Change? Yes, we can!

Over the past week, I’ve spent a considerable amount of time “brooding” over the amount of debt the American people have accrued, both the nationally but also the privately held debt. It is almost as if I can literally feel that debt weighing down on me as well as on many other people. I even began by writing this very blog entry dedicated to putting together a lot of exact numbers–back in high school I was fairly good at math, maybe that’s why I liked the idea–but then I realized: it is actually relatively unimportant how large the debt exactly is. What matters is the effect that “being so deeply in debt” has on people. For the most part, I would say that being in debt comes with a feeling of “not being able to afford something I usually would want to get and could pay for”. And sometimes the things people cannot afford to buy can be very important things… But being as deep in debt as we are at the moment probably comes more with the feeling of being “owned” by whoever I am indebted to.

Naturally, there are still quite a few Americans who do not yet personally suffer from the effects of either the national debt or their personal debt, should they have some. At least the way in which they suffer is probably very subtle, almost invisible even, and has not yet reached levels that affect their day-to-day activities let alone their ability to buy enough food to live off. But there are yet ways in which this kind of indebtedness affects everybody: by reducing our freedom in a considerable way, slowly eroding it. My assumption is that, if the amount of debt keeps increasing, the American People will, in the end, be “enslaved” by policy decisions made solely based on fiscal arguments. Even in the current presidential race, few people seem to ask the question whether or not any of the budget items for which candidates suggest cuts are useful or essential. The fact that “we need to save money” seems like all that matters. And another aspect is that not only those people with little money and potentially monetary debt will be enslaved, but also those with considerable wealth will be enslaved to follow “the rules” the financial markets dictate.

I’m now trying to step back from any concrete problems and instead attempt to describe the intersection of the society and economy I live in as I see it… It seems a fair assessment that, based on the division of labor and the highly specialized processes required to produce many if not most of the goods we have grown used to, we simply need a way of ensuring that the wealth that is being produced by the people through some form of work is, somehow, distributed. And I want to make it clear that I do not refer to wealth only as physically graspable goods, such as food, clothing, or cars, but also other accomplishments that increase our general quality of life and welfare, like education, public safety, and the rule of law! On the other hand, I sometimes have very strong doubts that some of the services provided by parts of the financial industry can ever be described as “generating wealth” of any kind, at least not when it comes to “commonwealth”, which is just a translation of the word republic!

Over time, the pre-dominant way that developed to determine the distribution of goods and services, in general, is based on a token-based, free-market economy. In such an economy, goods and services are “swapped” for currency based on a price that is, at least in theory, determined by supply and demand, which then automatically provides each individual participant of the economy with the greatest value, hence maximizing the overall wealth. For one, it ensures that goods of “lesser value” with the same requirements for resource use are, over time, removed from the market place. Importantly, the reason this system is chosen by the government, the democratically elected representatives of a republic, is not to benefit the few and allow individuals to get rich, but rather so as to generate the greatest benefit for society as a whole! It is also important to take into account that if the profit margin of anyone providing services, such as in case of education, or producing goods, such as in assembling cars, becomes too great, the price should be considered too high, such that the general population certainly does not get the “greatest value” in return…

As far as I can see, this description does not contain any information on how the required currency is provided, nor does it give any detailed rules as to how some of the less individual but rather society-based desires can be satisfied. And at this point I would like to describe my most recent thoughts based on a few observations:

In almost all market-based economies, the idea of having a central bank, which is as far as possible from government influence, that provides the currency seems being considered as without alternative. To the extent to which I understand economics, this is however by far not a proven fact, but rather it is the currently favored, and thus accepted, hypothesis or model. While some past occurrences have indeed shown that by simply giving the right to create money to the executive branch of government can lead to disaster, I don’t think that any proof has been presented that would allow to draw the conclusion of the opposite, namely that putting money creation into the hands of privately run banks is necessarily “in the interest of the people or society”. And given that this privilege of creating money seems to come with at least “some power”, I must admit I am quite surprised that the Supreme Court of the United States hasn’t yet found that allowing private banks to “create money” is unconstitutional.

In addition to the idea that a central bank is organizing the monetary supply, the idea that interest has to be paid for a loan seems equally without alternative. And what’s more, in the current flavor of monetary lending practices, the interest is not only paid on the original loan, the principal, but on all subsequently accrued interest-based debt, that is to say compound interest, in other words a possibly exponential growth of debt. Funny enough, I would at least see several ways in which the currently existing system could be “extended”. I’m not necessarily saying that each of my thoughts would be an improvement, but to say that “things have to be the way they are” simply seems to easy. For one, Congress could set rules prohibiting extremely high interest rates beyond, say, 10 per cent. And in cases were such interest rates yet seem reasonable, such as where the risk for the borrower is indeed very great, legal provisions could enforce that interest rates have to decline over time automatically and that compound interest is only legal for very low interest rates. In other words: if my history demonstrates a high risk of me being a potentially defaulting loan recipient, I might initially have to pay a high interest rate, say 25%, but once I have made regular interest payments over a certain period of time, the interest rate either would have to be lowered substantially or, alternatively, any interest that was not paid will not be added to the amount on which I have to pay that interest rate, as this amount was not part of the initial risk of the borrower anyway. And finally, if someone giving out a loan makes some profit with receiving interest, I find it not only fair but essential that this person than also truly carries the risk in the case of a default on the loan.

Why do I see those issues as problematic to begin with? Well, starting with the second area that is not covered by the description of a free-market society, I would argue that there are many desires which a society might express as a whole rather than individually. For instance, in the United States some of these desires are put expressly into the Declaration of Independence:

“We hold these truths to be self-evident, that all men are created equal, that they are endowed by their Creator with certain unalienable Rights, that among these are Life, Liberty and the pursuit of Happiness.–That to secure these rights, Governments are instituted among Men, deriving their just powers from the consent of the governed, –That whenever any Form of Government becomes destructive of these ends, it is the Right of the People to alter or to abolish it, and to institute new Government, laying its foundation on such principles and organizing its powers in such form, as to them shall seem most likely to effect their Safety and Happiness.”

I would argue that, naturally, the pursuit of happiness is certainly something every individual has, but on the other hand it might not be necessarily true that each individual wants to guarantee this for every other individual equally, which is why it was made something government shall try to achieve. In a way, this principle is somewhat contrary to the idea of some of the elements in our very economy insofar as competition, in the sense in which it is used in sports like the Olympics, requires equal chances and footing. Obviously if someone owns a lot of capital, mostly in form of currency liquidity, that person does not have to “struggle” as hard as someone else if they wish to pursue their happiness–or pursue anything else for that matter, so how can that be considered fair competition. Furthermore, it seems to me that while none of the people heading the “too big to fail banks” has been elected by “The People”, banks and other financial firms are beginning to exercise a great amount of influence over political decisions, to the point where I would question to what extent the actual government is still “in power”–and if that were not the case it would almost seem like a constitutional duty to attempt to abolish any form of government that has not been given the consent of the governed.

Now, please, don’t get me wrong. I’m not a fan of socialism or another kind of systems that wishes to simply “equalize” monetary means among participants of a given economy. But the idea that some participants of our economic system can consume goods and services in pursuit of their happiness simply by owning “excess capital” and living off interest payments made by others who require some of this excess capital to be able to participate in the economy at all seems not only strange but outright dangerously close to violating some of the principles the Founding Fathers wanted to see granted for every person living in the United States. The King of England was considered overbearing at the time, and in my mind at least the financial industry is playing an every more important role in how our daily lives are shaped.

As part of living in a society that, I would hope, is a civil society with a basis in the ideas of some of the greatest philosophers, my vision is that each and every member of society should participate on both sides: giving and taking. And the giving should not be limited to having one’s money “do the work”–which is a true misnomer in my opinion: money cannot work, it can simply be used to suck up someone else’s contribution to society in form of interest payments…

Do I see any hope? Well, yes, of course! But the vision I have would require people to give up quite a bit on the idea of “owning” an entitlement that is counted in forms of a dollar amount, at least when it comes to amounts that, by far, exceed what they could ever spend on regular consumption goods in the foreseeable future. So long as someone has the ability to “conserve” effort that was put into the economic system for very long periods, and pile up this conserved effort to ever higher mountains, the system will always carry an incalculable risk of failure. In that sense, I actually believe that re-designing some of the government-run programs, like Medicaid and Medicare, into a system that, within reasonable contraints, promises to pay for people’s basic needs and medical expenses when their insurance doesn’t cover for it or they simply don’t have an insurance, but that doesn’t do so in form of expressly stating dollar amounts is a necessary step to fix things. More generally, holders of U.S. Treasury Bonds would have to give up at least part of their entitlement, which next to Medicare and Medicaid also includes debt held by retirement funds, private investors, and investment firms.

But another big contribution that has to be made is that banks need to return to an actually useful business model: that of providing required services to society, not a way of providing the people working at banks with the means to get rich for their own sake, which then is rather a disservice to society. Financial capital is meant to serve the people, not the other way around…

Do I blame anyone involved? Not at all. If anything, I would say that the mantra of “if I just had a little more money, I’d be so much happier” works a bit like a virus. Once it infects our minds it almost is like taking over control of our lives. Involuntarily I am reminded of a movie from the 80s: They Live. A zombie-like world where many people have been brain-washed and are no longer seeking true happiness in their lives. And just as in the movie, at the very end, no-one in our society, not even someone who seemingly benefits from this way of organizing our economy, truly wins. Maybe we should step back a little from the numbers and think about what we, as a society, want our lives to look like, and what our government’s functions are supposed to be and then find ways for us to strive towards that goal and our government to fulfill those functions.

The relationship between money and entitlement

Personal friends of mine may very well groan… (this topic? again?) — yes, I feel I have to… In fact, I woke up a couple minutes ago and somehow feel that without getting a few words out now, going back to sleep will be difficult…

To begin with, I have a very strong feeling (and could probably find some scientific evidence, although I am happy to leave that for a later discussion) that most people (maybe even all people) have a strong desire (need) for safety and assurance that “things will be alright” in the future. Naturally, no-one can ever truly guarantee that the future will be “good”, but having someone say so (and trusting that it will), gives a sense of safety (assurance).

As a consequence, people are often willing to give up on other needs and desires (including but not limited to the need of acting morally, the desire to be happy in the moment, the overall need of satisfaction and fulfillment) in exchange for that assurance. For instance, if someone were to offer me the assurance that, for the rest of my life, I would not go hungry, that I would not go without medical assistance (should I require it), and that at least all physical requirements my body might have would be taken care of, I think there is a strong “temptation” to accept a relatively high price-tag in the moment for that guarantee. I might even compromise on some very important values that I hold…

And in a society where all of these things (food, health care as well as general provision for bodily needs) can be bought with money, one way of guaranteeing that those needs will be met is by offering me (a lot of!) money

That is, in short, I believe the reason why even relatively wealthy people still have a strong desire to increase their wealth; although it would, in the here and now, seem to be relatively unimportant: all their current needs are already taken care of, and any additional wealth is unlikely to have an impact on their current situation other than adding a number to their sense of virtual safety.

I’ve used the term virtual on purpose. Why? Well, here is where the relationship between money and entitlement comes into play. Money, in large quantities, represents the idea that, in some future economy, I will be able (allowed) to participate (consume) goods and services (which in my mind truly equated to the sense of entitlement). Don’t get me wrong: for many examples (such as my ability to save money for a while to then buy something I couldn’t afford with a single pay check, such as a car or even a house) this actually seems like (and probably is) a wonderful concept. However, when money is used (or abused?) to generate this “all-purpose” feeling of owning a card blanche (entitlement!) that, in the future, I will be able to simply “use up” goods and services (which still need to be produced for me or be made available to me by someone!), I think that this no longer represents an aspect that was originally meant to be linked to currency (an all-purpose means of exchanging goods and services in the present). And a strong inequality in the distribution of wealth might even be considered a form of slavery (those with little to no money would be forced to produce goods and services for those with more of it, simply to partake in the economy at all, even if they cannot even meet their basic needs with the outcome!).

The major reason for this discrepancy is that, through the market (where goods are priced based on supply and demand as well as the overall amount of wealth and debt in existence, which truly are two sides of one and the same coin), the amount of money required to buy any given good changes over time, and thus the amount of goods and services I am able to obtain with whatever wealth I have accumulated is not fixed (which, if that were true, would then indeed represent some entitlement!) but variable. So, as much as having (a lot of) money might seem like giving a wealthy person a sense of safety, this sense will only be experienced for as long as money doesn’t lose (much of) its value.

Two major problems now combine into a mix which, unless either problem is at least lessened in its impact, I would argue make it almost inevitable that any economy based on a free market and a monetary system where making money available (central bank lending) comes at a cost (interest), will eventually experience a near-fatal episode:

First, those people who “collect” money as a means of safety will never feel they have enough (and rightly so! once the money starts losing its value, all the entitlement they have collected thus far begins to melt for not to say evaporate). And while, deep down, most people probably sense that to be true, they will still deny that truth and attempt to increase their wealth (perceived safety) through collecting more (and more, and more).

The second problem is that once enough wealth has been accumulated (in few enough hands), the “real economy” (that is to say the part of the economy where money is used to actually buy means of production, such as labor and resources) is satisfied when it comes to liquidity, and the surplus of money (in the hands of the wealthy) requires (and irresistibly generates) new forms of “investment opportunities” (to increase the numeric value via interest rates).

From the outside (such as from the perspective of an alien, maybe — told you this is a crazy blog), it might possibly be even quite amusing to see what kind of “products” the engineers (economists) of the financial markets come up with to allow people who “own” large amounts of money (who have earned or received this entitlement in the past) to increase its (numeric, not actual, future-related) value by “investing” it in various way: my favorite so far is still the ability to buy credit default swaps (that is a bit like an insurance, in case some other, actually tangible good loses part or all of its value) without either having to own the actual good (compare it to being able to insure a house that you don’t own, but still having to option to cash in on should it get damaged or destroyed) or some system of transparency (such as a register to at least have a sense of how many of these insurances have been sold, by whom, and to whom).

The real problem is that for every unit of currency that is owned by someone (and considered wealth, let’s say a thousand dollars I have in my bank account), someone else must be owing the same amount of debt (each and every monetary system controlled by a central bank works that way, or otherwise: what good is wealth and entitlement if no-one owes me anything). And given that the amount of overall money seems to be increasing faster and faster (usually leading to price inflation), because the only true gain in wealth is of course growth above the nominal inflation rate, any such system must, in the end, collapse. I would almost go as far as to say that any currency system that does not “reign in” excessive interest rates as well as the ability to accumulate wealth without a specific purpose is to some degree, by virtue of how money works, destined to be unsustainable; unfortunately, in the end, no-one “wins” (not even the rich folks!)…

Do solutions exist? I think so! But the one crucial component to each and every solution I can think of is that people (which means everyone!) must be willing to give up on their sense of safety and entitlement (assurance). This can be done by accepting (much) higher taxation (but also giving up on the idea of a guaranteed retirement payment!) followed by truly reducing wealth and debt, or by hyper-inflation, or by some other means of neutralizing both wealth and debt (haircut on debts by disowning creditors). Why? It’s simply unrealistic to believe that by whatever means in the present anyone could ever guarantee that the wealth I own (effort that was put into the economy by me or in my name in the past without taking it out again immediately or shortly thereafter) will be able to buy me anything in the future (in essence: just as fiscally conservatives are talking about cutting back the social welfare state to end entitlement on the side of the relatively poor, they should also accept that “storing” wealth for a rainy day by the relatively rich is nothing but the same idea, only in form of currency instead of a provision in some law). This is, I think, exactly why an economic contraction (recession) is such a potentially disastrous event: people all over suddenly realize that their future is, inevitably, unsafe, and instead of keeping up the expenditure, they stop using currency in the market place. The reality simply is that no-one knows the exact state of the economy in the future. So it is simply a (partially false) promise if someone says: your needs will be met! (and that is, of course, also true for any other form of entitlement, including social security or Medicare/Medicaid…)

Only if people are willing to ease up on their (need for a) sense of entitlement can an economy run smoothly. What do I think is the best way to achieve this? By having faith in the future, by believing that, as long as humans with a sense of morality and fairness are “in charge”, I will not be “forgotten”. Then I am willing to accept that as good and useful money is for the purpose of exchanging goods and services in the here and now (and near future), I am much better off putting my faith and trust in the people of the future than the money (numeric wealth) I may or may not own by then.