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.
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.
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.
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.
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.
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.
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.