Over the longer term, on the other hand, it’s safe to assume that the vast majority of paper assets now in circulation, whatever the currency in which they’re denominated, will lose essentially all their value. This might happen quickly, or it might unfold over decades, but the world’s supply of abstract representations of wealth is so much vaster than its supply of concrete wealth that something has to give sooner or later. Future economic growth won’t make up the difference; the end of the age of cheap fossil fuel makes growth in the real economy of goods and services a thing of the past, outside of rare and self-limiting situations. As the limits to growth tighten, and become first barriers to growth and then drivers of contraction, shrinkage in the real economy will become the rule, heightening the mismatch between money and wealth and increasing the pressure toward depreciation of the real value of paper assets.
Once again, though, all this has happened before. Just as increasing economic abstraction is a common feature of the history of complex societies, the unraveling of that abstraction is a common feature of their decline and fall. The desperate expedients now being pursued to expand the American money supply in a rapidly contracting economy have exact equivalents in, say, the equally desperate measures taken by the Roman Empire in its last years to expand its own money supply by debasing its coinage. The Roman economy achieved very high levels of complexity and an international reach; its moneylenders—we would call them financiers today—were a major economic force, and credit played a sizeable role in everyday economic life. In the decline and fall of the empire, all this went away. The farmers who pastured their sheep in the ruins of Rome’s forum during the Dark Ages lived in an economy of barter and feudal custom, in which coins were rare items more often used as jewelry than as a medium of exchange.
A similar trajectory almost certainly waits in the future of our own economic system, though what use the shepherds who pasture their flocks on the Mall in the ruins of a future Washington DC will find for vast stacks of Treasury bills is not exactly clear. How the trajectory will unfold is anyone’s guess, but the possibility that we may soon see sharp declines in the value of the dollar, and of dollar-denominated paper assets, probably should not be ignored, and cashing in abstract representations of wealth for things of more enduring value might well belong high on the list of sensible preparations for the future.
8
CHANGE YOUR TIME ZONE, CHANGE YOUR MIND
ELLEN PEARLMAN
In three hours I will be rich.
In five hours I can only eat out once a month.
In thirteen hours I can buy myself an apartment paying full cash.
But right now, in this moment I could face foreclosure on my home.
During the next twenty-four hours nothing will have changed in my life. The only difference is the how long it takes for me to arrive in a new time zone or country.
Travel and globalization have shown the relativity of worth, value, and wealth. I know I speak from a perceived privileged position. Not all the world’s people can just hop on an airplane and zip off to destinations known or unknown. There are undeniably serious problems with poverty, dislocation, and starvation. What I am referring to here is more subjective. It is the perception behind what we desire, not the immutability and direness of critical sustainability.
I am a white, funky fringe American urbanite barely hanging onto my status as a middle-class creative arts professional. In my home country I have adapted myself to the considerable economic restrictions that come with my trade; cabs are taken only to get to the airport, and my car is sixteen years old. I survive on thrift store expeditions and lots of Craigslist forays. For the past few years I have been living inside artist villages that surround the outer rings of Beijing, China. Before that it was Latin America, and before that, Europe. I have outsourced my heath care to the most modernized, lowest cost places I could find (Argentina, Mexico, now looking at India), been able to take cabs everywhere (China), and only been able to afford to go out for coffee and barely even that (London). All of this is not new news for anyone who has traveled or sprung for a vacation.
What has not changed under any of these myriad circumstances is who I am and what I aspire to. My values, spirituality, and outlook remain the same—simple living, remaking and reusing most things, public transportation if available, vegetarianism, abstaining from luxury or brand name items at least on a first-pass basis (though I don’t mind the quality if it’s used). Yes, I have a laptop computer, but my TV is only thirteen inches wide and it is secondhand. I Dumpster dive when I have money and I Dumpster dive when I don’t. No difference. I have earned $100,000 a year and I have earned nothing.
What makes this wide discrepancy in my material circumstances is money, whether it is pesos, euros, renminbi, or dollars. It is various colored pieces of paper with intricate layered graphics issued and handled by hoards of international monetary traders who set my worth relative to where I stand on the planet at any given instant. The value of that paper, as everyone knows, can fluctuate tremendously. In China, I am perceived as a wealthy Westerner—no questions asked. That perception gains me entrée into the highest levels of society; I mean lunch with millionaires, powerbrokers, diplomats and even representatives to the National People’s Congress, levels that in my own country are not a daily staple of my life. It’s easy to say it is because I am a foreigner, but that’s not entirely true. It is also because of my perceived monetary value.
I am poor in Dubai and London, but I can be middle class or even rich depending on the location of my plane on the tarmac. What does this say about the value of money and self-worth? It’s not that money is not real, and its not that money doesn’t make a difference, but it does say that money is highly perceptual. The value of that perception, which many people base their worth upon, is skewed. I admit I get skewered by it as well, especially when there is not enough of it. For instance, to stretch the analogy, say you have purchased a new BMW car. As soon as you purchase it, it immediately loses a percentage of its value, even if you drive it a hundred miles for just one week. In real terms as the supposed newest model it’s probably still as valuable as it was the week before, but its worth has changed considerably because now there is a little dirt on the tires.
It’s certainly a more enviable position to be wealthy, or at least perceived as wealthy. The reasons are, besides material possessions, access, mobility, respect, and opportunity. Wanting these things allows one to develop potential, and enjoying the “better” things in life, although what is better does not share an across the board cultural consensus. Some people think bigger is better, and base their lives on that premise. It’s the pursuit of that premise that leads to the successful Ponzi schemes that frequently make it into the news. However, severe lack of money does restrict survival levels and growth—there can be no doubt about that.
Another way to look at this issue of worth is from a Buddhist perspective. Any phenomenon experienced is experienced only in the mind. The fact that things change is proof that they are transient and not as real as they appear. For instance, if pleasure truly existed it could never change into pain. You would experience nonstop pleasure. The truth is you cannot hold onto change. But where do experiences really originate? They emanate from your own mind.
Mind is powerful. For example if you imagine or dream that you are burning in a fire, you might break out in a real sweat, even though there is no actual fire anywhere. Buddhists say there is no object and no perceiver of the object and it is the mind that solidifies things. Still, believing in objective reality is very helpful when you look both ways while crossing a busy street so you don’t get hit by a car. But getting back to the analogy of the fire, as soon as you imagine the idea of flames you name it—fire. Names, in fact, are also imaginary. Think about all the languages in the world and the all the words for “fire.” What you are actually doing is connecting a sound or guttural utterance to a nonexistent image according to a set of strange, grammatical rules. That is
an issue of perception. So is money.
Value arises from mutual consensus. In China, the cold green translucent stone jade is highly valued. The deeper green it is, the more expensive it gets. I personally think jade is an ugly polished stone. It holds no value for me, yet this view is at odds with an entire nation and five thousand years of its history. That is what I mean by perceived value. I am not talking about the next hot meal on the table, which is clearly necessary for survival.
What happens in times of economic meltdown is partially about perceived value; what got us into the 2008 mess in the first place was betting on the nonexistent value of imaginary future assets called CDMOs. That formerly illegal speculation was made legal again in the year 2000 by an act of Congress allowed trading concrete assets (homes) for imaginary scenarios based on vague future predictions. This is the mass hallucination that has produced crippling consequences. It sprung from perceived, imaginary value.
Now SUVs are out. Credit card debt is out. Spending beyond your means is out. Living on borrowed funds is out. Acquiring what you can’t afford is out. Recycling plastic bags is in and carrying fiber or woven shopping bags is in. Because of rapid globalization I can clearly see my relative worth radically shift in the blink of an eye. I see it when I land in a foreign country. I see it in my own neighborhood.
In three hours I will be rich. In five hours I can only eat out once a month. In thirteen hours I can buy myself an apartment paying full cash. But right now, in this moment I could face foreclosure on my home. Which one of these scenarios is real?
9
REINVENTING MONEY: AN ECOSYSTEMATIC APPROACH
BERNARD LIETAER, ROBERT ULANOWICZ & SALLY GOERNER
CRISIS OF 2008
By now, everybody knows that we are still experiencing the ramifications of the biggest global financial crisis since the 1930s. The causes of this crisis will be debated for years to come. Some are blaming unrestrained greed; others a “sorcerer’s apprentice” problem in which financial engineering created products too complex even for their creators; still others condemn excessive financial deregulation, incompetence by bankers and/or regulators, or even willful manipulation. However, all policy debates focuses typically on how to limit the excesses laid bare by the last financial crisis, as if this crisis is the only systemic one that has taken place so far. While the 2007–08 crisis was the biggest, the International Monetary Fund (IMF) has identified no less than 122 systemic banking crashes preceding this one since the 1970s!1 To this, they add 208 monetary crashes and 72 sovereign debt crises. By now, such systemic crises have hit more than three-quarters of the 180 countries that are members of the IMF. If we want to ensure that “it never happens again” as all policy makers ritually claim after each crash, would it not make sense to start looking at the whole forest, rather than any specific tree?
From our perspective, what all this means is that we have now entered the period of unprecedented convergence of four planetary problems—climate change, financial instability, high unemployment, and the financial consequences of an aging society (as predicted in 1999 in Lietaer, The Future of Money). The ensuing crisis is playing out (and will continue to play out) in a classic two or three steps downward for every step upward pattern. Every small step upward (i.e., any temporary improvement) is predictably hailed as the end of the crisis. The same thing happened throughout the 1930s, and it is only after World War II that the expression “Great Depression” got used to refer back to that whole decade.2 It is quite understandable—then as now—why governments, banks, and regulators make such statements, simply because, then as now, saying otherwise would only make the situation worse.
The next logical phase in this systemic crisis keeps unfolding as if on automatic pilot. Whatever governments do, the banks and other financial institutions will want to cut back drastically on their loans portfolios wherever possible, in order to rebuild their balance sheets after huge financial losses. Thus, while cutting back on its loan portfolio is a logical reaction for each individual bank, when they all do it simultaneously, it deepens the hole that is being collectively dug for the world economy and ultimately for the financial system itself.
The second stage [of this economic crisis] is an attempt by the banks to cut their leverage and reduce their lending, so helping to drive the economy into recession. That will then feedback via bad debts in non-subprime lending and impact the capital strength of the banks. So we will see an adverse vicious circle of weak banks creating a weak economy which creates more weak banks.
—Charles Goodhart, professor emeritus, London School of Economics
There is a super bubble that has been going on for twenty-five years or so that started in 1980 when Margaret Thatcher became prime minister and Ronald Reagan became president. That is when the belief that markets are best left to their own devices became the dominant belief. Based on that, we had a new phase of globalization of financial markets and liberalization of financial markets. The idea is false. Markets do not correct towards equilibrium.… the whole construct, this really powerful financial structure, has been built on false grounds. For the first time, the entire system has been engaged in this [economic] crisis.
—George Soros, global financier and philanthropist
The Economist editorialized in its lead story on October 11, 2008, “Confidence is everything in finance … With a flawed diagnosis of the causes of the crisis, it is hardly surprising that many policymakers have failed to understand its progression.”3 This chapter will show that this is indeed the case, although in a deeper way than The Economist itself believes.
The last time we dealt with a crisis of this scale, the 1930s, it ended up creating widespread totalitarianism and ultimately World War II. The trillion dollar questions are:
How can we do better this time?
What are the strategies that will prevent us getting caught in an economic tailspin?
What are all the available options for dealing with large-scale systemic banking crises?
WHY SAVE THE BANKS?
Since governments’ initial response has been to bail out banks and other financial institutions, the first question must be: why should governments and taxpayers get involved in saving banks in the first place? After all, when a private business fails, it is considered part of the “creative destructiveness” that characterizes the capitalist system.4 But when large banks fail, somehow that doesn’t seem to apply, as shown again in the 2008 scenario.
The short answer to why banks are being saved is fear. Since banks enjoy the monopoly on creating money through providing loans, bankrupt banks means reduced credit, which in turn results in a lack of money for the rest of the economy. Without access to capital, most businesses contract, which causes mass unemployment and a host of collateral social problems. Thus, when banks are in trouble, they can trigger what is known as a “second wave” crisis, through a ferocious circle making a victim of the real economy: bad balance sheets in banks => credit restrictions => recession => worse bank balance sheets => further credit restrictions and so the spiral downward goes …
It is to avoid such a tailspin that governments feel the need to prop up the banks’ balance sheets. The next logical step is also formulaic. Whenever a bank or group of banks is “too big to fail” and gets in trouble, the taxpayers end up footing the bill, so that they can start all over again. In the latest banking crisis, exactly as in the previous 122 major banking crises preceding it, taxpayer bailouts have been the answer in every instance. Central banks will help by providing an interest yield curve that makes it easy for financial institutions to earn a lot of money at no risk, and in some cases by buying back bad assets.5
Among earlier examples, the United States government, which funded Reconstruction Finance Corporation during 1932–53 period, repeated the exercise with the Resolution Trust Corporation for the Savings and Loan crisis in the 1989–95 period, and again with the Troubled Asset Relief Program (TARP) of 2008. Other examples include the Swedish Bank Su
pport Authority (1992–96) and the Japanese Resolution and Collection Corporation since 1996. For the 2008 international crisis, the amounts involved are unprecedented. Usually, the costs of the U.S. bailout refer to the $700 billion of the emergency Troubled Assets Relief Program (TARP) that was spectacularly squeezed through Congress during the last months of the administration of President George Bush. In reality, the actual cost to the American taxpayer of the bailout exceeds $4.616 trillion!6 This includes the direct loans to Wall Street companies and banks, purchases of toxic assets, and support for the mortgage and mortgage-backed securities markets through federal housing agencies. This is an astonishing 32 percent of our GDP (2008), 130 percent of the 2009 federal budget.
Bloomberg, which went to court to obtain the numbers from the administration, concludes with an amount at $7.4 trillion.7 The most comprehensive estimate was performed by an ex–Wall Street insider. Before becoming a journalist, Nomi Prins worked on Wall Street as a managing director at Goldman Sachs, and running the international analytics group at Bear Stearns in London. Her estimate includes all the types of supports provided by both the U.S. Treasury and the Federal Reserve and comes up with a mind-boggling total of $14.4 trillion!8
What Comes After Money Page 8