The Steady-State Economy vs. "Growth"

[ApatheticNoMore]

The problem is that our economy has, since 1913, been set up to require growth because all the money in it is loaned into existence as interest bearing debt by the federal reserve. Without growth the holders of the debt have to default. A change to a steady state economy would require that the banks, who profit so extensively from the current system, be willing to allow a new system to be put in place. That isn't going to happen until the point when the current system collapses under its own weight.

I've never understood this argument really. I think what the system may require is ever more debt or continual money creation (the same thing right?). I guess which may be linked to growth as without growth this may be inflationary? And which may be linked to growth because it creates a sink or swim environment where some are bound to default?

Suppose a bank lends $100 out to the total economy (ok we're using ridiculous numbers for simplification purposes) and demands $10 in interest. Without overall economic growth there is no way to pay the $10 in interest back let's say. But WITH economic growth there's still no real way to pay it back seems to me. So with economic growth you have more widgets, the economy has far more houses or cars or something let's say. But there's still no more money. Only more money creation creates the $10 to pay back the loan.

Ok now don't all jump on me for oversimplifying economics (as it's way more complex than me ), I'm just saying I often interpret the argument that interest creates the need for growth as that growth itself will somehow create that which is needed to pay back the interest and I don't see how it possibly can. However I can see how a system in which there is not enough money to pay back the interest in total leads to dog eat dog competition among businesses to not be the ones left unable to pay their debt (because someone is bound to lose - zero sum) and this can create a need to "grow or die". However I am not really sure how this differs from the pressure from stockholders to "grow or die" as mentioned.

Btw: I have this book to recommend on alternative money systems. Money by Thomas H Greco Jr. (it has a forward by Vicki Robin). I especially like the description of mutual credit systems. It's the decentralized (and in many ways clearly libertarian) version (others call for public banking) However I do not think we should wait for alternative money systems to address environmental problems because addressing them is WAY too important for that, maybe at best something to be done in parallel.

[jp1]

With the current system it's certainly possible for some to succeed by borrowing money to invest in a business and create value and get ahead. But because all money currently in circulation has been loaned into existence it's impossible economy wide for everyone To be able to pay off their debts since there will always be not enough money to pay all the interest system wide. The result is either that a certain percentage of debt will be defaulted or there has to be a constant devaluation of the money so that the debts can be repaid with devalued money. This is why the fed chair(wo)man always talks of the 'evil' of deflation and the necessity to have inflation.

In a gold standard (or any other standard where money can be created by anyone through work (in a gold standard that work is mining) new money is not created as debt. Once created it does not also create a debt for someone, therefor a stable economy can be created.

If I open a central bank in a society without money and then loan $100 out at 5% interest to people to open businesses then at the end of the year $105 is owed back to me. No matter how successful each of those businesses is there will not be enough money for everyone to pay back the bank. There will still only be $100 in circulation. Some businesses will be successful and pay off their debt. Others won't because there is only $100 in existence. There are two options. Either $5 interest can be taken from the $100 to pay the interest, leaving only $95 in circulation. Eventually this will result in all the money paid back to the central bank as interest and no money in circulation. The alternative is for the central bank to loan out an extra $5. Now there's $105 in existence and the current interest can be paid. But now there's $105 total loaned out by the bank so the interest the following year will be slightly more than $5. But after the first year's interest has been paid there's still only $100 actually circulating. This can go on year after year but the amount circulating will remain $100 while the interst due will continue to grow each year. At some point the productive members of society, as a whole, will have to borrow more money then they can possibly pay in interest. That's the point when the fiat money system has to fail.

[catherine]

However I do not think we should wait for alternative money systems to address environmental problems because addressing them is WAY too important for that, maybe at best something to be done in parallel.

Here is Brian Czeck's response to that in the Huffington Post

[jp1]

Apathetic more, you've hit on exactly the problem. The current system requires both the dog eat dog competition and the ever increasing supply of money. Eventually it has to fail because the overall amount of debt has to keep growing forever to prevent collapse. The only way for society as a whole to get out from under this system would be for us as a whole to make that decision to go!with a new system. We all need at least some money because it's not possible to own land without money to pay the property taxes. Only homeless people can ever truly escape it as long as it exists. But since 40% of total wealth is owned by 1% of the population and since the Supreme Court just determined that unlimited sums can be spent on political speech it's likely that the 1% will use their vast vast wealth gained under the current system to defend the current system to the bitter end. The politicians, the only people who can end it, have made it very clear that they work for the bankers who have bought and paid for them.

[catherine]

Two points:

#1: The big idea in Czeck's piece--and, OP, you need to step in here because I'm a newborn to his ideas--is the idea that there would be steady growth in aggregate. Not sure how that works in practical terms, but it's just a way to stabilize the volatility of the market as a whole. I am going to buy Supply Shock to find out more about this, but that's what I've gleaned in an hour's worth of research on the web.

#2: To address the massive incentive to hoard cash and build wealth thereby creating huge disparities between rich and not-rich, disincentives to save, such as negative interest (which is NOT the OPs POV, but mine based on Charles Eisenstein and other proponents of demurrage) would go a long way to evening out the playing field. If money is like food--perishable--how would we behave differently? Yes, we would spend, which might mean consumption, but it also might mean spreading the wealth around.

ANM, I'm going to look into that book you mentioned also.

[jp1]

The problem is that money already is perishable and we have negative interest rates. Anyone who actually purchases stuff and who saves money is well aware that current interest rates are less than inflation.

A better plan, in my opinion, would be interest rates that actually encouraged average people to save. Wealth inequality was much lower a few decades ago and interest rates were much higher.

[ApatheticNoMore]

Greco makes a pretty compelling case for ZERO real interest rates (some fees could be attached to borrowing but this would not be simply another name for interest). I don't think we need demurrage (and yes we may already have it anyway to some degree, since it's not that easy to keep up with inflation). Greco also likes to draw a distinction between money where someone's money is actually lent and money that is simply created out of thin air (most bank money lending - really most interest is from money created out of thin air), although I don't know that he believes in interest for either.

Why do people save and try to get more money from their money anyway? Why are billionaires trying to get richer? I don't know, I suspect that is all about power since at that level money is no longer merely money (as you already have as much as you'll ever need or even want) and is POWER as such. But ordinary people might save for when they are unable to work etc.. So if you don't want them to save then? Then there has to be some other way of providing for them then (or else the ice floe?), they can do this by breeding (but is this environmentally wise?) or by society providing in some sense, by a social safety net like social security (only truth is all government projections are ALSO assuming growth) or some other way.

Here is Brian Czeck's response to that in the Huffington Post

I'm really not sure why addressing growth is better than addressing climate change. Because it's more fundamental? Ok. But when the U.S. regularly sabotages global climate agreements how is it actually any more viable as a strategy? That's why I say, keep the focus on all the real environmental problems (climate change, ocean acidification, collapse in ocean life, etc.)

[jp1]

If average people could actually save and be reasonably confident that their hard-earned money wasn't losing value maybe they'd be inclined to not always be spending and consuming.

The reason i save money is so that I can take care of myself when I am old and no longer able to work. If we are going to intentionally devalue it even worse than we currently do then maybe I shouldn't bother.

[catherine]

If average people could actually save and be reasonably confident that their hard-earned money wasn't losing value maybe they'd be inclined to not always be spending and consuming.

The reason i save money is so that I can take care of myself when I am old and no longer able to work. If we are going to intentionally devalue it even worse than we currently do then maybe I shouldn't bother.

In an ideal world, the community would care for you. I know that people think of that and say "horrors!" but there are countries that operate that way. (BTW, I also think "horrors"--my DS has told me he will be happy to take care of me in my old age and my response is, "don't you know you're talking to a very independent, self-reliant woman, you little whippersnapper! I can take care of myself, thank you!" But that doesn't mean I'm right.)

[ApatheticNoMore]

If average people could actually save and be reasonably confident that their hard-earned money wasn't losing value maybe they'd be inclined to not always be spending and consuming.

a zero *REAL* interest rate is enough for that. But still should the banks be able to get any interest at all (real or not) from creating money out of thin air?

In an ideal world, the community would care for you. I know that people think of that and say "horrors!" but there are countries that operate that way.

countries? I mean maybe there are tribal groups that operate this way. Countries may have a social safety net, but some social safety nets are based on economic growth assumptions (maybe the better ones aren't, but the U.S. does tend to do that - certainly all pensions are but they tend to make such assumptions even for social security whether or not they really have to).