Monday, May 18, 2015

This Thing Called Economic Growth

My wife and I, approaching the age of retirement, are thinking about the process of downsizing. When the children move out of the house, perhaps even before all of them do, we want to reduce our overhead, both in terms of money and in terms of time spent taking care of a house.

Our house isn't big. The average new house in the US is nearly 2,600 square feet. Ours is legally about 1275 square feet, though if you count the walk-out basement there's almost 2000 feet that can be considered livable space.

That's too much for us. We don't want to take care of that much, we don't need that much, and we can't afford to heat and pay taxes on that much. But we don't look at this as a step down. In fact, we consider it a step forward, from a life where too much time is spent caring and paying for a house, to, we hope, a life where much more time is spent creating, traveling, and just being together.

What if everyone did this? What if everyone scaled back, just had less, and spent less. Would the whole economy just collapse? Well, if you believe the economists, yes. The economy, they say, must grow to be healthy. But what, exactly, is economic growth and why is it so important?

The more I think about this question, the more I get the feeling that economic growth is an illusion, and that it is not, in fact, so important. At least, not in terms of what a real economy is: the trading of goods and services among people. The problem comes when you bring money into the equation.

Now, don't get me wrong. I'm not part of the Zeitgeist Movement or the Venus Project, proposing that we do away with money altogether. Money is a great means for facilitating all that trade, and it makes it far easier to create and distribute things like the Chromebox computer I'm writing this on now, which hooks up to my flatscreen TV. Both of them together costs less than $400, which is amazing, and a testament to our technological society.

The problem isn't the existence of money. The problem is the way we create money, pretty much everywhere in the world. We create it as debt.

Now, the mechanism of how we create money as debt is too big a discussion for this one little blog entry, and others have explained it far better than I can. But let's think about the consequences of creating money as debt.

Let's say that the total amount of money in a fictional economy is $1,000,000.00. The Central Bank doesn't just print this money and spend it, it uses it to buy government bonds, and those bonds pay interest.

Now we have a National Debt of $1,000,000. The money circulates through the economy so that we can trade goods and services with each other efficiently. So far, so good.

But the money has to be paid back. With interest. That creates two problems. First, paying back the debt takes money out of the economy and makes less money available for trade. And second, there is not enough money in the system to pay the interest. In fact, the only way to pay the interest is for the Central Bank to create more money. But the only way for the Central Bank to create more money is to create more debt.

You can see where I'm going with this. If more debt is needed to pay down debt, the amount of money in the system needs to increase just to pay the interest, not because of an increase in actual economic activity. And that's why there has to be all this growth. It's to sustain the debt money system.

Now, a growing economy is not, in itself, a bad thing. But neither is a shrinking economy. The question is: why is the economy growing or shrinking? If the economy is growing because there are more people needing, doing, and wanting more things, that's fine. If the economy is shrinking because people need, do, and want less, that's okay too. Except for that whole debt thing. That's the wrench in the machinery.

Is there an answer? I think so, and I don't have to be an economist to see the sense in it. The answer is to stop creating money as debt. Not eliminating debt altogether, but making it work the way we all think it works, where the money that banks loan comes out of the pool of existing money, and the interest is also paid out of that pool.

How do we do that? Sovereign money. We often accuse the US Treasury of printing money, but that's only true in the most literal sense of the word. In the US, the only money that's issued debt-free is physical coinage. Even our paper money is issued as debt. Look at a dollar bill. It's a Federal Reserve Note. "Note" means that it is a debt. And it's not a debt owed to the US Government; the Federal Reserve System is privately held.

The folks over at Positive Money UK have some great videos on their YouTube channel. Even though some of the specific refer to the UK, the fact is that it's pretty close to the same situation here in the US, in some ways worse. Have a look. And if it makes as much sense to you as it does to me, drop a letter to your legislators, and perhaps your favorite presidential candidate, to ask them why, after 100 years of the Federal Reserve System, we still borrow nearly all the nation's money into existence.