Shann Turnbull argues:

“The purpose of this note is to suggest how to connect the value of money to the natural environment to allow both society and the environment to exist together on a symbiotic perpetual basis. This would correct the current problem of modern official money, and the numerous complementary currencies tethered to them, that are not fit for purpose because amongst other reasons their value cannot be specified by any one or more specific quantities of real goods and/or services. The value of money has become indefinable, unpredictable and not subject to control by any Nation State. Central banks of each nation try to manipulate its value but are overwhelmed by external factors like their nation’s terms of trade, government policies, international interest rates, currency wars, exchange controls, hedge funds, speculators, market sentiments and unpredictable financial problems.

So official money is not fit for the purpose for determining the prices of real things to allow their efficient, effective and/or sustainable allocation by the “invisible hand” of markets.

Intelligent people from another planet would think that humans who believed in a benign invisible hand were either mad and/or money has become a religion.

While there is no fully satisfactory basis for establishing a standard unit of sustainable value in each bioregion of the world, the least worst political, social and economically acceptable approach could be the retail value of electricity (Kwhrs) generated by a producer/consumer cooperative using energy from benign renewable resources.

Some of the compelling reasons for pegging, but not backing, the value of money in each bioregion to Sustainable Energy Dollars (SEDs=$Z), are:

(i) Creating a relative cost advantage for generating renewable energy to reduce and/or remove the need for carbon trading or taxing . The cost advantage arises as interest costs are removed 1 for investment in electricity production from any source. As the investment cost of generating electricity from renewable energy are much larger per Kwhr generated from burning carbon, renewable energy becomes more competitive.

(ii)Energy consumption correlates well with GDP.

(iii)Energy consumption is an essential requirement to sustain prosperity in modern societies. So energy consumption is also an indicator of the quality of a sustainable society.

(iv)A single service of nature that is so fundamental for sustaining life on the planet in perpetuity provides a basis for a highly participative, transparent and democratic governing architecture to minimise self-interested manipulation by minority interests that could arise from using a basket of commodities whose composition would need to be changed over seasons, regions and technological change by governing elites in each region without necessarily recognising long term sustainable issues like climate change.

(v) Market forces are created for distributing the global population to bioregions that possess advantages in the production of benign renewable energy.”

The proposal above does “not explain the profound significance of establishing a sustainable standard unit of value, or using self-liquidating money from a negative interest rate that removes money as a store of value so that role of money is reduced to being ONLY a medium of exchange. These points are developed in my cited reference at the end of my 500 words.

(Refer to:‘Terminating currency options for distressed economies’,at: http://ssrn.com/abstract=2709413.)

A brief outline follows:

Because we have standards for weights and measures anyone can create tables and chairs of standard sizes and weights.

So a standard reference unit of value allows anyone to create contracts to exchange goods and services to democratise the creation of credit/money. The conversion of private credits into public money can then be achieved by credit insurance that guarantees the liquidation of democratically created credits/money.

The cost of the credit insurance would be carried by the contract used as money to create a negative interest rate. This provides a third way for terminating the existence of bottom up democratically created money.
No central bank is required as proposed by Mary Mellor or James Robertson.

The processes would mostly be regulated by supply and demand market forces for goods, services, investments and credit insurance.”Photo by Sunday’s child Photo by Eva Cristescu

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This brilliant analysis by Herman Daly, brings the two factors together, i.e. how the specific function of interest (money theory) is related to the function of capital (economic theory) and how both are embedded in a real physical world (thermo-dynamic theory).

In addition, it also explains the fundamental role of supra-national institutions of capital, the World Bank, in driving the whole system at the service of capital (institutional theory).

A must read, really!!

By Herman Daly:

“”When I was in graduate school in economics in the early 1960s we were taught that capital was the limiting factor in growth and development. Just inject capital into the economy and it would grow. As the economy grew, you could then re-invest the growth increment as new capital and make it grow exponentially. Eventually the economy would be rich. Originally, to get things started, capital came from savings, from confiscation, or from foreign aid or investment, but later out of the national growth increment itself. Capital embodied technology, the source of its power. Capital was magic stuff, but scarce. It all seemed convincing at the time.

Many years later when I worked for the World Bank it was evident that capital was no longer the limiting factor, if indeed it ever had been. Trillions of dollars of capital was circling the globe looking for projects in which to become invested so it could grow. The World Bank understood that the limiting factor was what they called “bankable projects” — concrete investments that could embody abstract financial capital and make its value grow at an acceptable rate, usually ten percent per annum or more, doubling every seven years. Since there were not enough bankable projects to absorb the available financial capital the WB decided to stimulate the creation of such projects with “country development teams” set up in the borrowing countries, but with WB technical assistance. No doubt many such projects were useful, but it was still hard to grow at ten percent without involuntarily displacing people, or running down natural capital and counting it as income, both of which were done on a grand scale. And the loans had to be repaid. Of course they did get repaid, frequently not out of the earnings of the projects which were often disappointing, but out of the general tax revenues of the borrowing governments. Lending to sovereign governments with the ability to tax greatly increases the likelihood of being repaid — and perhaps encourages a bit of laxity in approving projects.

Where did all this excess financial capital come from? Not from savings (China excepted), but from new money and easy credit generated by our fractional reserve banking system, amplified by increased leverage in the purchase of stocks. Recipients of new money bid resources away from existing uses by offering a higher price. If there are unemployed resources and if the new uses are profitable then the temporary rise in prices is offset by new production — by growth. But resource and environmental scarcity, along with a shortage of bankable projects, put the brakes on this growth, and resulted in too much financial capital trying to become incarnate in too few bankable projects.

So the WB had to figure out why its projects yielded low returns. The answer sketched above was ideologically unacceptable because it hinted at ecological limits to growth. A more acceptable answer soon became clear to WB economists — micro level projects could not be productive in a macro environment of irrational and inefficient government policy. The solution was to restructure the macro economies by “structural adjustment” — free trade, export-led growth, balanced budgets, strict control of inflation, elimination of social subsidies, deregulation, suspension of labor and environmental protection laws — the so-called Washington Consensus. How to convince borrowing countries to make these painful “structural adjustments” at the macro level to create the environment in which WB financed projects would be productive? The answer was, conveniently, a new form of lending, structural adjustment loans, to encourage or bribe the policy reforms stipulated by the term “structural adjustment.” An added reason for structural adjustment, or “policy lending,” was to move lots of dollars quickly to countries like Mexico to ease their balance of payments difficulty in repaying loans they had received from private US banks. Also, policy loans, now about half of WB lending, require no lengthy and expensive project planning and supervision the way project loans do. The money moves quickly. The WB definition of efficiency became, it seemed, “moving the maximum amount of money with the minimum amount of thought.”

Why, one might ask, would a country borrow money at interest to make policy changes that it could make on its own without any loans, if it thought the policies were good ones? Maybe they did not really favor the policies, and therefore needed a bribe to do what was in their own best interests. Maybe the goal of the current borrowing government was simply to get the new loan, splash the money around among friends and relatives, and leave the next government to pay it back with interest.

Such thoughts got little attention at the WB which was haunted by the specter of an impending “negative payments flow,” that is, repayments of old loans plus interest greater than the volume of new loans. Would the WB eventually shrink and disappear as unnecessary? A horrible thought for any bureaucracy! But the alternative to a negative payments flow for the WB is ever-increasing debt for the borrowing countries. Of course the WB did not claim to be in the business of increasing the debt of poor countries. Rather it was fostering growth by injecting capital and increasing the debtor countries’ capacity to absorb capital from outside. So what if the debt grew, as long as GDP was growing. The assumption was that the real sector could grow as fast as the financial sector — that physical wealth could grow as fast as monetary debt.

The main goal of the WB is to make loans, to push the money out the door, to be a money pump. If financial capital were really the limiting factor countries would line up with good projects and the WB would ration capital among countries. But financial capital is superabundant and good projects are scarce, so the WB had to actively push the money. To speed up the pump they send country development teams out to invent projects; if the projects fail, then they invent structural adjustment loans to induce a more favorable macro environment; if structural adjustment loans are treated as bribes by corrupt borrowing governments, the WB does not complain too much for fear of slowing the money pump and incurring a “negative payments flow.”

If capital is no longer the magic limiting factor whose presence unleashes economic growth, then what is it?

“Capital,” says Frederick Soddy,”merely means unearned income divided by the rate of interest and multiplied by 100” (Cartesian Economics, p. 27). He further explains that, “Although it may comfort the lender to think that his wealth still exists somewhere in the form of “capital,” it has been or is being used up by the borrower either in consumption or investment, and no more than food or fuel can it be used again later. Rather it has become debt, an indent on future revenues…”

In other words capital in the financial sense is the future expected net revenue from a project divided by the rate of interest and multiplied by 100. Rather than magic stuff it is an indent, a lien, on the future real production of the economy — in a word it is a debt to be repaid, or alternatively, and perhaps preferably, to not be repaid but kept as the source of interest payments far into the future.

Of course debt is incurred in exchange for real resources to be used now, which as Soddy says cannot be used again in the future. But if the financed project can extract more resources employing more labor in the future to increase the total revenue of society, then the debt can be paid off with interest, and with some of the extra revenue left over as profit. But this requires an increased throughput of matter and energy, and increased labor — in other words it requires physical growth of the economy. Such growth in yesterday’s empty-world economy was reasonable — in today’s full-world economy it is not. It is now generally recognized that there is too much debt worldwide, both public and private. The reason so much debt was incurred is that we have had absurdly unrealistic expectations about growth. We never expected that growth itself would begin to cost us more than it was worth, making us poorer, not richer. But it did. And the only solution our economists, bankers, and politicians have come up with is more of the same! Could we not at least take a short time-out to discuss the idea of a steady-state economy?”

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