the bulk of the wealth in the world. If we were to see the basic message of the feeding of the five thousand as meeting need and ending with abundance then maybe we wouldn't have the scarcity that is argued to exist. We might also look for alternative for those that are not renewable.

This isn't the only story that I see emphasising this theme. Jesus told a parable of the labourers who were hired at different times during the day but were paid the same amount by the land owner at the end of the day (Matthew 20:1-16). The difference between this story and our economic thinking is easy to illustrate. The labourers had the same need and this is what the landowner satisfied. He never sat down and worked out what each labourer was worth. He knew that if he didn't pay the workers a denarius, they wouldn't be able to pay for what they needed to live so he made sure that they were all paid the denarius. In our society, we would then argue that those who worked longer or who had the greater skill level should be paid more but in reality we neither practice what the landowner did or practice what we preach ourselves. In reality, we believe that it is fine to pay someone less that what they need for a day's work and to reward some more simply because of their status. Our system is designed to generate inequality. Hard work by the lowly paid will never enable them to overcome the disparity in how they are paid. Add to this that we are actively pursuing a policy of making the least able pay more when they don't have any resources nor are we providing them with the opportunity to obtain the resources to do so. It is about time that we heard Jesus' message and began to ensure that basic needs are meet and not that our own greed is being satisfied.

Jesus did tell some other parables that appear to contradict what I have just said. Possibly the most notable is the parable of the talents (Matthew 25:14-30). Here, the master is praising his servants who earned more with the gold that he had entrusted to them and takes away from the man who doesn't utilise what he was given. I don't see this as a story of making riches for ourselves but rather a story of utilising what we have been given. What I mean is that we shouldn't expect to be able to sit around and do nothing and be given what we need. We need to utilise the skills and resources we have been given for the work of God's kingdom. We should note that in our society there is much essential unpaid work done by people who have inadequate incomes. Unpaid work is not the same as meaningless work that many are actually paid to do. That doesn't mean that we should judge others and remove from them what they need to live because we believe they are not working in the best interests of the society that we want to create.

The key issue I believe of these stories is that we should not build our society on greed or accumulation of assets and resources. Rather we should focus on need, ensuring that needs are meet, and enabling people to fulfil their potential. This is both locally and internationally. If we do this, then I believe our management of resources will be more sustainable as the focus on growth for improved profit will vanish. As a result, we may find that the earth brings forth abundance.

Sunday, 2 March 2014

Social and Environmental Impact

What is the impact of the current economic system? Jackson and Dyson (2012) describe what they see as the social and environmental impact of the current economic system. There discussion focusses on inequality, private debt, government economic decisions, environmental impact, and democracy.

Inequality

The key issue here is that the system by default causes a transfer of money from the poor to the rich. This isn't taking into consideration that those on higher salaries (i.e. managers) are receiving higher wage rises than those on lower pay rates. The system relies on money being rented from the banks. This results in a transfer of money to the banking sector through interest. The reported figures show that there is a net transfer to the banks but that the wealthy, particularly the top 10%, lose less to the banks while the bottom 10% loss more than any others. This is partially a result of the lower income bracket relying on more borrowing to survive but it is also that interest charges make up a greater percentage of their expenditure. Lower income earners also have less disposable income available. Those with investments in multiple properties also benefit from rising property prices.

Also because the centre of banking is based in London, there is also a net transfer of wealth to London. The net location transfer of wealth will always be to where the highest salaries are paid or to the centre of banking.

Because of the renting of money for anyone to have a positive balance, someone else has to be in debt. This could be a company or an individual or government. The distribution of debt is a major influence on the stability of the system. As debt increases in the lower income groups, there is greater rise of failure to repay and the driving of the system into recession.

Understanding the system may help us to see how to reform it but we need to help everyone understand the system and how to change it. The problem is that as long as we see ourselves in an overall positive cash flow, we don't see that the system needs change. We even tolerate recessions and austerity if it doesn't take away the prosperity that we may have built up. What we need is a simulation or game that would allow people to see the actual consequences.

Private Debt

As I indicated in the previous section, any positive balance has corresponding negative balances. However, banks tend to lend on assets but such loans push up the prices of these assets causing an increasing level of debt. As debt increases there is a greater risk of a bubble burst and a recession.

However, increasing debt increases the money supply and repaying debt causes a shrinking of the money supply. Traditional economics suggests that as the money supply shrinks, the velocity increases but the evidence suggests that the opposite occurs. During 'boom' periods the velocity tends to increase and during 'bust' periods, the velocity tend to decline. The result is that during 'boom' periods the increasing velocity tends to increase the effect of the boom and during a 'bust' period the slowing velocity causes an increase in the decline.

Public Debt

Jackson and Dyson don't talk about the balance between private and public debt but there is a relationship there. Attempts to reduce public debt will put pressure on to increase private debt otherwise there will be a decline in the money supply. Looking at current reports, this is what we see happening as the government endeavours to control the increase in its debt, there is an increase in the private debt.

Possibly a lot more difficult to show is the impact of transferring public costs to private sector. Other than through increasing debt to the banking sector, the private sector has no way to generate additional money in the system even though it is generating product value (It could be argued that alternative currencies offer the public an alternative way of generating money. It is beyond the scope of the current discussion to deal with these and how they impact our current economic system). Charges for education, social services, health services, etc. put additional pressure on the private sector to borrow to meet these costs. The debt grows further through the interest charges putting more pressure on the money requirements of the private sector. Increased taxes also puts pressure on the private money supply further accentuating the the pressure on private monetary resources and the transfer of money from those less able to meet their monetary commitments.

What Jackson and Dyson do discuss is the way that the government profits from seigniorage when cash is created and sold into the system. When money is created by the banks, this profit is lost to the government. The banks profit from this operation is through the interest charged on the debt created. Note: Economists prefer to talk about this debt created by banks as 'credit' simply because it doesn't carry the same negative connotations and allows them to ignore issues of debt in their conversations. Jackson and Dyson estimate the loss to the government caused by allowing banks to create money and the consequences in terms of higher taxes caused and reduced public services caused by this loss of income.

If the government is obtaining the income through money creation then there would be a reduction in costs to the government through interest charges, lower taxes on the public sector, and a reduction in the transfer of public costs to the private sector. What seems like a logical argument that users of public facilities should pay for them only makes sense if those having to pay are actually generating the monetary wealth to enable them to pay for such services. It is the process of monetising wealth that is at the heart of the economic problems and the need for monetary reform.

Environmental Impacts

The issue here is that environmental goals are more long term than economic goals. As a consequence, during times when governments seek to reduce their monetary expenditure (austerity measures), environmental projects tend to be cancelled. However, it isn't simply the monetary expenditure. Short term business goals focussed on meeting profit targets also take precedence of the long term sustainability promoted by environmental goals. The consequence is a failure to invest in environmental projects, and a restriction in the nature of research conducted by universities. Although the government in the UK is currently talking about climate change as a result of the recent flooding, there is a continued emphasis on research aimed at innovative products to generate economic growth rather than research on sustainability and resolving the inequality in society and destruction of the environment.

The need to continually grow the economy also pushes society to a point where the 'carrying capacity' of the natural environment is exceeded. This wouldn't happen if there was a steady state economy. Under the current system, it is not possible to have a steady state economy. Growth is required and through it operation the system is unstable.

Although 'natural' disasters put pressure on governments to pursue longer term environmental goals, the basic pressure of the system is to discard these in favour of short term economic growth and company profits.

Democracy

The monetary system also reduces the operation of true democracy within society. Because money deposited in banks is owned by the banks and banks make decisions over who should receive loans, they have the power to shape the economy. Banks with their profit motive will tend to support productive businesses during a thriving economy with a gradual shift toward speculative and non-productive investment. Investing in non-productive activity tends to stagnate the economy leading to recession. Decisions of banks is not dictated by market pressures. Their decision is focused on making a profit. Therefore the banking sector has a big influence on investment in society and the direction of development.

Jackson and Dyson contend that the banks receive huge subsidies as a result of their ability to create money and that the payment of taxes on bank profits is only a small fraction of the total tax take. More significantly, the impact in world output as a result of a recession caused by banking activities far exceeds any benefits received as a result of banking activity during boom periods. Overall the banking sector gains more benefit from the public sector than it contributes and because of its control over where money is initially spent into the economy has more influence over the direction of society than any government. The number of people who have influence over bank behaviour is insignificant compared with the total population and these people are not accountable to the public for their actions.

Summary

This chapter doesn't paint a very positive picture about the current monetary system and its impact on our economy. Showing direct correlations from data is more difficult to show. It is also difficult to tell from an individual perspective the impact of the current system. If we want to highlight these issues to the general public, we need better ways of demonstrating the impact of the current system and the alternatives that we want to propose. Ideally these demonstrations need to grip the attention of the general public more than other issues that influence the public's decision making.

Jackson and Dyson do not argue for sustainable local communities but if we are to restore democratic power to the people then it needs to include grass root change in the system as well as pressure to change the operation of the monetary system.

Reference:

Andrew Jackson and Ben Dyson (2012) Modernising Money: Why our monetary system is broken and how it can be fixed. London: Positive Money.

Sunday, 9 February 2014

Oppression, liberation, and judgement

I struggle with passages on the bible that speak of violent judgement by God. This can be against those seen as his people of in the case of Nahum against those who oppress others. Nahum seeks to liberate his people but in order for liberation to occur, the bonds of the oppressor need to be broken. This means that oppressor will feel judged and to some extent broken.

I can see that in a violent world where oppression is through force or violence that judgement may also appear as coming by force or violence. This is not absent from our world. Some would argue that Iraq and Afghanistan have been set free from oppressive regimes by invasions led by western armies. However, we have also seen forceful oppressors defeated by peaceful means or civil disobedience. In these cases the oppressors have fought back but been humiliated by the growing support for the push for freedom. I am thinking specifically of the civil rights movement or the downfall of apartheid in South Africa.

My focus isn't against obvious slavery but against a system of economic interaction and thought that enslaves to paid work. In this case the oppressors to some extent like the slave owners argue that the generation of wealth will be harmed by a change to the system and the setting free of the oppressed. So often our language is too timid and in order to highlight the system for what it is, we need to talk of oppression and slavery.

I see our political leaders increasingly as the oppressors. They argue for an educational system that seeks to enslave children to a system of work from an early age. Through the measurement that they put in place, they destroy freedom of thought, innovation, and critical thinking. The children need to learn to conform (be indoctrinated in the ways of the system) so that they will become the new slave workforce or the new oppressors who are blinkered to alternative solutions or ways of thinking.

The wealthy are seen as the saviours and shouldn't be oppressed even though they increasingly take from others their wealth and condemn the wage earners to poverty or slavery. To many, the wealthy should not be condemned and that all have the opportunity to be wealthy if they will work hard, that is be enslaved to work. However, the escape from the grind of hard labour only comes through being the owner of the idea or production. But even this doesn't work if you are just part of the supply chain.

How will this system be overthrown? What will be the impact of it being overthrown? Clearly the overthrow of capitalism could come through violence such as invasion or riot. The outcome of this type of overthrow tends to be oppression by the victor and destruction of the previous oppressors. This is the type of vision that Nahum speaks of.

The second type of overthrow is through peaceful disobedience. This still embodies judgement of the oppressors and the ultimate loss of their status and power. They may seek to fight back with force but increasingly it will crumble leaving them at the mercy of those seeking change.

Liberation will come and the oppressors will be laid low but I fear that we still have not learnt that true peace comes from cooperation and sharing of resources. As long as we seek to protect what we believe to be ours, we will continue to have oppression and a struggle for freedom. True freedom will come through caring for others and willing releasing some of our own wants and assets for the use of others. Our rights have to be tempered by our responsibilities to others. Our actions have consequences that we need to accept and consider carefully.

Prophecy and Judgement

My interest in prophecy has less to do with ancient prophecy and whether it has been fulfilled. I am more interested in how we can communicate the demise of our current economic system and the growth of a more just and equitable system.

There is a clear cycle of economic recessions brought on by the systems need for growth and human greed, the desire to gain more for self and to ensure others do not benefit from the assets and resources we control without us being rewarded. Some would go as far as to say the west seeks to exploit resources of other nations to satisfy its own economic and social ambitions. There is token gesture to the poor and exploited people through aid schemes but not a redressing of the operation of the system from self preservation and advancement to a focus on real need and a sustainable world.

I believe I understand some of the situation that we are in and at lest some of the solution. We need to move back (if we were ever really there) to local sustainable communities. That is communities focussed on the quality of life for all creation. Communities that seek first to ensure all in the community have what they need to live and that the bulk of those resources are local. The current monetary focus has to vanish as does the accumulation of resources for selfish use. The drive to build wealth destroys the very resources needed to sustain life.

Where will our current path take us? Scarcity of resources will become more prevalent with more of the land becoming unproductive. The removal of natural vegetation will see increased natural disasters as the balance of the planet is increasingly destroyed. Nature will fight back. Actually, the weather patterns will continue but because of the life that they used to sustain not being there, the consequences will be more disastrous.

But it isn't just nature that will slowly destroy the human lifestyle. Increasingly, there will be unrest against leaders who work to increase their own wealth at the expense of the people. The nations currently holding power and appearing to be stable will find it increasingly difficult to choose winners who will not continue the conflicts. Their own increasingly unstable economies will increase the resistance and internal instability leading some to collapse. The economic environment seen as the sustainer of the quality of life will fail and communities because they have lost the ability to thrive without external input will fall apart.

Is any of this God's judgement or is this simply the inevitable path of our current political and economic system? Some who understand this are building alternative communities that seek to be more self sustaining but I fear that those who seek to build an alternative future will be brought down with the fall of the wider society.

The message of how to avoid such disasters remains the same. We must learn to show more compassion for the poor and less concern for our own status and wealth. We must understand more how to live and die sustainably rather than seek continued growth and consumption of resources.

There is a message here for the modern prophet and the prophet needs like the prophets of old to use the words that the audience will hear and understand. Yes, the message will sound of judgement but it should also express hope of a new future built of compassion and the welfare of all.

This may seem heretical but we seek to blame someone for the problems that we create. As Jacques Ellul (2010) argues that sin entered the world through human questioning and action against God, so judgement is the result of human action and not the response of a loving God. We contend God must have created evil or sin and so we see actions or the consequences of our actions as those of a judging God rather than simply the consequences of what we do or the evil which is uncovered in the light of love and compassion.

A loving God cannot protect us from the stupidity of our own actions just as a loving parent cannot save a child from the consequences of all of their foolish actions.

Reference:

Jacques Ellul (2010) On freedom, love, and power. Toronto: Toronto University Press.

Sunday, 2 February 2014

Justice and Silence

We read Micah 3 during this week. Micah in this passage speaks out against the the injustice in Judah's society. He speaks out on three fronts. These are the absence of justice in the courts, absence of justice in the popular prophets, and absence of justice in the government. It challenged me as I thought of things that are happening around us. There are many things that are happening that represent injustice in our society. Like Micah's society, there is injustice in the legal system, in the commercial environment, and in government. Those who are the closest equivalent to prophets seem to carry a message that this injustice is what needs to happen because it is the only way to make our economy work.

The question for me is whether injustice can ever be justified. If injustice cannot be justified and our economic system depends on unjust practices then it is time for us to stand up and speak out against it. This view is reinforced by a quote supposedly from Martin Luther King Jr. which says that says “Our lives begin to end the day we become silent about things that matter.” If we are aware of injustice, we need to speak out.

Why do I say there is injustice in our legal system? Protesters at the arms fair are now appearing in court because they obstructed entry of arms dealers to the fair. However, no arms dealers were prosecuted even though they sell illegal weapons. Likewise we see no bankers prosecuted for their activities that where seen to cause the economic crash. It seems that some people are above the law.

What in my view is a greater injustice is the political decisions that through having bailed out the banks now sees the poorest in society paying the price for the actions a few rich bankers. The government is reluctant to do anything that would upset those who possess the wealth and instead makes judgements about those on benefits. The consequence is greater numbers of people being dependent on foodbanks and other charities for survival. The government claims that “we are all in this together” but the reality is that we are not. There is increasing inequality with wealth moving up from all areas of society to the wealthiest one percent.

This is further reinforced when members of parliament, chief executive officers, and other senior managers receive more in pay increases than workers. The argument is that in order to retain the best people in these roles, they need to be rewarded so that they don't move on to other organisations. The same doesn't apply to the lowly workers. These are seen as replaceable and therefore don't need to be paid a competitive salary. If one leaves, you simply employ someone else. The consequence is that the top income people continue to receive salary increases that exceed the increase in the cost of living while the workers receive a token increase that is less than the cost of living. Over time, more and more people move toward the poverty line. The workers who are in this situation aren't just the labourers, it includes some fairly highly qualified people that are seen as the traditional middle class.

With increasing pressure put on the financial resources of most workers, there is less willingness to protest workloads or work conditions. Employment options decline during recession periods. Workers are increasingly becoming economic slaves.

Are these decisions just? Should we allow them to continue to happen? Are they the only injustices that exist in our society?

Saturday, 1 February 2014

Economic Consequences

This chapter, “Economic Consequences of the current system” (Jackson and Dyson, 2012, Chapter 4) deals with some of the standard assumptions of economic theory and how it relates to what happens in the economy. We shouldn't be surprised that economic models do seem to reflect observed patterns. After all the models are built based on observation of economic behaviour and patterns. What possibly should be asked is why these models failed to predict what happened in the crash?

Interestingly as I prepared to write this blog, I picked up a book that I brought years ago on the quantity of money (Visser, 1974). Since it is a book on monetary theory, I wanted to see whether it also used the formulae used by Jackson and Dyson. The answer was “yes.” However, in quickly browsing the text, I found that Visser when talking about the supply of money (chapter 2) accepts that banks create money when they issue credit in exactly the same way that Jackson and Dyson argue (chapter 2). Visser also has a lot of formulae for working with the money multiplier but I won't bore you with the details here. Visser says that he wrote his book to provide “students who already have some knowledge of economics” an introduction to monetary theory. He says “It is aimed at giving a coherent treatment of monetary theory, which should enable students to follow theoretical discussions of monetary problems and to place these in the wider context” (p ix).

Velocity of money

Let me return to the issues raised by Jackson and Dyson. There first section is about the “Economic Effects of Credit Creation” (pp 116-128). The key formula used here relates to the “classical quantity equation of money” (p 117). The formula appears fairly simple.

MV = PT

This formula “sets out the relationship between money, prices, and the number of transactions in the economy” (p 117). In this formula, “M stands for the quantity of money in circulation, V for the velocity of money (the number of times money is used for a transaction in a given time period), T for the number of transactions in that period, and P for the average price level of the transactions” (pp 117-118). Jackson and Dyson say that MV “represents the total effective money supply for a given period” and PT “shows the total value in monetary terms of the number of transactions for the same period” (p 118). Visser says MV is “the total amount of payments during the period considered” (p 55). Visser also contends that “For an economy in which all transactions are made against money, the right side of the equation is identically equal to the left hand side.” Jackson and Dyson say that “The quantity equation simply states that the total revenue from all goods and services sold in a given time period must equal the amount of money spent on goods and services during the same time period” ( p 118).

Anyone who has been in a property purchase chain understands how the same money can be used to complete a series of purchases. The completion of a purchase chain relies on the first buyer putting the money into the chain. When the first purchase is completed, the second house purchase can be completed. This continues down the chain until the last house purchase is completed. Each house purchase in the chain is dependent on the settlement of the previous sale. To some extent, this is easy to see because downstream purchasers assume that they will receive money from the sale of their existing house in order to purchase their next house. The velocity is the rate at which this money moves along the chain. It is also possible to see here that velocity isn't going to change much in these transactions. There is a minimum amount of time required to complete each transaction.

However, this same principle applies to the consumer economy. This is possibly at a slower velocity than for the house purchase chain. A consumer buys a product at their local shop. The shop owner doesn't immediately use that money but does use that money to buy product and to pay their workers. The question is just how quickly can the money circulate in any given time period and what limits the velocity.

You can simulate this easily with a simple game. Get some play money and some objects to represent products. How much money is needed in your simulated economy to make it work? It may be surprisingly less than what you expect. Some economists argue that there is no need to be concerned about money creation because the velocity of money deals with issues of supply.

Jackson and Dyson say that there are a couple of problems with these formulas. They say Werner separates the equation into two parts. These are the real economy which represents “the part of the economy that produces goods and services” (p 118) and the financial economy which represents transactions on assets that do not contribute to GDP. House purchase transactions belong in the financial economy while production and consumption transactions are part of the real economy.

Why use these equations?

If the economy is running at full employment (p 123) then any increase in the money or credit creation will cause a corresponding increase in prices. However, if there is still the ability to increase production then an increase in money or credit creation could cause an increase in the number of transactions but the prices can remain stable. In theory, if the velocity varies, the prices or production can vary but the evidence appears to suggest that there is little change in the economic velocity. It should be noted that there is no discussion about the issues of demand with respect to these formula although there has to be money in the system in order to stimulate demand.

Returning to the concept of a game, try adding money into the system without increasing production. Either the additional money remains unused or the prices will increase. Increase production without increasing the money supply and then you have to either increase the velocity or prices have to fall. To some extent, these are the standard arguments for a market driven economy except the market economy talks of demand rather than money.

If we were to inject money creation as debt with an interest cost, what would happen? Would the impact change if we were to scale up the number of economic units in the system? I suspect not. Surely interest adds to the price side of the equation so there is pressure on the money supply or the velocity.

Although Werner separates the equations for the consumer economy from the financial economy, people use their asset values to enable them to purchase consumer products. The separation is not as clean cut as the equations might imply.

Housing Boom

As I reflect on this equation and house prices, I recognise that there needs to be some type of demand for houses for the number of sales to increase but I have no evidence that the increase in demand is caused by new people wanting to enter the housing market or that the driver is really a lack of supply of houses. The demand issues to me seems more complex than what I have heard in debates and I haven't seen evidence of a population increase rising faster than the availability of houses. Housing preferences or availability of work in an area may also influence demand in specific areas leaving some houses unoccupied in other areas. This is not what this equation attempts to show.

What this equation does suggest is that in order to get a house price boom, there needs to be a greater increase in the money supply for house purchases than in the increase of houses available for purchase. That is there has to a credit boom to match the price boom. According to Positive Money, this would appear to be what the evidence is suggesting with a huge increase in credit for house purchases while there has only been a moderate increase in the number of houses supplied.

In the present situation in the UK, the government is attempting to stimulate the housing market through incentives for new home buyers but in order for the purchases to be completed, there needs to be a much larger increase in the supply of credit to these new buyers. Mortgage lenders are more confident in an environment where house prices are increasing and since their earnings are based on interest from the advancement of credit, they have an incentive to not only supply the credit but to ensure that prices continue to rise. There is no stable state conditions for a housing market.

Financial Instability

The issues of financial stability are the focus of the next section of this chapter. They base their discussion on Minsky's “Financial Instability Hypothesis” (pp 128-134). Minsky describes three different types of economic units. These units are defined in terms of their ability to meet their financial commitments. They are:

Hedge Units: These are conservative in their operations in that they work to minimise risk and as a consequence they are able to fully meet their economic commitments (i.e. principal and interest) from their income alone. As a consequence they are only vulnerable to changes in demand. Regardless of the state of the economy, these economic units survive provided demand for their product remains at an appropriate level.

Speculative Units: These are able to cover the interest on their economic commitments from income but have to refinance to cover the principal. This means they require continued access to finance in order to continue operations. In a fairly stable or growing economy, these units are not at risk and may migrate to becoming hedge units but in a recession or an environment where access to credit is tight, they may find themselves at risk and can easily become ponzi units.

Ponzi Units: These are unable to cover principal or interest. To survive, they incur an increasing debt burden or sell off assets. They rely heavily on rising asset prices in order to survive. If asset prices fail then they are also in danger of collapse.

Minsky argues that following a recession, companies are risk averse and are conservative in their economic borrowing. As a consequence organisations tend toward being hedge units. As confidence grows, lenders begin to finance more speculative units since the evidence suggests that loans will be repaid and economic growth will ensure their survival and maybe even help them to become hedge units. Also in a stable economy, asset prices will tend to increase because few assets are up for sale.

This positive indication of growth leads to more risk taking and a willingness to finance ponzi units especially where they are speculating on asset price growth. The increase in ponzi units begins to increase the number of assets up for sale causing a reduction in prices with a corresponding increase in the risk of failure.

Economic confidence encourages risk taking but at the point where more assets come on the market and there is a reduction in asset prices, there is a revising down of expectations. The ponzi units find it more difficult to sell off their assets to cover their debt liabilities and begin to fail. The money supply begins to shrink and asset prices decline further causing more economic units to fail.

Although Jackson and Dyson do not talk about the role of growth and profit on these economic cycles, it is clear that these help fuel the move from being a hedge unit to a speculative unit and finally a ponzi unit. Competitors who are taking more risks appear to be making huge profits and there is pressure from investors for the economic unit to do the same.

Consequently, during boom cycles, hedge units become speculative or even ponzi units only to find all that they had worked for has vanished as the bubble bursts and they are no longer able to satisfy their economic commitments.

Government Intervention

Jackson and Dyson now turn their attention to government intervention (pp 134-139). The consider three cases.

If there is a recession during a period of high inflation then government intervention is not required. Rising asset prices enable economic units to cover the debts even though it may mean a downsizing of their assets. As long as asset prices remain high, the system will slowly balance itself out although some economic units may have shrunk in size.

If the recession is during a period of low inflation then there is a increase in distress selling in order to cover debts which causes a further decrease in asset values further exacerbating the recession. Lenders will favour organisations with market power forcing many smaller economic units out of business. Once recovery begins, the organisation with market power will again increase prices since the level of competition has been reduced.

The third option is the government intervening during a low inflation recession. The first issue under the current system of money creation is that the government implements austerity measures in order to control the increasing debt incurred through intervention in the economy. This can remove crucial services causing further difficulties and failures within the economy. The alternative is for the government to increase taxes but this puts more stress on economic units and may harm the rate of economic recovery.

But intervention through monetary policy can have other unintended consequences. The lower of interest rates benefit borrowers but hurts savers (i.e. pension funds). This puts pension funds at risk of not being able to meet their future commitments so they seek to increase contributions reducing the available spending power in the economy.

With the decreasing return on bonds there is an increase in the desirability of other assets. This causes their prices to rise. If the government had intervened to maintain asset prices then this may give investors a false sense of stability causing them to take more risks.

Minsky concludes that “booms and busts, asset price bubbles, financial crises, depressions, and even debt deflations all occur in the normal functioning of a capitalist economy. What is more, periods of relative stability increase the likelihood of instability and crisis by increasing returns and thus the desirability of leverage” (p 139). The conclusion is that the capitalist system is inherently unstable.

My Evaluation

It would seem that regardless of how you analyse a system based on debt and profit making, it is going to run into boom and bust cycles. From the “quantity equation of money”, too much money or credit being injected into the system is going to push rising prices. Too little causes prices and possibly transactions to drop. Although economists argue that the velocity of money smooths out the excesses and shortfalls, the evidence seems to suggest that the velocity is fairly static. Minsky with “Financial Instability Hypothesis” seems to show that a capitalist economy is by design unstable and will go through boom and bust periods.

Positive Money's proposal may address the debt side of the equation and consequently reduce the level of debt and instability but will it really solve issues of inequality? That will depend on how new money is spent into the economy.

So far the alternatives to capitalism have not delivered either nor have they endured as long as capitalism. But are the options only capitalism with minimal government intervention or communism with total government control. Are there alternatives that do not fall between those two extremes but come from alternative ways of thinking about how we work together and utilise resources?

I am increasingly seeing the solution as not just repairing the way money is created and injected into the system but one of changing the focus of our economy from personal gain, protection of assets, and growth to an economy focussed on meeting needs. When I talk of needs, I don't simply mean the needs of people, I include all of the planet. We can no longer afford to keep enslaving people and our natural resources to a money focussed economic system. Real change has to come from communities that operate in a sustainable way and that ensure that all needs are satisfied. As long as money is used as the primary measure of success, there will be exploitation of natural resources and people for the desires and greed of those in control of the key resources. The change in focus has to be across the whole system but a key is the local community and the way local communities interact to share and satisfy needs.

So why do I support the Positive Money proposals? We need to start somewhere and unless we break the enslavement to debt and boom and bust cycles, it is going to be difficult to usher in other alternatives.

Reference:

Andrew Jackson and Ben Dyson (2012) Modernising Money: Why our monetary system is broken and how it can be fixed. London: Positive Money.