Like other market crashes, this one was blamed on dodgy deals and abuse of the system. Unwilling or incapable of looking critically at money, chroniclers of capitalism’s excesses focus instead on human greed. The evil CEOs of Enron or WorldCom, the heartless bankers of Wall Street, or the overzealous traders at Goldman Sachs are indicted for fleecing shareholders and undermining an otherwise functional system. Parading them in handcuffs before the press makes us feel good for a moment, until we take in the truly clueless expressions on their faces. They thought they were just doing their jobs—trying to grow their companies at the rate dictated by their debt structures. Their behavior is normative, not an aberration.
Not that these characters are blameless, but when we fault “corruption” for our economic woes, we are implying that something initially pure has been corrupted by some bad actors—like a digital file that was once intact but whose data now has errors in it. That is not the case here. Rather, an economic operating system designed by thirteenth-century Moorish accountants looking for a way to preserve the aristocracy of Europe has worked as promised. It turned the marketplace into one giant debtors’ prison. It is not only unfit for the needs of a twenty-first-century digital society; central currency is the core mechanism of the growth trap.
This is the real cause of the severity and longevity of the 2007 crash. Rather than figuring out how to compensate for central currency’s extractive bias, a highly digital finance industry chose to exploit it. The digital perspective that allows us to see money as an operating system doesn’t necessarily motivate people to revise the core code so that it serves people better. That would be a pretty heavy lift, even for the most idealistic among us. So instead, bankers and financiers sought to leverage the structural flaws of the money system for their own gain.
They understood that return on capital outpaces real growth and that in a digitally accelerated marketplace a disconnect between winners and losers was inevitable—just as on iTunes and Amazon. Only here, the winners would be those who had capital, and the losers would be those stuck in the real economy of goods and services. So they sold money to borrowers, then sold those loans to less-intelligent lenders. Meanwhile, they insured and bet against those original loans. This created a win-win for those with capital—they got paid their regular interest rates for lending money, but they also won their bets against the people and companies they were counting on to fail.18 The lucky winners benefited not only from the return on capital but also from the inability of real growth to keep up with interest.
Instead of our cynically profiting from the failure of people and business to keep up with the needs of capital, might there be a way to change the way capital functions? Might money have gotten too expensive for its own and our good? We’ve seen how individual companies can wind down from the growth imperative by lightening their debt loads, changing investor expectations, and becoming more adaptable to market conditions on the ground. But the economic operating system on which these corporations are required to function cannot enjoy the luxury of voluntary slowdown. Unlike natural systems or even human society, an interest-based economy must grow in order to survive. This worked for centuries, as long as there were new regions to conquer, resources to extract, and people to exploit. An expansionist economic system both necessitated and inspired the colonizing of the Americas, Africa, and Asia. As long as more money was being borrowed, there was more money to pay back the bank and keep the currency afloat.
In the absence of new continents in which to expand growth, industry strived to speed up rates of production or to make existing processes more capital intensive. Industrial farming, for example, generates more crops in the short term than do traditional, less-intensive methods. It also requires more machinery, fertilizer, and chemicals. By abandoning the practice of rotating crops, industrial farming also depletes topsoil faster, which in turn generates even more dependency on chemicals and pesticides. More money is required—and that’s the object of the game. If Big Agra processes lead to a less-healthy population or higher cancer rates, Big Pharma is ready with costly fixes, fueling another source of economic expansion.
But we’re all getting depleted in the process. Our real world of humans, soil, and aquifers replenish themselves more slowly than the impatience of capital can accommodate. “Housing starts” can accelerate only as fast as the market for new homes. When the marketplace isn’t being artificially goosed by speculators, humans just can’t keep up with the housing industry’s need for excuses to cut down more forests, irrigate more land, and construct more homes. Moreover, as Naomi Klein has more than demonstrated in her book This Changes Everything, climate change is a direct result of an expansionist economy: the physical environment can’t service the pace of capital while also sustaining human life.19
Economic philosopher John Stuart Mill identified this problem as far back as the 1800s. “The increase of wealth is not boundless,” he wrote.20 He believed that growth wasn’t a permanent feature of the economy because nothing can grow forever. No matter what the balance sheet may be asking for, economic growth is limited by the finiteness of the real world. We can generate only so much activity and extract only so many resources. Instead, Mill saw the end of growth concluding in what he called the “stationary state”—a sustainable equilibrium in which there would be “a well-paid and affluent body of labourers; no enormous fortunes, except what were earned and accumulated during a single lifetime; but a much larger body of persons than at present, not only exempt from the coarser toils, but with sufficient leisure, both physical and mental, from mechanical details, to cultivate freely the graces of life.”21
Mill didn’t see this stationary state as devoid of improvements to society, technology, and overall satisfaction. It would merely mark the happy end of the era of big investment and associated extraction and growth. Capital will have fulfilled its purpose in building out our society and bringing us to the “carrying capacity” of our planet. In other words, people might produce and consume different or better stuff, but they won’t be able to produce or consume more stuff. They won’t have to, though, because the “progressive economics” of capitalism will have been abandoned and replaced with something else.
Digital technology, computers, networks, and miniaturization at first appeared to herald a shift toward these more steady-state approaches to life. Telecommuting would mean less gas consumption, and computer screens would mean less printing. Neither prediction came true. Worse, though, speculators saw in digital technology a gateway to a new, virtual form of colonialism: a new place to lend and deploy capital, new territory for growth.
Alas, the big data profiles of teenagers can’t support the same robustness of growth as entire continents of slaves and spices. Besides, consumer research is all about winning some portion of a fixed number of purchases. It doesn’t create more consumption. If anything, technological solutions tend to make markets smaller and less likely to spawn associated industries in shipping, resource management, and labor services. They make the differential between real growth and return on capital worse, not better. This means they push the banks and investors even further away from anything like real earnings until eventually there’s a complete disconnect between capital and value.
So how can an entire economy that is based on an arithmetic premise of perpetual, infinite, and impossible growth somehow deleverage itself? And even if there’s room for more growth, how do we unpack some of the accumulated frozen capital and get it back into circulation so people can buy and sell more goods and services?
Policymakers have painfully few good stimulative tools at their disposal, and the ones they do have aren’t particularly good at getting money into the hands of real people, where it’s needed. Helping people transact isn’t the sort of activity their operating system was built to support in the first place. Central currency was intended to extract value from the economy, not pump it in. That’s why it’s more intuitive and superficially cons
istent to demand austerity and belt-tightening from debtor nations than it is to ease policy or lower interest rates. If countries or regions can’t pay back the interest on the currency they “borrow,” then shouldn’t they be given less of it? That’s the justification against bailing out failing eurozone nations. It sounds logical on the surface, but if the struggling nations are loaned less, then how are they to pay back more—especially if they’re not allowed to print their own money to foster some economic activity?
Central banks weren’t built to fix this. The Federal Reserve’s primary function is to protect the wealthy—those who are holding cash—by preventing the inflation that would make that cash less valuable. During hard times, a compassionate central bank can choose instead to pump more money into the economy—but it really has only two ways to accomplish that. It can lend money to banks at the lowest interest rate possible—even zero—or it can buy the banks’ stashes of bonds (what’s known as “quantitative easing”). But for this money to reach the real economy, the banks still have to lend it to people and businesses. Nothing is forcing them to do that part, and in a low-interest environment, their profit margins on lending are squeezed anyway. Most banks would rather invest the money in more leveraged financial instruments or buy the stock of existing companies. Moreover, given the slow-growth economy, many banks refuse to take money from the Fed, loath to take on credit that they know they’ll have to pay back. They already have more money sitting around than they know what to do with, and if they take on additional capital, their ratio of profit over net worth only gets worse.
The other choice is for the government to take on debt by borrowing money from the central bank and giving it to workers—ideally, people who are doing some task for the government, such as building infrastructure or providing a social service. The money these workers earn as payroll is then circulated through the rest of the economy when they make purchases. When the economy recovers, the government collects more taxes to pay back the central bank.
That strategy, employed successfully during the Great Depression, would be a tough sell today. Many of our elected leaders don’t understand concepts as simple as the debt ceiling; most Americans don’t realize that federal spending has been flat or down since 2009, lower than at any time during the Reagan administration, and even lower than Paul Ryan’s infamous budget proposal of 2011.22 They don’t even see how improving infrastructure can itself stimulate economic activity23 or that the very best time for the government to borrow money for that purpose is when interest rates are close to zero. It still feels like charity or socialism.
What people have a hard time wrapping their heads around is that putting money into circulation should be less about paying people for working or not working than it is about giving people a means to transact. We don’t need the government to hire unnecessary workers; we need people to be able to exchange value with one another. Cash could serve that utilitarian purpose if it weren’t so wrapped up in its other, more extractive function. This is the heart of the divide between the supposed 1 percent and the people. Our ability to generate value has been paralyzed by our inability to find a means of exchange. People who work for a living are suffering under a system designed to favor those who make their money with money. Yes, it’s what Marx was saying; but there’s an out. We’re not looking at a fundamental property of economic activity or even an unintended consequence of capitalism. This is an economic operating system working as it was programmed to. And we can program it differently.
REPROGRAMMING MONEY—BANK VAULTS TO BLOCKCHAINS
Thankfully, we have both the perspective and the tools required to change the operating system of money, either by adjusting the one we use or by building some new ones. Although business intransigence and government incompetence will likely forestall any meaningful modifications to the central currency system, the greater digital landscape fosters alternative approaches to enabling transaction.
Besides, there’s no reason to ask central currency to do something other than what it was programmed to do. It’s a great tool for storing and growing wealth, for long-distance trading, and for large-scale, expansionist investing. It’s just not a great tool for transactions between smaller players or for keeping money in live circulation. So let’s not use it for that. Just as we don’t ask a carpenter to build a house using a hammer but no saw, we can’t expect the economy to function with just one monetary tool. Contrary to our intuition, we can have more than one form of money in operation at the same time. This wouldn’t be a Communist plot at all; on the contrary, we would merely be subjecting currency to the open competition of a free market. May the best money or moneys win.
If we’re going to consider remaking money for a digital age, however, we have to decide just what we want it to do. In programmer-speak, what are we programming for? The various answers to this very simple question lay bare the biases underlying many of the loudest proposals for changes to our currency system. For instance, what does pushing for a gold standard accomplish other than raising the portfolios of those who have already invested in gold? Requiring the Treasury to back every dollar with a certain amount of gold would certainly prevent the central bank from going on a printing spree. Money would get a fixed value, and there would be no threat of inflation. But how would a gold standard promote circulation over hoarding? It wouldn’t. A gold standard is optimized to address fear that one’s savings are not safe if they’re measured in government-backed dollars. But gold-backed currency would be no better at promoting a peer-to-peer marketplace than gold coins were back in the Middle Ages. It’s biased toward scarcity.
Bernard Lietaer, one of the economists who helped design the euro, has been proposing since 1991 that fiat currencies—money declared legal by the government but not backed by a physical commodity—be replaced or at least augmented with currencies that represent a “basket” of commodities.24 His current suggestion is to create a currency that is backed by one third gold, one third forests, and one third highways. The gold is the fixed-commodity component, as there is only so much of it. Forests are the growth component; trees grow. And highways, thanks to tolls, are the income component. As an investor’s response to deflation, or even as a new reserve currency, it makes sense.
But if we’re trying to compensate for the way central currency tends to work its way out of circulation and into the bank accounts of the already wealthy, we should be looking instead for ways to help money move around better. This has less to do with making sure money has some intrinsic value for long-term storage and accumulation into the future, and a lot more to do with making sure it can serve as a medium for exchange right now. In economic programming terms, we should optimize no longer for the growth of money but for the velocity of money. Not for saving money but for exchanging it. By analogy to another newly digitized medium, it’s less about finding a way to preserve movies, such as videotapes or DVDs, than about finding a way to distribute them to people’s homes, such as through digital cable and satellite. We’re less concerned with the content itself than with promoting its movement. In that respect, the money itself doesn’t matter, anyway, except insofar as it helps people exchange goods and services. Perhaps that’s why most of the first real innovations in digital currency had to do less with new kinds of money than with new means of transferring it.
For instance, the first online selling platforms, most notably eBay, turned millions of regular people into vendors for the first time. But there was no easy way for them to accept payments. Checks could take weeks to clear, stalling delivery unless sellers were willing to ship without funds verification. Credit cards were impractical: most casual sellers didn’t make enough sales to offset the costs of a business account and payment processing system.
PayPal created the first utility capable of addressing the rising need for peer-to-peer transactions. The original model was simple. Buyers and sellers registered their bank accounts or credit cards with PayPal. The buyers authori
zed electronic transfers to PayPal. PayPal then informed the seller that the funds were secure, and the seller mailed the merchandise. The buyer verified its arrival, and PayPal released the funds to the seller. PayPal served as both a trusted exchange agent and an escrow account. The whole service was free, since PayPal could earn interest on the money during the three or four days it held it in escrow.
But the banking industry and its regulators sensed an upstart in the making and challenged the company’s legality. Only regulated savings institutions are entitled to make money on “the float,” as PayPal was doing. So PayPal changed its business model and began charging buyers and sellers directly for the service.25
Still, PayPal was the first of many companies to promote peer-to-peer transactions by lowering the barriers to entry into the existing money networks. A company called Square took this a step further, developing both the technology and the accounting infrastructure through which people could swipe credit cards and accept payments through their smartphones. Although many coffee shops and smaller retail stores now use Square and an iPad in place of more cumbersome and expensive credit-card systems, the people most dramatically empowered by the system were independent sellers and service people and those who want to pay them. Google and Apple, meanwhile, are competing to develop new ways of using credit cards and bank accounts through phones and tablets—technologies that, presumably, could help the smallest businesses as much as the biggest ones.
These systems increase the velocity of money by fostering transactions between nontraditional players, making them simpler to execute, easier to verify, and faster to complete. So far, however, they all use the same, rather expensive transaction networks—such as those run by the credit-card companies or the automated clearinghouse (ACH) system that serves banks.26 In fact, they’re really just digital dashboards for the existing trust authorities, which still validate every transaction and absorb part of the cost of fraudulent transfers—currently over $10 billion per year.
Throwing Rocks at the Google Bus: How Growth Became the Enemy of Prosperity Page 16
