Journey Notes

Here is a mail I’d sent to Financial Sense before the G20 economic emergency summit in Washington DC – they never published it, so I’m now publishing it myself. Isn’t the Internet great.

On Wednesday this week, the German “Spiegel” magazine had five Nobel Prize winning economists give their ideas for a “new world order” of finance and economy, before the G-20 summit in Washington over the weekend. Robert E. Lucas went on the record with this: “The regulatory problem that needs to be solved is roughly this: The public needs a conveniently provided medium of exchange that is free of default risk or ‘bank runs’.”

My jaw dropped – no, he isn’t going to say that, is he!? Not the G-word, he’s a Nobel Prize decorated economist after all! But what are you supposed to think when someone says “medium of exchange that is free of default risk”? I know of only one that’s worked so far – but let’s hear the Professor out: “The best way to achieve this would be to have a competitive banking system with government-insured deposits.”

My jaw dropped again. If governments did not allow currency to be created out of nothing, which of course makes it worth nothing, they would not have to guarantee the deposits with more nothing! It’s that simple – all the world can now see quite easily where government-guaranteed nothing-money has led us, and I feel like the Professor is asking “whom do you believe, me or your own eyes?” But then I have not studied economics and do not therefore understand why governments are free of default risk, as the Professor implies.

The underlying point that this brought home to me is just how important it is to governments to maintain control of the currency – important enough to seize control of the banking system, and parts of the producing economy – basically to cordon off the big cesspools of nothing-money to be found, and swallow their entire foul contents – just to keep control. And why, to protect the people? Possible. But perhaps this is just plain self-preservation instinct. Without government controlling the currency – no government.

It takes years to get big fundamental science projects approved and funded, and even more years of uphill battles for any significant art funding – and rarely are we talking even one billion dollars here. But that is unproductive money anyway, as good as throwing it out the window, right?

And when an investment bank comes unstuck because of, shall we say, imprudent leverage and complexity of its “products”, suddenly hundreds of billions are found for stuffing the hollow shell to keep it standing, probably with growing awareness that all the “assets” bought are only going to return the “ass”, if that. And if the billions are not found, they’re created out of nothing, all at once. That is not throwing money out the window – that is throwing money down a black hole.

And yet, even this price is not too high for our governments to pay, and the perception of what is “unproductive” is quite different here. I think our leaders feel it in their bones that the licence to print currency is the only thing of true importance to keep them in power – let the control of the currency and the “system” slip away and people will take matters into their own hands, including a medium of exchange of their choice.

The power to print is the key to the kingdom – therefore if someone says a G-word at the summit, it will be “guarantees”, and if someone says an S-word, it will be “safeguards” – so we’ll do the same thing as always, only much harder, and stuff all the hollow shells with $$$ and €€€ – if you have done something for so long so successfully, it’s hard to give it up just because it doesn’t make sense anymore.

Another thing that has me worried about the “direction setting” is that no one – no one! – questions growth. Perhaps it’s just my lack of economic training, but we are now very near the maximum of liquid (transport) fuel availability. Nothing equals fossil fuels in safety, convenience and energy density, and nothing will replace them in a hurry. Economic activity means energy consumption – and once we have squeezed the waste out of our systems, we’ll have a hard time keeping “negative growth” away.

Over the past 100 years the pyramiding-debt model has worked fine thanks to free fossil energy and resulting effortless economic growth. This is bound to end very shortly and the transition has already begun – this time the energy crisis gave the financial crisis a tow, and was then overtaken by it, but only just. Growth is then supposedly re-started by pent-up demand – only next time there may still be no supply to meet it. The challenge is unprecedented in human history – to develop a workable model for a rapidly shrinking economy, where borrowing against the future may be impossible. Now would be a good time to think about this too – Nobel Prizes are waiting.