....for the Economy

Where Does Money Come From?

However, there is a downside to Interest. Or rather there is a downside to the way the Debt system works. The Debt system is our money system. Our money supply is created by Private Banks from the creation of debt. 95% of our money is created this way. Nobody controls how much Debt a Private Bank can create. It is not controlled by Government nor a Country's Central Bank. It is conjured up on Computer screens alone. Banks manufacture money out of thin air in order to lend it to you. This is so they can charge Interest. It is in their interest to put you in debt. It is how they make money. Personal debt in the UK now exceeds £1.3 trillion (GBP) with more than 1 million in danger of insolvency in case of economic downturn. Since the late 1990's UK GDP grew by £800 billion (GBP) but personal and Government Debt increased by £1600 billion (GBP) in the same period. Hence it took £2 (GBP) of Debt to create £1 (GBP) of economic growth. This isn't growth. It is smoke and mirrors. An empire of debt. We are borrowing in order to get further into debt. The debt grows and grows until it exceeds the total value of goods and services within the economy. Hence further growth is impossible. In fact failure is a mathematical certainty. Debt has no future. Debt is a gun to our heads that drives us on. It depolitcises the electorate. You are hostage to it. It links each person to the money markets and suddenly WE have to care about whether banks fail. We have much more important things lin life to worry about. Collapse is inevitable and, when it comes, it will be unlike any crash we have experienced in the last 200 years. Before we could just apply more energy to the economy and just burn our way out. However, in a world in energy descent economies have to shrink, not grow. Hence there will be a paradigm shift of a scale that we are totally unprepared for.

So why are we sleep walking towards this in a system desperate for reform? The problem is that each incremental step is so easy and there are no warning signs. It is much like climate change. The people in charge of the system make so much money from it that it is not in their interest to change anything. We borrow money because we gambling that we can repay it. We are speculating with it. Even the Mortgage on your House is subject to Property Bubbles. It doesn't seem like we are gambling because the good times have been rolling on since the end of World War 2. The very idea that this would suddenly end is not built into the system. There is no safety net. Historically Stock Markets and Land Prices have always risen ahead of inflation because the modern economy is fuelled by cheap fossil fuels. This fuel has been pumping up the economy for so long that the paradigm of endless growth is now built into the money system. So we have to keep growing our economies to stay ahead of the game. We can only service the Debt by expanding our Businesses and making MORE money to pay the Interest. Our Governments borrow money and pay Interest too. When THEY pay Interest they just take it out of Tax Revenue, ie, it's OUR Money. In fact Tax Payer's money is such a good source of revenue that Governments are persuaded to borrow money for all kinds of Public Goods such as Hospitals and Schools. Arguably they don't have to. Arguably there are cheaper forms of Public Investment that do not put future generations of citizens in Debt.

Economic Growth was traditionally thought of as being a good thing. A growing Gross National Product (GNP), in purely monetary terms, was thought of by Economists as a measure of human wellbeing. It was not. Growth in the British Empire lead to the ruthless pursuit of new colonies for their raw materials. This lead to the destruction of sustainable indigenous cultures and planted the seeds of World War One. In fact it might surprise you to learn that British Domestic growth prior to 1800 actually lead to declining standards of living amongst the population. It was not until 1850 that the conditions of life rose to their level 200 years previously. Despite the modern paradigm (that free market economics leads to growth) the evidence strongly suggest that the greatest advances in the standards of living (for the British Population) were a result of depression or the ends of World Wars (via redistributive Government Policy). Economic Growth, as Government Policy, did not appear in Britain until 1955. This lead to an immediate deterioration in the quality of life right up until 1988. Crime, ill health and unemployment have all soared. The extra income people earnt was spent on anti-crime measures or moving out of the urban sprawl to the countryside. Thus money earnt doesn't tell the whole story at all. People are rich but feel worse off. Unbelievably even terrible disasters, man-made or natural, increase GNP as they create more work for the Emergency Services. We can't increase Human Welfare if aren't even measuring it correctly.

Consider what "Money" and "Debt" really is. A potato is real wealth but it will not last forever. Its value is in it food energy. The value is released upon consumption. You have to consume it or starve. When you don't have a potato then you are in debt. This 'negative potato' (hunger!) is Virtual Wealth. You will need to pay someone for this food. Debt and hunger can grow forever and last forever. Our Economies are machines to turn REAL Wealth into Virtual Wealth. Hence the role of money is to supplant temporary 'Real Wealth' with permanent debt. You can save money and its value will increase. You can't do that with food. The Real World can't grow forever like the Virtual World can. There is a limit to growth. The real wealth of natural ecosystem in which we all survive has not grown. It has declined and been eroded in order to make virtual wealth. Sooner or later the 'real' decline will catch up with the 'unreal world'.

If we borrow in the expectation that we will keep getting richer what happens when we lose that faith? Then the system crashes. It is a Pack of Cards waiting to fall. It has fallen before and Governments have stepped into prop it up with Tax Payer's Money. Nobody question whether or not this form of economic management is sustainable or in the best long run interest of the majority of citizens of the country. Nobody questions if it is even just. Would it work in a shrinking economy? No, it won't. This is the Empire of Money and it cannot last any longer than Empires of Ideas, Steel, Concrete or Military Power. We don't question it because it is run for the benefit of a minority. When that minority have most of the Money and Power then they out-vote even Governments. Hence our Democracies are out-sourced to the Private Sector and we lose our collective say. Interest reinforces the Economies need to grow whether it can or not. We are locked into unsustainable growth pretending it will go on forever when we know it cannot. What goes up will come down. We have not prepared ourselves for a soft landing because our Interest/Debt/Money system only works in the good times. There is no happy ending.

The Casino-Economy

In the six years until 2007 a small handful of Hedge-Fund Managers in the investment houses of Europe, Asia and America gambled with Billions of Dollar, Pounds and Yen of their Client's money. Their complex systems of leverage (borrowing money to invest) created the greatest concentration in wealth since the Industrial Revolution. The top 25 Hedge-Fund Managers in the World earnt around £250 million a year, each. In the UK in 2005 250 of them earnt around $40 million each. So what happened to create this new-found wealth? Interest Rates were at a new low after the dot com bubble had burst and the twin towers fell in New York. Money was cheap and the Chinese had a lot of it to lend (from the money they were making producing all the 'real' goods the World wanted to buy).

Whereas during the Industrial Revolution great Industrialists created enormous wealth through building factories and creating products (taking forty years to accumulate their fortunes) the only things that the Hedge-Fund Managers did was move money from A to B on Computer screens. They took a small percentage for the privilege then another 20% of any profits. They couldn't lose. Their actions were so far removed from the real world they were taken completely by surprise when the "safe" mortgages they had purchased turned out to have been miss-sold to people who could never afford to repay them. They never performed the due diligence to check if this sub-prime market was sound. The bubble burst and the Banks stopped lending - even to each other. Central Banks and Governments around the World stepped in to bail-out failing Banks and pump liquidity (money) into the Finance Sector. Interest Rates were lowered and the boom-bust process carried on for another cycle.

The winners? The big Financiers and Fund Managers who pocketed the commission from the good times. And when the bad times came? Did they pay back the money? No. Of course not. They bought yachts and sailed away. Who picked up the tab when their foolish gambling failed? Taxpayers. Governments cannot allow their Banking systems to collapse. In 1998 a Hedge-Fund called "Long-Term Capital Management"  made a series of bad bets. In fact, so bad that it had borrowed more than fifty times the assets it had under management. The Federal Reserve said that its failure posed "unacceptable risks to the US economy". Panic ensued and the Central Reserve released £3.6 billion to bail our 14 Wall Street Banks. They will do anything to keep the current finance system propped up. Even if the system is fundamentally flawed. Money is flowing indirectly from the poor to the richest people in society. And it isn't just the poor. In order to encourage all those Investors and Fund Managers to set up shop in the UK the Government there let the super-rich get away with paying very little domestic tax. Whilst the Governments Tax Collecting authority (the HMRC) was announcing new measures to prevent Small Business Owners from sharing profits with their spouses, the super-rich were legally able to pay millions in dividends to their wives registered domicile abroad. Tax free. There was surprise in May 2007 when a senoior figure in private equity actually admitted that executives were paying less tax than the cleaning lady. Everyone below the super-rich pay. People pay. Small Businesses pay. You, me, practically everyone you know. We finance the super-rich. It is a system known as 'socialism for the rich and market economics for the poor'. They gamble and cannot lose.

Within Companies transfer pricing became a great way of avoiding paying Tax. Now sixty percent of Global Trade is actually internal within Companies. They move the profit around to the part of the world where the tax is at its lowest. A group of 20 major UK non-Oil companies with a turnover in excess of £100,000 million (GBP) paid tax at a rate of just 0.35% to the British Treasury. Since the money had to come from somewhere Her Majesty's Customs & Revenue conjured new and inventive schemes to get more money from much smaller Companies. Tax Rules were carefully scrutinised, reinterpreted or just rewritten before being applied retrospectively to plunder millions from the smallest sart up Businesses - many of whom only employed one person. When the money couldn't be raised then Health and Education was raided. Meanwhile in 2006 Britain's 54 billionaires paid Income Tax at an equivalent rate of just 0.01%.....

Currency Gambling currently accounts for $2 trillion EVERY DAY. Hedge Funds are essentially unregulated. They make their own rules. The gross error a judgement that lead to the Subprime disaster in 2007 has happened before. Ten years before, the 1997 East Asian Financial crisis was caused by Hedge Funds betting the wrong way. The movements in money through Currency Speculation became huge and largely irrational. A national economy could be destroyed overnight through a careless (but largely irrelevant) remark by a leader in that country.

Commentators on this state of affairs agree - the whole process is insane. It can't last. So, what is the counter argument? Of course there is a simple idealogical one that has been around for years but most recently has pretty much been implemented by the Bush Jnr regime in Washington. It goes something like this: Corporations and their Money Markets are good because they create wealth. Welath trickles down to everyone and everyone becomes richer. Therefore it is OK for the costs of Business to be externalised to the general public because, through their very existence, they act for the greater good. Therefore the public should pick up the bill for the externalities of Business. It is only fair. The trouble with this concept is two fold (and it has nothing to do with quaint concepts of equality):

• All the evidence shows that the money hasn't trickled down - it trickled up
• The system works as long as there are no limits to growth. As there are physical limits then the system must be able to contract without harming the economy, but it cannot.

Hence even the most heinous flat-earth economist must surely now agree that this system doesn't work very well and then must fail. So, what is their next line of reasoning? Well, the money in the money markets is our money. It is all our pension funds, savings and investments. True, but this can easily be viewed as a combination of bribery and hostage taking! So, what would their final argument be? Well, the money markets are there to raise money for investment in Business. This isn't quite true. Only 1% of all the money invested in the Money Markets actually reaches a Company. The rest is gambled. That is 99%. Finally we could argue that the markets are there for Shareholders to Invest their Capital. This is no longer true either. New equity flowed out of the market for fifteen years out of the twenty between 1981 and 2000. Money is flowing out of the markets to shareholders and NOT the other way round. What does this mean? It means endless profit-taking not investment. Rather than building up existing and new companies they are being de-capitalising them. They are being broken up and sold on. The money markets are eating themselves whole.

Replacing the Empire of Money

Everyone from eminent Economists to Presidents of the United States (Thomas Jefferson & Abraham Lincoln - indeed Lincoln wanted an internal US Currency) have pressed for Monetary Reform. The need to create a sustainable economic system, that would be more just for all, is clear to see. James Robertson, co-founder of the New Economics Foundation details what the reform could look like:

• Central Banks, independent of Governments, should be the only agent able to create money
• The money is then injected into the Economy via Government spending
• Private Banks would have to borrow money in order to make loans
• There would be no restriction upon how many loans can be made apart from the fact the money has to exist

In the UK this change would lead to an additional £45 billion (GBP) per year in Government Revenue. The Banks would lose £20 billion (GBP) a year. Guess why the reforms haven't been made? The Banks run the show. Current privileges will not be given up without a fight. Sadly they hold all the Card in this Pack. Their House of Cards will collapse under its own weight again and again as it is tax payers who will bail them out again and again.

John Maynard Keynes at the Bretton Woods Conference in 1944 presented ideas that would prevent the over-concentration of wealth. His proposals were thus:

• Capital should not cross borders from a high wage to a low wage country
• There must be a balance of trade between participating countries
• There should be full employment within participating countries
• There should be no monopolies or near monopolies

Today's "Globalisation" breaks all four of these rules (first proposed by David Ricardo - one of the founders of Classical Economics). Needless to say the US rejected these proposals and set the stage for the post-war Economic System. Keynes warned that such a system would create terrible debt in poor countries. He went on to suggest:

• an International Clearing Union should maintain the balance of trade between countries
• there should be an independent currency for trade between nations
• such a currency would be worthless for speculation, ie, you could only buy and sell things with it

This would wipe out what Thomas Friedman termed the 'electronic herd' of currency speculation. The International Trading Currency would incentivise each country to brings its trade surpluses or deficits to zero. Excesses would be taxed to a limit, above his limit the balance would be surrendered to the Clearing Union. Rich Countries would no longer just be able to buy Third World Mineral resource. They would have to trade it for real goods and services. Corrupt Politicians would be unable to store money abroad. Local Trade would have an advantage over long distance trade. Local Production would serve local purposes. These very principles are so very much the opposite of current thinking in the neo-liberal "free trade" orientated World Bank and World Trade Organisation that they make no headway.

What is more, at Bretton Woods the US gave ITSELF the right of Veto on any changes to the neoliberal rules of the World Bank and IMF. This is not to stop the peoples and Governments of the non-aligned World from adopting these proposals. The US will, of course, fight this every step of the way. The current Economic System is balanced in the favour of big US Corporations. Their hegemony is not to be questioned. There is nothing new or unique in this. Much of the wealth of the British Empire was the result of unequal trade arrangements.

Modern Reform

Suggestions like the International Inter-Country Trade Currency pre-date modern concerns about Peak Oil and Climate Change. As we nudge the upper barriers of Growth we risk Economic as well as Ecological collapse. Economies cannot grow anymore. The atmospheric sink for our carbon waste is filling up. The source of our carbon is running out. Hence the idea of an international currency for trade has morphed into an emissions backed currency (ebcu). Since the availability of Energy and not Money will control future trade then it is energy that is this new currency. The ebcu would be issued to each country based on a per capita basis, ie, population. The US and its wealthy allies would not be able buy this currency. No more of the ebcu would every be issued.

A Cap and Share policy would start with Special Emission Rights being traded in ebcus. These rights would be distributed to each country each year, again based upon population numbers. They would be then distributed to each person in that country. Those who extract and trade in Fossil Fuels would have to buy these Emission Rights from each person in order to conduct business. The Emission Right is a person's Carbon Footprint. By buying it you are purchasing it as a right of emission from burning fossil fuel and releasing its trapped carbon into the atmosphere.

Here's the rub - each year the number of Emission Rights per capita would FALL. This would decrease Greenhouse Gas Emissions and ration the dwindling stocks of the World's Oil supplies. These Special Emission Rights (SER) would turn into a currency of international trade. As those in poor countries would not need their full quota then they could sell them to rich countries using ebcu as currency. For example, the US would have to export goods and services to earn the ebcus to do this. Money would flow from rich countries to poorer ones. Kiss goodbye to Third World Debt. Everyone would be incentivised to switch to renewable technologies and away for fossil fuels.

Interest Free Banking, Negative Interest & Barter

What if I told you that there is a way that a modern economy can operate without the need for Bank Interest? Such a scheme operates already. The JAK Bank in Scandinavia doesn't charge its Customers Interest. Intrigued? Well, essentially they barter instead through what amounts to a loyalty scheme. Instead of Interest earnt on Savings you receive Points. You then borrow up to eight times more points than you have saved if you just keep your savings in the Bank. Simple. You can't withdraw your money until you pay off the loan. Since this mechanism is not subject to Interest Rates (set externally) then the members are insulated from the Casino Economy. As you pay far more interest on your Mortgage during your life than you ever earn in Interest on savings (afterall that is how the Bank makes money!) then you still gain despite not earning Interest as money. The gains are incredible. At the end of your mortgage you get the House AND your life savings built up over the years because you were not paying interest on the money you owed. Inevitably, over the years, the other Banks have tried everything in their power to kill the JAK system. Thankfully they failed and it survived as a modern example to us all. Other systems have been killed by the vested interests of the banking system. Until the 1980's New Zealand had interest-free mortgages.

Maybe we need to be even more revolutionary. Rather than just NO interest, how about NEGATIVE Interest? Bernard Lietaer, one of the World's top Currency Traders has suggested that Business would actually welcome a negative Interest Rate. The reason? Positive Interest forces short-term investment decision making upon Business because of the system of calculating "discounted cash flow". This essentially discounts a Company's future to the point at which there is no point saving for anything. Currency growth favours only currency speculation and not the wise investment in real assets. When you have negative Interest your currency loses money (demurrage currency) so that long term investments suddenly become highly profitable in today's numbers.

Less than 5% of the money darting around the World Money Markets has ANYTHING to do with the trade of real goods and services. The rest is used for speculation. It is unregulated and untaxed. So, why don't we just Tax it? A 0.1 to 0.25% "Tobin Tax" has been proposed but is fiercely opposed by the Financial Authorities. (Demurrage currency or a Global Eco-currency would make it unnecessary anyway.)

Since currency speculation scares even the biggest Companies out there they have started to barter. Vodka, Nuclear Power, Oil, Jet Fighters, you name it. Goods a changing hands across borders rather than money.

Conclusion

There is a Coming War..... There was a time we could kid ourselves that greed was good. Experience has shown otherwise. It would be nice to see all that money trickling down through the Economy to benefit all. However, the systems is not stacked that way. Money flows in the opposite direction. Increasingley so. This is not a plea for greater equality or greater redistribution of wealth. There is no need for Marxist or Socialist rhetoric here. This is, however, a simple suggestion that the system does practically everyone a disservice. It is unstable. It is unsustainable. It is not just. It does not supply everyone with equal opportunity. Since the poor are the vast majority of people on this planet we will never be able to negotiate the future without offering permanent reform to a system designed to keep them in their place. They won't help us unless we help them.

If we don't take a different path then there is a Coming War. This War will be for the right of the majority of people to have a say in the Economic System that rules their lives. Time is running out. We have a multitiude of solutions but no Political will to carry it out. Such conditions can only have one result: catastrophic collapse and reform. This will be a far more painful revolution than the one we could perform peacefully. However, those inside the system have a vested interest in keeping things just as they are. Until the pain of this Coming War hits them there will be no change. The Pentagon is already planning for a century of asymmetrical warfare, street-by-street, house-by-house, man-to-man, in Third World Countries. So we are locked head to head. The immovable object and the unstoppable force. The way out of this impasse? Stop playing with the big boys. Relocalise now. Turn your back on THEIR system. Stop playing by THEIR rules. Slip from their grasp. We all need far greater self reliance. Self reliance will protect you from the Empire of Money. Self reliance will protect us from the Coming War. If everyone simply boycotted the system, there will be no system.

See our "Relocalise" section for information about how people can reform their local economies.