The End of Growth: Adapting to Our New Economic Reality (40 page)

In theory, as Harvard economic historian Niall Ferguson points out, there are six ways of resolving a debt crisis: (1) increasing the rate of GDP growth; (2) reducing interest rates; (3) offering bailouts; (4) accepting fiscal pain — reductions in benefits and standard of living; (5) injecting more money into the economy; or (6) accepting defaults, “including every type of non-compliance with the original terms of the debt contract.”5 If the premise of this book is correct and it has become nearly impossible to grow GDP, then we can eliminate option (1). Interest rates (2) cannot realistically be reduced lower than zero, which is essentially where they are now (for banks — though credit card interest rates are still in the range of 20 percent). As the debt problem worsens, bailouts (3) become more expensive and less effective. The austerity option (4) is distasteful to everyone and can only be pursued aggressively at the risk of a breakdown of social cohesion. Government printing of money (5) is frowned upon by trading partners and inflates away savings. Option (6), widespread defaults, could lead to a broad-scale failure of the monetary-financial system, so it will likely be avoided, except in limited circumstances.

Currently governments are dithering with all of these options, applying them in an
ad hoc
and piecemeal fashion. However, two of the six have at least a theoretical capability of being implemented in a fairly dramatic, strategic way if and when the crisis becomes otherwise unmanageable. These strategies would consist of a modified debt jubilee (a form of default, option 6), or a bout of inflation through the creation of non-debt-based currency (option 5). Both would come with major risks, but either could, in principle, buy time for the implementation of a more fundamental reform of the entire economic system.

A modified debt jubilee could take the form of a universal “haircut” — a term currently being used in financial circles to describe a situation where the market value of securities being held by financial firms as part of their net worth is significantly reduced. In the strategy being proposed, the “haircut” would apply to all financial claims. Government by edict would reduce all debt by a certain percentage — let’s say, somewhere between 75 and 90 percent. At the same time, all investments and savings accounts above a certain figure (allowance would have to be made for pensioners and low-income individuals) would get the same treatment. The process would be complicated and unpopular, especially among those with the most to lose, but it might help get us past the wall. It would reduce economic activity significantly — that’s going to happen anyway, even in the best instance — but it would also remove the overhang of debt that threatens to bring down the entire economy.

How might this work? Let’s say, as a starting point, that we wanted to protect all assets below a certain level. In the US, perhaps all assets below $25,000 could remain untouched. Then, one simple way to administer the “haircut” would be to slice a decimal place off everyone’s debts, savings, and other accounts. If you had a $250,000 mortgage, it would be knocked down to $25,000 — but your $20,000 savings account would survive unscathed, as it fell below the $25,000 limit designed to protect pensioners and other low-income individuals. Your debt overhang would have shrunk from $230,000 to $5,000. A wealthy person who had gained $5 billion through investing in hedge funds would now have only $500 million. A business that owed $750,000 in loans would now owe $75,000. And so on.

The net result would be a “re-set” in the relationship between claims and real assets, bringing that relationship back into a somewhat more workable balance. Of course, this “re-set” would be hugely controversial, confounding...and painful.

Sound far-fetched? Certainly, an action like this would not be undertaken unless other tactics had failed. It would yield winners and losers: although everyone would feel the effects, the impact would be uneven. At first glance, it seems those with the fewest assets and highest debts would suffer least. A more likely outcome would be widely distributed dislocations, unemployment, and so on, so there would be plenty of suffering to go around. But, this “re-set” would give us the opportunity — if we took advantage of it — to restructure our economic and financial systems to be more sustainable and resilient.

The second strategy would consist of governments or central banks creating debt-free money. This is how economist Richard Douthwaite, founder of the organization FEASTA and editor of the book
Fleeing Vesuvius
, describes it:

The solution is to have central banks create money out of nothing and to give it to their governments either to spend into use, or to pay off their debts, or give to their people to spend. In the eurozone, this would mean that the European Central Bank would give governments debt-free euros according to the size of their populations. The governments would decide what to do with these funds. If they were borrowing to make up a budget deficit — and all 16 of them were in deficit in mid-2010, the smallest deficit being Luxembourg’s at 4.2 percent — they would use part of the ECB money to stop having to borrow. They would give the balance to their people on an equal-per-capita basis so that they could reduce their debts, or not incur new ones, because private indebtedness needs to be reduced too. If someone was not in debt, they would get their money anyway as compensation for the loss they were likely to suffer in the real value of their money-denominated savings. Without this, the scheme would be very unpopular. The ECB could issue new money in this way each quarter until the overall, public and private, debt in the eurozone had been brought sufficiently down for employment to be restored to a satisfactory level.6

An alternative would be to pass laws against usury (for example, any interest rate greater than 20 percent would become illegal), then print enough money to accelerate inflation beyond 20 percent. People’s debts would decline over time, as would the value of money being held. The government could spend money into existence for social welfare programs, thus ensuring that retirees and other vulnerable groups don’t get hit too hard.

In the US, a version of the “free money” strategy is being advocated by Ellen Brown, author of
Web of Debt
. Brown argues that the United States Congress has the constitutional authority to coin money, but historically has needlessly delegated the power of money creation to the banking system — and, since 1913, to the Federal Reserve. The Federal government has on occasion created money directly, without borrowing — notably to finance the Civil War. The Federal Reserve’s second bout of quantitative easing, in 2010, was essentially a version of this strategy: the Fed bought government debt with money created on the spot, and interest from the debt will be rebated to the Treasury. However, Brown argues that the best way to pursue this option would be for the government itself to directly issue debt-free money, rather than for the Fed to do it through a more circular means.

The objection usually raised against government “printing” of large amounts of new money is that this would be highly inflationary: the US economy could suffer the same fate as Weimar Germany, with its currency becoming virtually worthless and all savings being wiped out in the process. Brown disagrees:

Adding money (“demand”) to an economy with high unemployment and unused productive capacity serves to increase productivity, increasing goods and services or “supply.” When supply and demand increase together, prices remain stable. And adding money to the money supply is obviously not hazardous when the money supply is shrinking, as it is now.... Financial commentator Charles Hugh Smith estimates that the economy now faces $15 trillion in writedowns in collateral and credit. If those estimates are correct, the Fed could, in theory, print $15 trillion and buy up the entire federal debt without creating price inflation. That isn’t likely to happen, but it does make for an interesting hypothetical.7

Over the short run, emergency measures could include the Fed buying up short-term municipal bonds in order to ease state and county fiscal crises, and the European Central Bank doing something similar with bonds of member nations, creating money to fill the gap left by the contraction in the money supply which resulted from the financial crisis of 2008 and that has led to soaring budget deficits.
⁸

Another related, longer-term measure that could help, according to Brown, is the establishment of state or provincial banks. Currently, North Dakota has the only state-owned bank in the US, established by the state legislature in 1919. The bank’s original purpose was to free farmers and small businesses from indebtedness to out-of-state bankers and railroad companies. By law, the state deposits all its funds in the bank, and deposits are guaranteed by the state. The Bank of North Dakota is a bankers’ bank, partnering with private banks to loan money to farmers, real estate developers, schools, and small businesses. It also purchases municipal bonds.

What would be the advantage to the state of having of such a bank? With fractional reserve lending, banks extend credit (create money as loans) in amounts equal to many times their deposit base. If a state owns its bank, it need not worry about shareholders or profits, so it could lend to itself or to its municipal governments at zero percent interest.
⁹
If these loans were rolled over indefinitely, this would be essentially the same as creating debt-free money.
¹⁰

Clearly, none of these strategies can solve the long-term problems of declining energy and minerals, rising population, and worsening environmental crises. They are merely ways to avert the looming wall of monetary-financial collapse. Once we have bought some time, we must begin to redesign certain basic structures of the economy that currently function properly only in a context of constant growth.

One of these structures consists of the money we use.

Post-Growth Money

Over the past few centuries, with urbanization and the expansion of trade, money has become essential to the functioning of societies. Today even the most remote human communities depend on the vagaries of a technology of exchange that only a few people seem to understand, and that periodically suffers crises of over- or under-valuation.

As we saw in Chapter 1, metal-based forms of money were dominant for more than a millennium until the 20th century, when virtually the entire world adopted debt-based currencies no longer backed by metal. Yet, due to the requirement for interest payments, debt-based currency can only function well in an expanding economy.
¹¹
As we’ve also noted, a transition back to metal-backed currencies is problematic. This means we will
have to
reinvent money in the years ahead.

Given money’s importance, it would be natural to assume that the discussion about currency systems and how they function is robust, featuring a wide-ranging literature, numerous college courses devoted to the subject, and so on. This is far from being the case. The notion that alternative kinds of money may be possible, some of them superior to debt-based currency, has occurred to some (Henry Ford, for example, is reputed to have been enamored with the idea of an energy-backed currency), but only a very few thinkers seem to have explored money systems in depth.
¹²
The project requires that we start by taking account of genuine human needs and then ask how money can be used to help satisfy them. It also requires a careful examination of our current monetary system and its vulnerabilities and failures. The goal should be to design a system — possibly involving several interlocking currencies to be used simultaneously but for different functions — that would liberate the exchange process from political and banking interests that presently tend to distort and commandeer it for their own ends: a system that could serve the needs of a steady-state or shrinking economy as easily as those of one that is growing.

In the previous section we noted the recommendation by Ellen Brown and Richard Douthwaite that governments (including US state governments and Canadian provincial governments) create their own debt-free money. Economist Herman Daly, author of
The Steady State Economy
, has mooted essentially the same idea: If there were a 100 percent reserve requirement for banks, this would get them out of the business of creating money; meanwhile government could award lump sums to new entrants into the economy (every 18-year-old would receive enough to pay for a college education) and lend money into existence at zero percent interest for socially worthwhile projects.
¹³

Brown and Douthwaite insist that we don’t need banks in order to create money, and money doesn’t have to be loaned into existence with interest accruing. The kind of money we’ve been using for the past century is based on credit — which is helpful because it allows the money supply to expand or contract as conditions require.
¹⁴
After all, money is more of a relationship than a thing: it is, in Brown’s words, “a legal agreement, a credit/debit arrangement, an acknowledgment of a debt owed and a promise to repay.”

However, credit-money need not be dependent on bank-generated, interest-bearing debt, if buyers’ and sellers’ credit accounts can be cleared directly. The idea is simple and is already being demonstrated in hundreds of local currencies that are in active use around the world. Many are versions of Local Exchange Trading Systems (LETS), in which each transaction is recorded as a corresponding credit and debit in the two participants’ accounts. The quantity of currency issued is always and automatically sufficient and does not depend on a bank or government for issuance.
¹⁵

Some local currencies have no physical representation and consist only of the mutual credit of participants, while others use paper notes representing anything from a number of hours worked (Ithaca, NY, has a local currency known as “Ithaca Hours”) to quantities of food in storage (Willits, CA, has “Grange Grains”). The backing of local currencies with something tangible seems useful primarily as a way of defining the unit of account, and as a way of making the currency more “real” and acceptable to users.