16 Nov 2012

Bernard Lietaer & others : Money and Sustainability - The missing link

I've just finished reading "Money and Sustainability : The Missing Link", written by Bernard Lietaer, Christian Arnsperger, Sally Goerner and Stefan Brunnbuber. It's really excellent, and absolutely stuffed full of interesting ideas.

The authors push for the development of a range of alternative monetary systems that would allow the economy to develop in a sustainable and resiliant way. They argue that the current system, based on the creation of the money supply as interest-bearing debt by commercial banks, is unworkable because it requires exponential growth to pay off the accumulating compound interest. They mention the 100% reserve plan ("The Chicago Plan") proposed by an increasing number of groups (including Positive Money), but argue that a better way to get the system changed would be introduce a range of alternative systems, all of which are not debt-based, and which would allow the system to evolve naturally.

While I am personally a strong supporter of moves to completely abolish the creation of money as debt by private banks, I can see that the ability of the banking lobby to thwart any such moves should not be underestimated. And since, as the authors point out, the need for reform is so urgent, we simply cannot sit around waiting for the resistance of the banking sector to wear down. In particular, they argue that the massive infrastructure investments needed to deal with climate change simply cannot wait - financial crisis or no financial crisis.

They actually make 9 specific suggestions that can be introduced in parallel - 5 that can be done at the local level, while the four others would require the intervention of national governments. I'll no doubt have a look at some of them in later posts, because there are some really intersting ideas there.

But, just for now, let me mention a couple of other points that they make.

First, like me, they talk about the insane levels of foreign exchange activity revealed by the BIS Triennial report - $4 trillion a day. However, unlike me, they were able to come up with a number for the percentage of those transactions that are actually associated with the real economy. The answer? 2%. The other 98% is pure speculation.  They note that "one day's currency speculation represents more that the annual economic output of Germany or China changing hands". Here's the graph, which shows the daily volume of foreign exchange transactions reported by the Bank for International Settlements (in billions of dollars) for the month of april once every three years compared with foreign exchange transactions based on "real" economic exchanges. The authors note that the temporary dip in 2004 was due to replacing 12 European currencies by the euro.
Second, they also take up the very interesting case of France, which until 1973 the Government was able to get money as interest-free loans from the Banque de France. And they make use of the analysis made by Derudder & Holbecq (2008), showing that had that system continued, French national debt would now be just 8.6% of GDP rather than 78%. The graph (also used by Ellen Brown in her latest piece) is very compelling.
Interestingly, the curves in the graph only start in 1979, because before that, there are apparently no records that distinguish between the reimbursement of debt and the interest payments on the debt. That, in itself, is a pretty amazing fact that reveals just how much we have been hoodwinked. But the general point is that the real cause of the massive amounts of government debt are laid bare. It is not overspending by governments that is the real problem - it is the highly toxic effects of compound interest demanded by the commercial banks for creating the money supply.

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