Agenda for a New Economy Read online

  Here is a simple description of how the money-creation process works.

  ALCHEMISTS IN EYESHADES

  Most people think of accounting as a rather boring subject, but pay attention here, because nearly every dollar in circulation has been created by a private bank with a deceptively simple accounting sleight of hand. Understand how it works and you understand why our current system of debt money created by private banks for private gain makes it possible for a few people to acquire obscene amounts of unearned money while sticking the rest of us with the bill.

  My college economics professors taught us that banks are financial intermediaries between savers and borrowers: A saver makes a deposit and the bank lends that money to a borrower to finance a business or home. But that isn’t the way it really works.

  Unless you are holding a long-term certificate of deposit, you have immediate access to the money you deposit in your bank. If you borrow money from the bank, you also have immediate access to the funds in the account that the bank created in your name when it made the loan. When a loan is issued, the bank’s accountant enters two numbers in the bank’s accounting records: She records the borrower’s promise to repay the loan as an asset, and the money the bank puts into the borrower’s account as a liability.

  At first glance, it looks like these entries cancel each other out, which in a sense is true. The key is that neither entry existed previously. With the accountant’s entries, the bank created new money from nothing in the amount of the loan principal and caused the amount of money in the economy as a whole to increase. At the same time, the borrower acquired a legal obligation to repay the principal with interest.

  This, in fact, is how all money (except for coins and some special notes) is created. It should be noted that the bank-created money is purely electronic. There isn’t even a paper record.

  Needless to say, granting banks the right to create money with a computer keystroke and then lend it out at interest makes banking very profitable, and Wall Street, which owns the banks, enormously powerful. Unless this power is limited and used with great care, it leads to financial instability and inequality, creates an economic growth imperative, and distorts economic priorities, all costs to society I explain in chapter 7, “The High Cost of Phantom Wealth.” The consequences can become truly devastating when banks discover the profit potential in putting this money-creation power at the service of financial speculators and predators engaged in the creation of phantom wealth and ignore the underlying assumptions of the debt/credit money system we have left it to them to manage.

  FROM GOOD DEBT TO BAD DEBT

  The debt-based money system that is the foundation of Wall Street’s control of the economy and society is based on an underlying logic. So long as its practice is true to that logic, the debt model of money creation can be a driving engine of real-wealth production — up to the point at which the economy encounters the limits of the planet.

  Driven by greed and blinded by hubris, Wall Street forgot the logic and created a debt bomb that guaranteed economic and financial collapse.

  The Logic of Productive Saving and Investment

  The logic of the debt-based money system assumes that the financial system receives the savings of working people and in turn lends those savings to entrepreneurs and enterprises to finance capital investment projects that expand society’s pool of real wealth.

  This logic assumes that savers are deferring immediate consumption so that the economic resources that otherwise would be directed to their consumption are instead devoted to creating new capital assets that support greater future production. It further assumes that the benefits of this new real wealth are shared equitably among those who contributed to its creation: The savers who defer their consumption receive a fair share as interest. The entrepreneurs who convert the savings into productive capacity receive a fair share as profit. The workers who provide the labor receive a fair share as wages, and the governments that provide the supporting infrastructure receive a fair share as taxes.

  The operation of the financial system was more or less consistent with this logic from the 1940s through much of the 1970s. Then the orgy of deregulation described in chapter 5 allowed it to morph from a servant system into a predator system devoted to making money without the bother of financing productive enterprise.

  The Illogic of Negative Saving and Consumer Debt

  In October 2008, BusinessWeek called attention to what it called a gigantic credit bubble, “consumption that was not justified by income growth,” and estimated that for U.S. consumers the total gap between income and consumption over the previous ten years totaled some $3 trillion dollars.5 That gap was one of the many conditions for financial disaster resulting from the creation of phantom-wealth illusions but, of course, it was and continues to be highly profitable for Wall Street.

  Anytime debt exceeds the capacity to repay it, there is a problem for someone. When the total debt of a society is greater than the total market value of all its real resources, it means that the expectations of the holders of the debt — for example people whose retirement savings are invested in supposedly safe derivatives based on toxic assets — cannot be fulfilled. The society faces the difficult task of determining whose claims and expectations will be fulfilled and whose will not.

  In the current instance, there is a deeper issue. Business-Week was talking about consumer debt. The logic of the money system assumes that debt is a means by which savings are translated into investment in expanding productive output. In our current case, the money lent comes from an accounting entry, not from savings, and it is used to fund consumption, not production. The debt and the expectations of those who hold it grow exponentially, but actual production does not. This creates an ever-greater disconnect between expectations and the real wealth available to satisfy them.

  It is the same situation when the government spends beyond its income to finance nonproductive consumption items such as an outsized military establishment and Wall Street bailouts. Deficit spending by government may be justified for investments in various forms of real productive capital, such as infrastructure, education, health, research, and environmental rejuvenation. These build the society’s productive capacity and thereby contribute to the creation of corresponding real wealth. By contrast, wars deplete real wealth, and Wall Street bailouts, in the absence of corrective structural reforms, simply revive the predatory phantom-wealth machine.

  Although this may sound a bit complicated, the basics are simple. Borrowing for investment in productive capacity is a generally beneficial path. Borrowing for current consumption is bad because it creates no new value and creates debts that can only be rolled over into ever-greater debt that the borrower has no way to repay.

  We are in trouble as a nation not because our expenditures exceed our income but because the excess expenditure is for consumption rather than for investments that support increased future output. Furthermore, we make up the difference between our consumption and our production with imported goods purchased on credit extended by the producing countries. The more we allow cheap products from abroad to crowd out domestic jobs and businesses, the more dependent we become on imports, the faster our foreign debt grows, and the faster our capacity to repay the debt declines.

  These systemic imbalances create ever-growing instability on a path to ultimate collapse. It is also a path to a condition of permanent servitude called debt slavery, which I put in historical context in chapter 14.

  The Language of Self-Deception

  One of the main reasons we tend not to see such irrational and destructive dynamics is that the deceptions are built right into our language. We refer to speculation as “investment” and to phantom wealth as “capital.” The practice of equating money with financial capital comes from a time when savings, representing deferred consumption, were used to invest in new productive capacity. In the global casino economy, that idea of savings seems a bit quaint, yet we continue to use the old linguistic conv
entions.

  This obfuscation of the language is an important contributor to the mistaken perception that as a global society we are getting richer, when in fact we are getting poorer in ways that put the future of our species at risk.

  Wall Street, as economic system or syndicate, is extremely good at what it is designed and managed to do: make a few people fabulously wealthy without the exertion and distraction of producing anything of real value. From the perspective of the beneficiaries, money is money, and those who have lots of it can indulge themselves in luxuries beyond the imagination of the kings and emperors of previous times.

  The major failing of the existing financial system from the perspective of its Wall Street beneficiaries is the tendency for asset bubbles to collapse and wipe out large portions of their asset statements, even forcing them to sell off estates, yachts, and private jets at fire-sale prices.

  In the bigger picture, even when the bubbles are expanding, Wall Street’s gain is a net loss for the rest of the society because Wall Street’s growing claims on the real wealth of society dilute the claims of others. The social costs of growing inequality and the environmental costs of the related profligate consumption fall on those who don’t have the money to live in splendid isolation from the resulting social and environmental breakdown.

  The idea that economic growth will bring up the bottom and finance environmental restoration has no substance. The so-called rising tide lifts only the yachts and swamps the desperate, naked swimmers struggling for survival, and no amount of money can heal the environment in the face of unrestrained growth in material consumption.

  For the winners, it works out fine in the short term that growth in Wall Street financial assets plays out for the rest of society as growing inequality. A wealthy class needs a servant class, and what remains of the world’s real wealth need only be shared among the very rich.

  Fortunately for the rest of us, there is an alternative to Wall Street phantom-wealth capitalism: a real-market economy.

  CHAPTER 3

  A REAL-MARKET ALTERNATIVE

  Communism forgets that life is individual. Capitalism forgets that life is social, and the kingdom of brotherhood is found neither in the thesis of communism nor the antithesis of capitalism but in a higher synthesis…that combines the truths of both.

  MARTIN LUTHER KING JR.

  AMERICANS HAVE long been told that the only alternative to the rapacious excess of capitalism is the debilitating repression of communism. This sets up a false and dangerously self-limiting choice between two extremes, both of which failed because they created a concentration of unaccountable power that stifled liberty and creativity for all but the few at the top.

  The alternative to both of these discredited experiments in centralized power is an economic system that roots power in people and communities of place and unleashes our innate human capacity for cooperation and creativity. We have a historic opportunity to bring such an economy into being. The key is the often-mentioned distinction between our existing Wall Street and Main Street economies.

  WALL STREET VERSUS MAIN STREET

  Wall Street and Main Street are names given to two economies with strikingly different priorities, values, and institutions. They are distinct but interconnected, and they are often in competition.

  Wall Street

  Wall Street refers to the institutions of big finance and the captive corporations that serve them. They may be located anywhere, not just on the famous street in New York City that has become a global symbol of capitalist excess.

  Wall Street is a world of pure finance in the business of using money to make money by whatever means for people who have money. Any involvement in the production of real goods and services is purely an incidental byproduct. Maximizing financial return is the game. To that end, Wall Street institutions have perfected the arts of financial speculation, corporate-asset stripping, predatory lending, risk shifting, leveraging, and debt-pyramid creation. Successful players are rewarded with celebrity, extravagant perks, and vast financial fortunes.

  Wall Street players justify their actions with the claim that they are creating wealth for the benefit of society, a convenient bit of self-delusion. We noted in the previous chapter, however, that money isn’t wealth. It is only an accounting chit, a number of value only because by social convention we are willing to accept it in return for things of real value.

  Main Street

  Main Street is the world of local businesses and working people engaged in producing real goods and services to provide a livelihood for themselves, their families, and their communities. Main Street is more varied in its priorities, values, and institutions. Like the diverse species of a healthy ecosystem, its enterprises take many forms, from sole proprietorships and family businesses to cooperatives and locally owned and locally rooted privately held corporations. Achieving a positive financial return is an essential condition of staying in business, but most Main Street businesses function within a framework of community values and interests that moderate the drive for profit.

  I grew up in a small town in which my family had a successful retail music and appliance business. My dad took great pride in standing behind and servicing everything he sold. I recall the not infrequent experience of his answering the phone during dinner and asking Mother to keep his dinner warm as he got up to open the store for a customer with an urgent need. One, I remember, was from a local musician who had broken his guitar pick and needed a replacement for a job he was playing that night. At that time, a pick was probably no more than a 10-cent item.

  I understood that business was a service to the community and that that was what businesspeople provided. Many Main Street business owners continue to this day to embrace a similar commitment to community service, including the twenty-one thousand members of the Business Alliance for Local Living Economies already engaged in building the New Economy. This commitment is an essential part of what distinguishes Main Street from Wall Street.

  CORPORATIONS

  So, what of corporations? Many of them produce beneficial goods and services that we need in our daily lives. Where do they fit between Wall Street and Main Street? The answer is, “It depends.”

  The legal form of the modern publicly traded limited liability corporation was invented a bit more than four hundred years ago when the king of England issued a charter to the East India Company. He thereby granted a group of investors, including himself, an exclusive Crown-protected license to colonize the lands of Asia and expropriate their resources through trade and military force.

  The corporate charter suits this purpose well: It creates the legal capacity to amass under unified management the power of virtually unlimited financial capital; moreover, the shareholders who benefit are exempted from liability for the consequences of management’s actions beyond the amount of their investment. It is an open invitation to abuse to which even saints are prone to succumb.

  That said, there are incorporated businesses with identifiable responsible owners who live in the communities in which their businesses are located and who operate their corporations as responsible members of their community. These corporations are properly considered part of the Main Street economy.

  Once a corporation sells its shares publicly through Wall Street exchanges or to Wall Street private equity investors, however, it becomes an agent of Wall Street. Whatever values it may have had before are, in all probability, subordinated to Wall Street interests and values. The production of goods and services becomes incidental to the primary business purpose of making money. As a onetime executive of the Odwalla corporation told me, “So long as we were privately owned by the founders, we were in the business of producing and marketing healthful fruit juice products. Once we went public, everything changed. From that event forward, we were in the business of making money.”

  Notwithstanding the title of my first book on the global economy, When Corporations Rule the World, the real economic power in this country resides with Wa
ll Street institutions that buy and sell major corporations as if they were mere commodities. Any chief executive officer of a Wall Street–traded corporation that puts social or environmental considerations ahead of financial return will soon find himself cast out through a revolt of institutional shareholders or a hostile takeover.

  * * *

  FREEDOM TO COMMIT FRAUD

  The term free market is a code word for an unregulated market that allows the rich to consume and monopolize resources for personal gain free from accountability for the broader social and environmental consequences. A free market rewards financial rogues and speculators who profit from governmental, social, and environmental subsidies, speculation, the abuse of monopoly power, and financial fraud, creating an open and often irresistible invitation to externalize costs and increase inequality.

  Markets work best within the framework of a caring community. The stronger the relations of mutual trust and caring, the more the market becomes self-policing. The need for formal governmental oversight and intervention is minimal. An economy of powerful corporations governed by a culture of greed and a belief that it is their legal duty to maximize returns to shareholders is a quite different matter, and it is difficult for even the strongest of governments to control.

  * * *

  Visit a contemporary corporate headquarters and you see people, buildings, furnishings, and office equipment. By all appearances, the people are running things. An organizational chart will show clear lines of authority leading to a CEO who in turn reports to a board of directors. It is easy to think of a corporation as a community of people. That is, however, a misleading characterization, because the people are all employees of the corporation and paid to serve its financial interests. If the corporation is Wall Street owned, they are bound to serve Wall Street interests, and their employment is solely at Wall Street’s pleasure.