Every day we hear or read the same depressing news on the radio, television, print media and internet etc. that we are in the worst financial crisis is history. We hear about the economic downturn, job losses, layoffs, bankruptcies, mortgage foreclosures, market collapse. We live in interesting times.
It is all about jobs, jobs, jobs.
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It's the economy, stupid! |
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Now go out and shop. |
What do the experts, economists, politicians, CEOs, financial analysts, hedge fund managers and bankers really know?
We take many things for granted and yet we are so ignorant of the truth. Many children will tell you that milk and bread come from the supermarket and money comes from an ATM.
Global economics is so complicated that it makes no sense at all.
In order to understand the financial mess that we are in, we have to strip away the complexity of the economic system and go back to basics. We also have to put aside any preconceived ideas we may harbour in our heads.
What you are about to read is not opinion. These are facts and observations of how the current economic system operates and the things that are so wrong about it. This will not only shake your previous belief system but will challenge the very foundations of the current economic model.
For starters, we have to examine how the role of money has moved away from its original purpose of facilitating trade and has become not only an instrument of corruption and greed but also the ultimate means and goal for power and self gratification.
To begin, let us examine the role of bartering by looking at the interaction and interplay of the butcher, the baker and the candle-stick maker.
The three share with each other in mutual provision and without the need for currency or money. Nevertheless, money plays an important role. It allows one to trade over time and distance. Money is the lubricant of the economy, the grease that keeps the economy moving. It is the life blood of the economic system. And yet it is not sacred. We can still trade without money.
Of course, the three roles are purely metaphorical and symbolic. Their purpose here is to represent fulfillment of basic human needs for food, shelter and well-being. The butcher, baker and candle-stick maker each produce a necessary good or service which they exchange among themselves. This demonstrates the concept of division of labour as each focuses on a particular task and can therefore be more efficient and productive.
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The first observation is that money is a human creation and is not sacred. It is artificial. |
Well you may ask, "What about government and services? Who pays for teachers,
doctors, police, fire protection and infrastructure?" So let us add these
into the picture under Government and Services.
Now we draw a big circle around all of these to indicate that this is a closed system. What do we mean by this?
In a closed economic system, money is neither gained nor lost. It is a zero-sum game. If you think deeply about it, advertising, giving to charity and taxation, as examples, are all part of this zero-sum game. There is no such thing as a free lunch. This is a rather profound observation.
As in a lottery, wealth is not created but simply redistributed. Money is moved from one person to another.
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The second observation is that the economy is a zero-sum game. There is no such thing as a free lunch. Eventually someone pays. |
So where does money come from? Well we guess it comes from the bank. So let us add the banker into the picture. What we don't realize is that money is created by banks out of thin air. Money represents debt and is created simply by adding a few extra numbers to your bank account. In the end, the loan has to be repaid and the numbers are reset back to zero. Lending money is simply an accounting exercise. Overall, this is still a closed system and a zero-sum game.
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The third observation is that money is created out of nothing as debt. |
This model so far does not show the complete picture of the current economic system. To complete the picture we need to add three more elements. Then the outcome changes drastically.
Firstly, we add the Earth. Two hundred years ago our concept of the Earth in this model on the scale with the economy would have been a huge globe which would not fit on the page. In other words, the world was so large and vast, it was inconceivable that we would ever run out of land, air, water and natural resources or that humans were at all capable of altering the atmospheric environment that we depend on. But now things have changed. We have run into the physical limits of the Earth. Not only are we consuming the Earth's resources at alarming rates but we are dumping wastes faster than the environment can reabsorb. We are consuming our natural capital. The natural non-renewable resources we leave behind for future generations are rapidly diminishing.
The second element to include is interest earned on loans. Remember, money is created by handing out loans. Banks, with the continuing practice of having zero reserve requirements, may lend out as much money as they want. Eventually, one would hope that the loans are repaid at which time the accounts are reset to zero. But there is a catch. Where does the money to pay the interest come from? Additional loans must be created to pay the interest which is compounding at an exponential rate. The only way this scheme of loan creation and compound interest payments can be maintained is to have a continuously growing economy. This is a pyramid scheme. We have to create more and more debt in order to keep financing interest payments.
Total world debt as of 2009 amounts to $100 trillion dollars and growing. Who can even imagine that amount of money? It is $100,000,000,000,000 which will never be repaid. Meanwhile, private financial banks and institutions become the beneficiaries of the global monetary expansion.
The third element to include in our picture is monetary savings or financial wealth. When we put aside money for the future we are banking on the expectation that we will be able to redeem our hard earned cash for goods and services. But will this come to fruition? Wealth means surplus. For our wealth or savings to retain it's value we must balance this by creating surplus into the system. Surplus is not created when we produce and sell non-durable consumer goods.
So here is the rather simplistic but complete global economic model.
So what is wrong with this economic system?
Firstly, it has become an open system that relies on continuous growth and a continuous depletion of the Earth's natural capital. Secondly, in order to meet the demands of compounding interest, more debt must be created continuously. In order for this to happen the economy must keep on growing. All of these are clearly not sustainable.
In order to become a sustainable economy and a sustainable society, we need to immediately take the following actions.
Governments, politicians and corporate leaders are urging us to be competitive in the global market. They fail to recognize that global economics is a zero-sum game. The economy, ecology and social equity and justice are all intertwined. There is no free lunch. Society pays in the long run.
Corporations and businesses are obsessed with market share and the bottom line. Corporations need to curb their appetite for obscene profits and need to demonstrate more corporate social responsibility. We all need to recognise the difference between making a decent living and making a decent profit.
We have created global systems that are brittle and unable to withstand shocks. Our just-in-time delivery system, long food supply chain, energy, transportation and finances all are vulnerable to any downturn in the economy or any catastrophic disaster.
So in conclusion we ask, "What can we do about this situation?"
Look at yourself, your job, your spending habits and your lifestyle and ask yourself the following questions and see if you can honestly answer "yes" to as many of them as possible.
If you can answer "yes" to all of the above then you are truely a champion of sustainability. Now you need to go and spread this message.
Where do we go from here? What can each one of us do?
We need to realize that we vote daily with our wallets by both the things we buy as well as the things we do not buy. By boycotting businesses and corporations that continue to persue destructive and unjust practices we send out a clear message which will bring an end to these practices.
We need to simplify life by adopting and embracing simple ways of doing things. We need to reduce, simplify and localize our daily lives and activities. We need to focus on fulfilling our needs and not our wants by curtailing our desires for material things. We need to take only our fair share and recognize when enough is enough.
We need to build resilience in our local communities by strengthening our neighbourhood networks. We can prepare to help each other in a time of crisis by getting to know our neighbour and fellow citizen, for we are all interconnected with each other and with the Earth that is our only home.
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