Sunday, 6 November 2016

“Debt free” money won’t solve environmental problems.

This Guardian article by Jason Hickel published yesterday starts with the claim that replacing the GDP yard stick will cut our desire for consumer goodies, and hence cut our consumption of natural resources. (Article title: "To deal with climate change...")

Whaaat? So people don’t want cars for convenient transport: they want them because car production increases GDP? Truly hilarious. And people don’t heat their homes to keep warm: they heat them because burning fossil fuels also increases GDP? If you aren’t laughing your socks off, you should be.

Debt makes economic growth necessary?

Next, the article claims that the fundamental reason why economic growth is needed is so that people can pay off their debts. As the article puts it, “Debt is the reason the economy has to grow in the first place.”

So people don’t go tens of thousands of pounds into debt so as to acquire nice, warm, well decorated houses? Rather, debt appears from nowhere, and people then sweat their guts out building and acquiring houses so as to pay off the debt. This is Alice in Wonderland stuff.

Disposing of debt based money cuts debts?

The article then trotts out the old canard that replacing so called “debt based” money with central bank (CB) issued money will cut debts (and hence cut our consumption because as explained above, we allegedly go out to work to cut debts rather than to acquire consumer goodies).

Before explaining the flaw in that argument, I’ll say something about debt based and non debt based money.

There are two basic forms of money. First there is CB issued money which consists of notes and coins plus credit balances that commercial banks have at the CB. An important characteristic of that money is that it is a NET ASSET as viewed by holders of that money, i.e. the private sector.

Second, there is money issued or created by commercial / private banks. That money is not a net asset as viewed by the private sector: reason is that for every dollar or pound of that money, there is a corresponding dollar or pound of debt owed by someone to a commercial bank. As the saying goes, privately issued money “nets to nothing”.

Thus the first form of money is arguably “debt free”. Some economists have challenged the idea that CB money is debt free, and on the grounds that such money could be said to be a debt owed by the state to the private sector. Basically I don’t agree and for reasons set out here. I.e. the claim that CB money or “base money” as it is sometimes called is debt free pretty much holds water.

Now money thru the centuries has taken a huge variety of different forms: almost everything has at some time or other been used as money: various metals, paper, wood, cowrie shells, cattle, you name it. And indeed, debt can be used as money.

Plus it is perfectly possible to have a system under which the use of debt as a form of money is banned. Indeed, at least four Nobel laureate economists (including Milton Friedman) have advocated that. I back the idea myself.

Unfortunately banning the use of debt as a form of money does not get rid of debts, any more than tons of gold disappeared into thin air when gold was no longer used as money in Britain and elsewhere.

Put another way, if we have a system under which only CB issued money is acceptable, there will still be people with cash to spare and others willing to borrow. And it makes sense for the former to lend to the latter. Indeed, all else equal (i.e. assuming the distribution of wealth, income inequalities and so on remain the same), the total amount of borrowing, lending and debt will remain much the same if we switch to a “central bank money” only system.

Actually there’d be a FINITE, but not large reduction in the total amount of lending, borrowing and debt under a central bank money only system. Reason is that under that system, private banks cannot just print the money the lend out: i.e. under that system, it costs more for private banks to acquire money to lend out, thus interest rates would rise a bit, thus the total amount borrowed and loaned would fall a bit.

As for any deflationary effect of that, that’s easily dealt with by having the state print and spend more money into the economy. The net result is that everyone has more money, but if you DO WANT to borrow, it’ll cost you a bit more. Certainly the UK’s “Independent Commission on Banking” considered the CB money only system, and came to the same conclusion, namely that the cost of borrowing would rise. But in the UK in the 1980s, mortgagors paid almost THREE TIMES the rate of interest that they pay nowadays, but for some strange reason the sky didn’t fall in. Thus I doubt a modest rise in interest rates would be a disaster.

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