Finding the Upside
At the tail end of my last money-ish post, I quoted L. Frank Baum's opening to his topical money allegory The Wonderful Wizard of Oz:
Dorothy lived in the midst of the great Kansas prairies, with Uncle Henry, who was a farmer, and Aunt Em, who was the farmer's wife. Their house was small, for the lumber to build it had to be carried by wagon many miles.
This was, of course, printed first in 1900. People carried most things by wagon, especially in rural farm lands, simply because the gadgets we take for granted, the automobile in all its cargo and people hauling variants, were not common. Worse, the vast vehicle support apparatus such as rural roads in 1900 would not support any but the most rudimentary (ie. slow) transport. Wagons pulled by beasts and men were the norm.
How times have changed.
Today, I happened to catch John Michael Greer's Archdruid Report entry titled The Upside of Default, where he coins a new word, just for fun, and pokes a bit more fun at this "investmentariat":
The investmentariat has been told for decades that their money ought to make them money, but nobody told them that this only works in an economy that experiences sustained real growth over the long term, and nobody would dream of mentioning in their hearing that we don’t have an economy like that any more.
All the investmentariat knows for sure is that the kind of safe investment that used to bring in five per cent a year is now yielding a small fraction of one per cent, and the risks you need to take to get five per cent a year are those once associated with the the kind of "securities" that make a mockery of that title.
He goes on to calculate very, very roughly that our Western economies have morphed into something of an impossibility.
In 2010, the latest year for which I could find figures, the total value of bonds issued by nonfinancial businesses was $1.3 trillion, and the total net issuance of stock by all companies was $387 billion. . . . Total stock and bond issuance in 2010 to support the production of real goods and services was thus something less than $1.7 trillion; let’s double that figure, just to leave adequate room for other ways of raising capital that might otherwise slip through the cracks, for a very rough order-of-magnitude figure around $3.4 trillion.
In 2010, the total stock of debt and equity potentially available for trading in financial markets was $212 trillion, and the total notional value of derivatives that same year was estimated at $707 trillion. . . . We can . . . estimate the total paper value of the world’s financial wealth at $1 quadrillion, of which the fraction directed into the productive economy in one year amounts to around a third of one per cent.
(I made with the bold.)
Thus our industrial output of actual goods and real services has fallen just as our financing of "stuff" has ballooned to a ratio of three bucks of financial paper to a penny of product and service. With me so far? Now, here's where Greer quite rightly drops the bomb:
Money is not wealth; it’s a system of abstract, culturally contrived tokens that we use to manage the distribution of real goods and services. A money system can simplify the process of putting energy, raw materials, labor, and other goods and services to work in productive ways; that’s the reason we have money, or rather the reason most of us are prepared to discuss in public. That’s not what the other 99% of the world’s financial assets are doing, though. They are there to ensure that the people who own them have disproportionate, unearned access to real, nonfinancial goods and services.
I've very specifically denoted the process that creates these "abstract, culturally contrived tokens" in several past posts. In a nutshell, a commercial bank issues a loan, creating the money in the process in return either for collateral or based simply on an educated bet that the borrower will be likely to pay according to the loan's terms (credit card debt falls into this latter category). These loans should adhere to a very specific set of characteristics. As Winthrop W. Aldrich noted, commercial loans should be short-term, "self-liquidating commercial transactions, largely in the movement of goods and crops through the various stages of production and distribution; and in the making of short-term loans against good collateral." To engage in other types of money-creating lending is to risk financial instability in both the issuing institution and, should the shaky practices become rampant, the economy in general.
Let's get more specific as to what constitutes a good loan. It could be equipment for industry; a tractor for a farmer greatly simplifies and speeds every aspect of farming, making it more profitable by far than beasts and hand wagons as Dorothy saw in Kansas. A car or truck likewise proves a far better means of conveyance than beasts or feet alone. Power equipment of all sorts, the same. I should take pictures of the gas and diesel beasts my grandpa parked for the last time in the back pasture; he used them all until they would run no more, then kept them for spare parts until rust took the rest.
A century of ever newer and better power equipment replaced the labor of beasts both two and four legged; each wave of improvement brought greater economic growth. Our economies expanded almost continuously through the 18th and 20th centuries (with occasional monetary contraction hitches brought by financial shenanigans or armed bellicosity). And on average the lives of the average improved by leaps and bounds in this last 300 years.
Back to the Archdruid. He notes that "Periods of sustained economic expansion are rare in human history, since most societies live close to the edge of the limits to growth in their bioregions. . . ." The exceptions? The most notable was "the late Roman Republic and early Empire," which usually expanded through invasion and conquest. We today can compare ourselves to the Roman example:
During the three centuries of their power, the world’s industrial nations looted their nonindustrial neighbors with as much enthusiasm as the ancient Romans looted theirs, but they had another source of plunder-half a billion years of fossil sunlight, stored up in the form of coal, oil, and natural gas. In effect, we stripped prehistory to the bare walls so that we could enjoy an age of gargantuan excess unlike any other.
(Relevant to the Archdruid and myself is a simple fact that makes all other facts pale in comparison, that the supply of the most popular liquid variety of "fossil sunlight" stopped expanding in May of 2005. Back to the Archdruid:)
One consequence was that our moneylending industry was able to metastasize to a scale no previous gang of usurers has ever been able to attain. The basic arithmetic remains unchanged, though: usury is only viable in an expanding economy, and as the global economy enters its post-peak oil decline, the entire structure of money that makes money is going to come apart at the seams.
As almost an aside, I'll note that Greer's AR title here is a play on words. "The Upside of Default" is an homage to Thomas Homer-Dixon's groundbreaking book, The Upside of Down. In this book, Homer-Dixon analyzes human societies and compares them to biological systems, adapting the forest ecology research of Canadian ecologist, Buzz Holling. One of my favorite passages from the book (since we're mentioning the Romans) was the author's picture of a single keystone in just one minor arch of the Coliseum. He calculated about how much acreage of silage for beasts and grains for people it would have taken to quarry the raw stone, transport it the 75 miles from the quarry to the Coliseum construction site, shape the stone and place it within the arch. I can't remember the exact figure, but it was in the hundreds of acres, again, for one minor stone. Sobering.
I link to and go into an excellent podcast interview with Homer-Dixon here, if you'd like to read through a transcript I made of it; the short version of his and Hollings' theory follows.
Forests and societies go through phases. First come weeds that focus on growing fast and reproducing quickly. When the soil is prepped by the weeds and lichens, next come shrubs, then deciduous trees, then conifers. The biomass of the forest increases with each phase, which in turn increases the interconnectedness of the various root, fungal and fauna networks producing and delivering nutrients. Over time, the redundancy of the early weed phase is reduced, a process that allows the forest as a whole to direct more of its limited energy to growth. This process is summed by Homer-Dixon by a three-axis cube comprised of Potential, Connectedness and Resilience.
The last, Resilience, proves the fly in the ointment. As Potential and Connectedness increase, Resilience decreases; mature forests are more brittle, each potential threat becoming more dire. When a forest gets most of a single nutrient (fixed nitrogen, for example) from just a few species of plant, a threat to any one of these plants represents a crisis point for the forest. From the interview transcript:
Now here's critical point, and this is really very powerful, and it comes out of this research: These researchers are suggesting that every highly adaptive system has to have a breakdown phase -- what they call the Omega Phase -- in its cycle. That breakdown, that loss of resilience . . . , crisis, reorganization of the components of the system, are essential to adaptation.
We are going through an omega phase today, folks, as financial system fails to increase actual productive economic activity that it depends upon for its continued survival, and simply because the fuel that drives this productive activity can no longer be increased. The result: loans cannot be repaid. Entire countries are either in default, have defaulted, or are going to default. Remember the earlier words of the Archdruid; usury (charging interest on lent monies) "only works in an economy that experiences sustained real growth over the long term."
Ah, but Homer-Dixon notes that people don't like change. Again, from the interview:
We ask our leaders, whether they're our business leaders, corporate leaders, political leaders, basically to keep things the way they are, on the current trajectory. And the current trajectory has been growth and increasing connectivity and complexity. We want them to keep us on that trajectory. The implication, if Holling and these other theorists are correct, is that all that's going to do is make the eventual crisis that much worse, the breakdown that much worse.
So, is there a conclusion to all this theorizing? But of course. Our expanding economic system is done expanding. By necessity, it must contract. The problem, of course, is that adapting to any contracting economy is going to take some hard getting used to. Here's a real kick in the short curlies: What does one call an economy that creates an expanding supply of wealth tokens representing the actual productive goods and services collateralized by the token creation process? Why, that would be called a capitalist economy.
On the plus side, the faster we realize this and move on to whatever form of economic transaction that proves more relevant in a post-abundance world, the faster we can move on to the next phase of our human existence. And that next phase could very well prove far more exciting, far more innovative, far more long-lasting than the one we find ending around us one austerity protest at a time.
It's only a matter of recognizing what actually is, restructuring what needs to be, and looking for the upside in all of it.
Dorothy lived in the midst of the great Kansas prairies, with Uncle Henry, who was a farmer, and Aunt Em, who was the farmer's wife. Their house was small, for the lumber to build it had to be carried by wagon many miles.
This was, of course, printed first in 1900. People carried most things by wagon, especially in rural farm lands, simply because the gadgets we take for granted, the automobile in all its cargo and people hauling variants, were not common. Worse, the vast vehicle support apparatus such as rural roads in 1900 would not support any but the most rudimentary (ie. slow) transport. Wagons pulled by beasts and men were the norm.
How times have changed.
Today, I happened to catch John Michael Greer's Archdruid Report entry titled The Upside of Default, where he coins a new word, just for fun, and pokes a bit more fun at this "investmentariat":
The investmentariat has been told for decades that their money ought to make them money, but nobody told them that this only works in an economy that experiences sustained real growth over the long term, and nobody would dream of mentioning in their hearing that we don’t have an economy like that any more.
All the investmentariat knows for sure is that the kind of safe investment that used to bring in five per cent a year is now yielding a small fraction of one per cent, and the risks you need to take to get five per cent a year are those once associated with the the kind of "securities" that make a mockery of that title.
He goes on to calculate very, very roughly that our Western economies have morphed into something of an impossibility.
In 2010, the latest year for which I could find figures, the total value of bonds issued by nonfinancial businesses was $1.3 trillion, and the total net issuance of stock by all companies was $387 billion. . . . Total stock and bond issuance in 2010 to support the production of real goods and services was thus something less than $1.7 trillion; let’s double that figure, just to leave adequate room for other ways of raising capital that might otherwise slip through the cracks, for a very rough order-of-magnitude figure around $3.4 trillion.
In 2010, the total stock of debt and equity potentially available for trading in financial markets was $212 trillion, and the total notional value of derivatives that same year was estimated at $707 trillion. . . . We can . . . estimate the total paper value of the world’s financial wealth at $1 quadrillion, of which the fraction directed into the productive economy in one year amounts to around a third of one per cent.
(I made with the bold.)
Thus our industrial output of actual goods and real services has fallen just as our financing of "stuff" has ballooned to a ratio of three bucks of financial paper to a penny of product and service. With me so far? Now, here's where Greer quite rightly drops the bomb:
Money is not wealth; it’s a system of abstract, culturally contrived tokens that we use to manage the distribution of real goods and services. A money system can simplify the process of putting energy, raw materials, labor, and other goods and services to work in productive ways; that’s the reason we have money, or rather the reason most of us are prepared to discuss in public. That’s not what the other 99% of the world’s financial assets are doing, though. They are there to ensure that the people who own them have disproportionate, unearned access to real, nonfinancial goods and services.
I've very specifically denoted the process that creates these "abstract, culturally contrived tokens" in several past posts. In a nutshell, a commercial bank issues a loan, creating the money in the process in return either for collateral or based simply on an educated bet that the borrower will be likely to pay according to the loan's terms (credit card debt falls into this latter category). These loans should adhere to a very specific set of characteristics. As Winthrop W. Aldrich noted, commercial loans should be short-term, "self-liquidating commercial transactions, largely in the movement of goods and crops through the various stages of production and distribution; and in the making of short-term loans against good collateral." To engage in other types of money-creating lending is to risk financial instability in both the issuing institution and, should the shaky practices become rampant, the economy in general.
Let's get more specific as to what constitutes a good loan. It could be equipment for industry; a tractor for a farmer greatly simplifies and speeds every aspect of farming, making it more profitable by far than beasts and hand wagons as Dorothy saw in Kansas. A car or truck likewise proves a far better means of conveyance than beasts or feet alone. Power equipment of all sorts, the same. I should take pictures of the gas and diesel beasts my grandpa parked for the last time in the back pasture; he used them all until they would run no more, then kept them for spare parts until rust took the rest.
A century of ever newer and better power equipment replaced the labor of beasts both two and four legged; each wave of improvement brought greater economic growth. Our economies expanded almost continuously through the 18th and 20th centuries (with occasional monetary contraction hitches brought by financial shenanigans or armed bellicosity). And on average the lives of the average improved by leaps and bounds in this last 300 years.
Back to the Archdruid. He notes that "Periods of sustained economic expansion are rare in human history, since most societies live close to the edge of the limits to growth in their bioregions. . . ." The exceptions? The most notable was "the late Roman Republic and early Empire," which usually expanded through invasion and conquest. We today can compare ourselves to the Roman example:
During the three centuries of their power, the world’s industrial nations looted their nonindustrial neighbors with as much enthusiasm as the ancient Romans looted theirs, but they had another source of plunder-half a billion years of fossil sunlight, stored up in the form of coal, oil, and natural gas. In effect, we stripped prehistory to the bare walls so that we could enjoy an age of gargantuan excess unlike any other.
(Relevant to the Archdruid and myself is a simple fact that makes all other facts pale in comparison, that the supply of the most popular liquid variety of "fossil sunlight" stopped expanding in May of 2005. Back to the Archdruid:)
One consequence was that our moneylending industry was able to metastasize to a scale no previous gang of usurers has ever been able to attain. The basic arithmetic remains unchanged, though: usury is only viable in an expanding economy, and as the global economy enters its post-peak oil decline, the entire structure of money that makes money is going to come apart at the seams.
As almost an aside, I'll note that Greer's AR title here is a play on words. "The Upside of Default" is an homage to Thomas Homer-Dixon's groundbreaking book, The Upside of Down. In this book, Homer-Dixon analyzes human societies and compares them to biological systems, adapting the forest ecology research of Canadian ecologist, Buzz Holling. One of my favorite passages from the book (since we're mentioning the Romans) was the author's picture of a single keystone in just one minor arch of the Coliseum. He calculated about how much acreage of silage for beasts and grains for people it would have taken to quarry the raw stone, transport it the 75 miles from the quarry to the Coliseum construction site, shape the stone and place it within the arch. I can't remember the exact figure, but it was in the hundreds of acres, again, for one minor stone. Sobering.
I link to and go into an excellent podcast interview with Homer-Dixon here, if you'd like to read through a transcript I made of it; the short version of his and Hollings' theory follows.
Forests and societies go through phases. First come weeds that focus on growing fast and reproducing quickly. When the soil is prepped by the weeds and lichens, next come shrubs, then deciduous trees, then conifers. The biomass of the forest increases with each phase, which in turn increases the interconnectedness of the various root, fungal and fauna networks producing and delivering nutrients. Over time, the redundancy of the early weed phase is reduced, a process that allows the forest as a whole to direct more of its limited energy to growth. This process is summed by Homer-Dixon by a three-axis cube comprised of Potential, Connectedness and Resilience.
The last, Resilience, proves the fly in the ointment. As Potential and Connectedness increase, Resilience decreases; mature forests are more brittle, each potential threat becoming more dire. When a forest gets most of a single nutrient (fixed nitrogen, for example) from just a few species of plant, a threat to any one of these plants represents a crisis point for the forest. From the interview transcript:
Now here's critical point, and this is really very powerful, and it comes out of this research: These researchers are suggesting that every highly adaptive system has to have a breakdown phase -- what they call the Omega Phase -- in its cycle. That breakdown, that loss of resilience . . . , crisis, reorganization of the components of the system, are essential to adaptation.
We are going through an omega phase today, folks, as financial system fails to increase actual productive economic activity that it depends upon for its continued survival, and simply because the fuel that drives this productive activity can no longer be increased. The result: loans cannot be repaid. Entire countries are either in default, have defaulted, or are going to default. Remember the earlier words of the Archdruid; usury (charging interest on lent monies) "only works in an economy that experiences sustained real growth over the long term."
Ah, but Homer-Dixon notes that people don't like change. Again, from the interview:
We ask our leaders, whether they're our business leaders, corporate leaders, political leaders, basically to keep things the way they are, on the current trajectory. And the current trajectory has been growth and increasing connectivity and complexity. We want them to keep us on that trajectory. The implication, if Holling and these other theorists are correct, is that all that's going to do is make the eventual crisis that much worse, the breakdown that much worse.
So, is there a conclusion to all this theorizing? But of course. Our expanding economic system is done expanding. By necessity, it must contract. The problem, of course, is that adapting to any contracting economy is going to take some hard getting used to. Here's a real kick in the short curlies: What does one call an economy that creates an expanding supply of wealth tokens representing the actual productive goods and services collateralized by the token creation process? Why, that would be called a capitalist economy.
On the plus side, the faster we realize this and move on to whatever form of economic transaction that proves more relevant in a post-abundance world, the faster we can move on to the next phase of our human existence. And that next phase could very well prove far more exciting, far more innovative, far more long-lasting than the one we find ending around us one austerity protest at a time.
It's only a matter of recognizing what actually is, restructuring what needs to be, and looking for the upside in all of it.