Paul Volcker, formerly chairman of the Federal Reserve and head of President Obama’s Economic Recovery Advisory Board, warned, “If you don't take action, you can be sure that the economy will go down the drain in the next 30 years. What may happen to the dollar and what may happen to growth in China or whatever, pale into insignificance compared with the question of what happens to this planet over the next 30 or 40 years if no action is taken [on climate change].”24
The UN Intergovernmental Panel on Climate Change (IPCC) has concluded that most temperature increases since the mid-20th century are very likely due to the increase in human-generated greenhouse gases.25 Though some debate still continues, the IPCC’s findings are supported by the national academies of science of every major industrialized nation.26 Most other ecological damage is probably linked to human activity as well.
As is well documented, whenever serious financial interests are involved, calls for reform hit the proverbial brick wall. Financial markets focus on the next quarter’s results, and even if a particular CEO were to advocate longer-term priorities at the expense of immediate results, he or she would be admonished or removed from office. Only when we have resolved the next “money question” is there any real chance to address the ecological credit crunch in a timely and systematic way.
Our bottom-line money question here is: How can we resolve the conflict between short-term financial interests and long-term sustainability?
THE FINANCIAL DIVIDE
The divide between the haves and the have-nots is growing worldwide. This disparity is now greater than at any time since the beginning of the 20th century. A 2005 UN report estimated that the 50 richest people in the world were earning more than the 416 million poorest.27
In the United States, most of the tremendous wealth generated in the past few decades has gone to a very small percentage of the very rich. “Of the surplus of over a trillion dollars generated between 1979 and 1999, 95 percent went to a mere five percent of Americans.”28 The financial wealth of the top one percent of U.S. households now exceeds that of the lower 95 percent combined.29 The pay gap between top executives and average employees in the 365 largest U.S. companies soared from 42:1 in 1980 to 531:1 in 2000.30 And while the average income has increased by 9 percent for those in the top fifth of the pay scale, it has instead decreased by 2.4 percent for those in the bottom fifth.31
Families are increasingly hard hit. After 50 years of work, the average American family manages to amass savings of just $2,300.32 This is despite the fact that the average American worked two weeks more in 2000 than a decade earlier. Increasingly, both parents must now be employed. In 1968, only 38 percent of married mothers worked for pay, while today’s figure is more than 70 percent.33 Though such data reflects societal changes and improved job opportunities for women, it also indicates the added demands on families.
Wealth concentration is not isolated to America. Indonesia’s 15 richest families hold 61.7 percent of all stock market holdings. The comparable figure for the Philippines is 55.1 percent, and for Thailand, 53.3 percent.34 Meanwhile, 80 countries have lower per capita incomes than a decade ago.
The outcome of this inequality is tangible: “Of the world’s total population, 65 percent have never made a phone call; 40 percent have no access to electricity. Americans spend more on cosmetics, and Europeans more on ice cream than it would cost to provide schooling and sanitation for the two billion people who currently go without.”35 Three billion people presently live on $2 or less per day, and 1.3 billion of those get by on $1 or less.36 Approximately 1.2 billion do not have enough food or protein, and between 2 and 3.5 billion do not get enough vitamins or minerals to remain healthy.37
The money question here is: How will we address economic inequality globally when even industrialized nations are finding it increasingly difficult to provide for their own citizens?
THE JOB CRISIS
The world economy has been dramatically affected by today’s ongoing economic downturn, with loss of jobs an especially destabilizing factor. In January 2009, U.S. employers slashed 598,000 jobs, the biggest monthly loss in 34 years.38 In Japan, unemployment jumped from 3.9 to 4.4 percent in November 2008—the biggest monthly increase in almost 42 years.39 In China, 20 million workers lost their jobs in 2008.40 The UN International Labour Organization (ILO) estimated that up to 51 million jobs would be shed and push an additional 200 million workers into extreme poverty in 2009, mostly in developing economies.41
The global struggle for jobs is, however, not new. Former UN Secretary General Kofi Annan reported in 2006 that at least 576 million able and willing people worldwide were out of work or chronically underemployed, and were unable to escape extreme poverty.42 According to former Wall Street Journel associate editor Paul Craig Roberts, Americans had already lost more jobs in the years preceding the subprime mortgage debacle than at any time since the Great Depression.43 Citing the U.S. Bureau of Labor Statistics, the New York Times reported that, “the American economy has added virtually no jobs in the private sector over a 10-year period from July 1999 to July 2009.”44
The competition for jobs in the United States is expressed as a gradual degradation of employment conditions. U.S. labor productivity, for instance, was up 1.8 percent in 2007, yet inflation-adjusted wages were down 0.8 percent in that same year.45 According to the ILO, the average American worked 1,978 hours in 2000, up from 1,942 hours in 1990. This represents almost a week of extra work annually, within a decade.46 Workaholism has become, for many, a tacit requirement for keeping one’s job.47
One telling sign of the U.S. job crisis is the growing burdens that workers are expected to bear. Corporations are scaling back on benefits such as health coverage and pensions. The average household income is now barely higher than it was in 1973, while the volatility of earnings and financial risks have soared. Unlike Europe, where job losses show up in raw unemployment numbers, U.S. indicators manifest through what Yale political scientist Jacob Hacker calls, “the great risk shift,”48 in which new levels of jeopardy and compromise are being placed onto workers without commensurate increases in income. Even those families in which both parents are working are often one serious incident—a medical bill or factory closure—away from disaster.49
The future looms uncertain. Though the Information Revolution offers much promise, it has not yet shown any indication of leading to a postindustrial global economy that will provide sufficient job opportunities for the 7.5 billion forecast by 2020, much less the current population.50
Jobless growth—increased overall earnings without a proportionate expansion of employment—is not merely a forecast for major corporations, but has become an established fact and in many instances a desired goal. Political and economic columnist William Greider observes, “The world’s 500 largest corporations have managed to increase their production and sales by 700 percent over the past 20 years, while at the same time reducing their total workforce.”51
Economists will correctly argue that improvements in productivity, which then lead to job losses in one sector, tend to create jobs in other areas. In the long run, therefore, technological change does not much matter to overall employment. These new technologies, however, are coming upon us faster and faster and necessitate fundamentally new sets of skills and a massive displacement of jobs. If the change is rapid enough, these job dislocations can be just as disruptive as permanent job losses.
Nobel laureate Wassily Leontieff has summarized the overall process as follows: “The role of humans as the most important factor of production is bound to diminish in the same way that the role of horses in agricultural production was first diminished and then eliminated by the introduction of tractors.”52 While we could let the horses die out peacefully, what will we do with people?
The money question here is: How can we provide a living to additional billions of people when tens of millions are out of work and our technologies make jobless growth a clear possibility?
THE BANKING/MO
NETARY CRISIS
Our banking and monetary systems are in a state of great instability. Though the economic crisis of 2008–2009 was the most severe disruption in decades, it was certainly not the only one. In just one 25-year period (1971–1996), the World Bank identified 169 monetary crises and 93 banking crises, which hit 130 different countries.53 These figures do not include more recent and serious troubles, such as the Asian crisis (1997), the Russian crisis (1998), the Argentinian crisis (2001), and the banking crisis of 2007-2008. In 2003, Nobel Laureate Joseph Stiglitz stated, “Something is wrong with the global financial system. International financial crises or near-crises have become regular events…The question is not whether there will be another crisis, but where it will be.”54
One systemic cause for this fragility is the global casino of unprecedented proportions that currently determines our money’s value. Daily turnover in foreign exchange in 2010 was $4 trillion.55 This amount is more than triple that of 2001 and excludes the large amount of derivative trading.56 Nearly 96 percent of these transactions are purely speculative—they do not relate to the “real” economy or reflect the global movements or exchanges of actual goods and services.57 Functioning primarily as a speculative market, currency exchange is driven not only by tangible economic news but also by mere rumor and conjecture.
The economic pinch is being felt worldwide and by all sectors of the economy. Russian President Dmitry Medvedev noted correctly that: “Failure by the biggest financial firms in the world to adequately take risk into account, coupled with the aggressive financial policies of the biggest economy in the world, have led not only to corporate losses. Most people on the planet have become poorer.”58
According to the U.S. Federal Reserve, 2008 saw a decline of $11.2 trillion in U.S. households’ net worth (the difference between assets and liabilities). It was the sixth straight quarterly decline since the peak in the second quarter of 2007 at $64.4 trillion.59 Meanwhile, home equity fell to 46.2 percent of market value, the lowest level on record.60
The net effect of ongoing financial crises is the rapid shrinkage of the middle class. A few very rich individuals are left at the top of the economic heap, with most others nearing or already in poverty. This was the case with the Asian, Russian, and Argentinean crises, and could also occur in the United States and elsewhere.
A more in-depth analysis related to the financial crisis is presented later in this work. Suffice it to say here that given the key role of money in our world, disturbances to the banking and monetary sector adversely impact the whole of society and exacerbate the megatrends. Downturns affect jobs, health coverage, pension plans, and our ability to address a host of socioeconomic and environmental issues.
The last money question is straightforward: How can we better prepare for or actually prevent future economic and monetary crises?
To help illustrate why our megatrends have thus far resisted efforts aimed at their resolution, we offer the following parallel from the pages of medical history.
A MEDICAL ANALOGY
The emergence of our monetary paradigm occurred at a time when the medical treatment of choice for the prevention and treatment of illness and disease was bloodletting—the removal of often-copious amounts of blood from patients. Though actually harmful to patients in the majority of cases, bloodletting remained the most common medical practice from antiquity up until the late 19th century. When, for example, George Washington came down with a throat infection, nearly four pounds of his blood were removed. It was far more likely the treatment and not the illness that contributed most to his demise.
The practice of bloodletting and the many notions that justified it, as well as the explanations that were offered time and again for a patient’s inevitable decline, went unchallenged by one generation after another for the better part of 2000 years. Notwithstanding the brilliance of the theories in support of this practice and the physicians that espoused them, both theory and practitioner were mistaken. But in the absence of bacteriology, immunology, and other common understandings available to us today, this flawed medical procedure had the appearance of certitude and managed to endure for millennia.
Our megatrends persist not because they are intractable but, once again, because we are using a very limited set of monetary tools that were put in place by another age.
CLOSING THOUGHTS
Our ineffectiveness in the face of global challenges is not an expression of the intractability of climate change, job losses, or other pressing megatrends. The persistence of such issues is instead related to our continued inability, so far, to identify and address their root causes, and in particular, to more fully grasp the link between so many vital concerns and money.
No matter how sincere the desire or how determined the effort, we simply cannot expect our difficulties to disappear until and unless we understand the functional dynamics of the current monetary system.
CHAPTER FOUR - A Money Primer
Money is like an iron ring we put through our nose. It is now leading us wherever it wants. We just forgot that we are the ones who designed it.
~MARK KINNEY
If you find yourself confused about money, take considerable comfort in the fact that you are not alone. John Maynard Keynes once quipped: “I know of only three people who really understand money: a professor at another university, one of my students, and a rather junior clerk at the Bank of England.”61 A prudent man, he didn’t name them.
If the Great Recession has assured us of anything, it is the extent to which Keynes’ assessment still runs true. Most of us, from leading economists and financial wizards to the average layperson, have never been properly introduced to money. Given what is at stake today, it is high time and to the benefit of all to put an end to this perennial mystery.
The following primer provides an overview of the basics of our modern-day monetary system.
THE MYSTERY OF MONEY
Every modern society, regardless of its cultural or political background, has accepted the current monetary system. When the French and Russian revolutions overthrew the established order in their countries (in 1786 and 1917, respectively), they changed just about everything, save for their currency. Each society completely rebuilt its legal system. The French overhauled their entire classification of measurements by creating the metric system, and even tried to change the calendar. The Russians threw out the very concept of private ownership and nationalized all their banks and corporations. Nonetheless, the monetary system remained exactly as before, with only one cosmetic difference—the bills were now adorned with new mottoes and heroes. When Mao’s communist takeover occurred in China, and when more than 100 colonial countries gained their independence over the past half century, the same phenomenon occurred, that is, each simply copied the now-standardized national currency system.
Little understood to this day is that virtually all national currencies operational in our world—regardless of their country of issuance; their designation as dollars, euros, or pesos; or their material composition, shape and particular motifs—are each the same type of money.
The U.S. executive director to the IMF in the Clinton administration, Karin Lissakers, offered this revealing definition: “Money is magic. Central bankers are magicians. Like all magicians, they don’t like to show their tricks.”62 Was she referring to real magic or simple parlor tricks? The answer is both.
Magic and mystery have surrounded money throughout its long evolution. For millennia, the magic was religious in nature. Now high priests of business, wielding impenetrable scientific equations, perform the magic using an intentionally cryptic language. William Greider, in his aptly named book on the Federal Reserve, Secrets of the Temple, wrote: “Like the temple, the Fed did not answer to the people, it spoke for them. Its decrees were cast in a mysterious language people could not understand, but its voice, they knew, was powerful and important.”63
A congressional hearing with former chairman of the U.S. Federal Reserve Alan Greensp
an, for instance, had as much ritual and ambiguity as did the oracles of Delphi in ancient Greece, as reflected in this typical Greenspan witticism: “If I seem unduly clear to you, you must have misunderstood what I said.”64 It was only after his retirement that the chairman’s own lack of clarity was revealed. Speaking before the U.S. Congress in October 2008, Greenspan conceded his “shocked disbelief” regarding the role that lending institutions, deregulation, and other policies played in contributing to the financial crisis of 2008–2009.65
What is Money?
New Money for a New World Page 4