Plenty of countries in the past have tried to cover expenses that overshot income by spinning the presses at the local mint. The result is generally hyperinflation, of the sort made famous in the 1920s by Germany and more [...]]]> John Michael Greer hits on a crucial question that I’ve given some thought to in the past:

Plenty of countries in the past have tried to cover expenses that overshot income by spinning the presses at the local mint. The result is generally hyperinflation, of the sort made famous in the 1920s by Germany and more recently by Zimbabwe. That I know of, though, nobody has tried the experiment with a national economy in a steep deflationary depression, of the sort that has been taking shape in America and elsewhere since the real estate bubble crashed and burned in 2008. In theory, at least in the short term, it might just work; the inflationary pressures caused by printing money wholesale could conceivably cancel out the deflationary pressures of a collapsing bubble and a contracting economy – at least for a while.

What I see is a monetary system in a vicegrip. There are massively powerful forces of inflation and deflation at work in the system. For the moment these forces balance each other, perhaps mostly do to the sheer momentum of “normalcy.” But as the forces grow more powerful and the managers of the economy run out of clever tools, the chances that these forces will remain in balance over the long term appears vanishingly small. The system is balanced on a knife edge, and when one of the forces of inflation or deflation takes the upper hand it will spell disaster for our monetary system.

*******************

As the financial crisis deepens, it is becoming a political crisis, a leadership crisis, and a global crisis of trust. Our economy has become disconnected from the creation and exchange of real value, and suddenly [...]]]> I just came across this piece I wrote back in October 2008 but never published. A little dated, but still relevant.

*******************

As the financial crisis deepens, it is becoming a political crisis, a leadership crisis, and a global crisis of trust. Our economy has become disconnected from the creation and exchange of real value, and suddenly the ground that appeared so solid is shifting beneath our feet.

I believe that the roots of this crisis are very deep, and also very simple: our economic system demands exponential growth, and yet we live on a finite planet. The necessity of growth is hardwired into our monetary system, and when that growth falters the system comes under incredible strain.

We base our monetary system on these two premises:

1. Money is loaned into existence by banks
2. Loans must be repaid with interest

These premises are simple, yet when thoroughly understood they are extremely unsettling, for they clearly describe a system out of touch with reality, a system that simply cannot continue indefinitely.

The process of paying interest on loans is common knowledge. What is less well understood is that the money that we have been loaned is created by the bank at the moment that we borrow it. The implications of this are profound. Because money is created through loans, and loans must be repaid with interest, there is always more debt than there is money. The only way that debts can be repaid is if the supply of money is continually growing. Yet that means total debt is also continuously growing.

Although it has been unjust from the beginning, for generations this basic system has worked to grow our collective wealth. But now it is now under severe strain, and may be on the verge of failure. For generations, the money loaned into existence was invested to create real wealth. Because it generated real wealth, the loans could be repaid. But in a world of depleting resources, it becomes much more difficult to create real wealth, and more lucrative to invest in speculative enterprises based on perceptions. Houses that are assumed to increase in price forever are one such speculative investment. And because real value creation is waning, this speculation has become a cornerstone of our economy.

And now, the reality is dawning that we have invested massively into schemes that have not provided us with things of real value. Our houses are basically the same structures they were 10 years ago. The idea that they have doubled or tripled (or more) in value is proving to be an illusion. And our financial systems are buckling as the reality of our situation sets in.

The housing bubble may be the unfortunate basis of the unfolding meltdown, but the roots of our problem go much deeper than that. We have a money system that demands perpetual growth, and we live on a finite planet. We are seeing the collision between these two irreconcilable realities, and as vast and powerful as our market economy is, we are about to learn that the limits of nature cannot be overcome, and we ignore them at our own peril.

If this analysis is correct, then our political and financial leaders will be unable to stave off this crisis indefinitely, no matter how many trillions are pumped into the economy. This financial breakdown will affect us all, and we will all be called on to discover the strength, courage, and generosity to help ourselves and our communities find a way through the challenges we face.

Samantha owns a sweater, and Kathrine owns a purse. Samantha prefers Kathrine’s purse over her sweater, and Kathrine prefers Samantha’s sweater, so they trade. Now Samantha owns the [...]]]> The root of all economic activity is the creation of value. A clear understanding of economics begins with an inquiry into what economic value is, and how it is created.

Samantha owns a sweater, and Kathrine owns a purse. Samantha prefers Kathrine’s purse over her sweater, and Kathrine prefers Samantha’s sweater, so they trade. Now Samantha owns the purse, and Kathrine owns the sweater.

This simple example demonstrates value creation at the most basic level.

To put this another way, at the time of the trade Samantha values Kathrine’s purse more than her sweater. When they trade, she has received something of greater value to her, so she has created value for herself. But if you look at the other side of the trade, Kathrine values Samantha’s sweater more than her purse, so she has also created value for herself through the trade.

This is the heart of the economic process: exchange for mutual benefit. Every economic exchange creates mutual benefit – it creates value on both sides of the transaction.

This basic fact of economics has the strength of a law of nature. It is by true by definition. Value is created on  both sides of an economic exchange. If value is not created on both sides of an exchange, it is not an economic exchange in the true sense.

UPDATE July 23, 2010: Just for clarity sake I’ll add here that an economic exchange is just one subset of economic activity. There are perfectly essential economic actions in which value is not created on both sides (eg gifts).

I’m feeling that the time is right to revise this piece of work. It could be made much more relevant and direct, and much more useful. [...]]]> In January of 2006 I published (electronically) a paper titled The Organic Economy. The process of writing it had taken a couple of years, including long stretches without any writing.

I’m feeling that the time is right to revise this piece of work. It could be made much more relevant and direct, and much more useful. Times have changed since 2006, and I’ve certainly changed. I think that there is something of real value in the paper, but it needs to be presented in a more accessible way.

Instead of trying to be comprehensive or present a complete framework, I will be striving to offer something of more direct and immediate relevance to the economic challenges being faced by people, businesses and communities everywhere.

I don’t have huge amounts of time to dedicate to this work, so I have no real idea when I’ll have something ready to share, but hopefully it will be within the next few months.

Many of the people I meet do this dance [speaking at conferences] 50 or 100 or 150 times a year – they are constantly on trains, planes and automobiles, enduring the exhaustion of travel, the rush of doing something important presumably compensating for the physical price. I admire [...]]]> Excerpt from Lessons Learned by Sharon Astyk

Many of the people I meet do this dance [speaking at conferences] 50 or 100 or 150 times a year – they are constantly on trains, planes and automobiles, enduring the exhaustion of travel, the rush of doing something important presumably compensating for the physical price. I admire what they do, even though I can’t emulate it. Most of them are driven by the fact that their work matters – and it does. But they also know that most people will say “great talk, really interesting” and go home and live their lives much as they did before. And they will get on a plane and play Cassandra again tomorrow in a different city, or at home in another article, or another paper – and most people won’t listen.

So after the conference, we talk about what it is like – what it is like to imagine things most people don’t want to imagine, or look at numbers that no one else wants to hear. What it is like to try and get funding for research that shows this, or to make governments pay attention. What it is like to be dismissed or reviled. What it is like to do all you can bear, and know that it almost certainly isn’t enough to preserve what you want most to preserve.

But what I never hear – and I think I would – is that it isn’t worth doing the work – spreading the word, working for change, trying to make things better. You’d think that you would hear that – that people who express profound doubt in the efficacy of their measures – or at least whether they will be enough – would consider stopping. But they never do.