Confessions of a former localist

I think it would be forty years ago that I first advocated strengthening the local economy and about twenty years ago I began to believe that a local currency and a local bank were  necessary for this to happen. To help mainstreet we need local money

Wairarapa notes green-dollarsIf you are like me and fraternise with people in the complementary currency and peak oil movements you will have been told the line: “When there is a crisis, whether it is financial or a civil defence crisis, you will need local currencies to help you survive.” You are exhorted to help build an alternative economy where you trade with each other, start your own savings circle so you can lend to each other without interest, use a locally owned bank or credit union and so on.  So far, so good.

The theory is fine. Ignore the mainstream economy, get to know your neighbours and abracadabra you will be safe. Banks can collapse and they can have as many financial crises as they like but you will survive.

Some very good people have handed out this line of advice, and still do. I believed it and advocated it myself for years too. It is just that it is not enough and it's not a really accurate story.

But if our economic system grinds to a halt, time banks and LETS systems won't get us very far. They won’t buy us houses and they won’t provide investment capital for new sunrise businesses needed to produce jobs. They won’t clear up a welfare mess or stop wealth accumulating with landowners. They won’t stop investment banks from beguiling investors into buying fraudulent products. They won't  rebuild a hospital or even perhaps fix a washed-out road.

These actions are for national politicians.

Yes I do know that there are a wide variety of local currencies and national complementary currencies that can match unmet needs with excess resources. I wrote a book on the subject. At the time, I researched and described as many of these economic tools for self-sufficiency in the book as I could, and there are even more nowadays.

But it is critical to go further in this quest, because no matter how many local initiatives that can be taken, there is still the necessity for initiatives at national level.

imgres-4So we need to scale up complementary currencies. At first I believed that if a local authority issued a local currency and accepted it for payment of rates, that would be as far as we could expect. It would do the job nicely. But others persuaded me New Zealand is a very small country those who have lived in Europe say our national really resembles a local currency. Besides, now that you are thinking about national politics you have to address the tax system.  And what about the growing power of the banks? Where would you keep your money that was safe?

About two years ago, after I had worked assiduously for years to start a local Transition Town and start a local timebank,  I had a Skype call from an Australian environmental economist that I once shared a platform with after my book came out. He  told me he was extremely concerned about the global situation. I said I was happy with my Transition Town work and my timebank work. He then reminded me that even if we in our town had reached a remarkable degree of self-sustainability, even if we could feed ourselves and clothe ourselves and provide energy for our transport and warmth, what would happen if hungry people from the neighbouring town invaded us?

Oh, that made me think. So it wasn’t long before I had left the Transition Town and timebank colleagues to soldier on without me and had turned my attention to national politics, that I finally addressed some of the national issues.

OK so what if we scaled up complementary currencies and designed a second national currency differently from the one we have now?  Yes, that is what I have been working on now for a couple of years and one of those efforts is on this site somewhere.

And I have also been working on the idea of linking that new national currency to a radical new tax and welfare system.  Those long years in the local currency movement have completely convinced me of the idiocy of income tax and I already knew that sales tax like GST hurt the poor more than the rich. When you see the administrators of tiny LETS systems struggling to persuade Inland Revenue that their trades should be free of tax, but this is only allowed if a plumber in normal life doesn’t do plumbing for his LETS trading. That is ridiculous. Then I saw the unfair rulings of IRD when barter companies pleaded with them to show mercy. Their good small businesses just had to go under.

Basically the new system would grow in the undergrowth of the older unbalanced economic system producing all the misery of climate change, poverty, instability etc.

That is what I am working on now with other people who can see the vision. It won’t be long now before we come up with a clear proposal. It is a systems approach.

 

Intractable BIG PROBLEMS need to be tackled as a living system

Over the last two years I have been increasingly puzzled about my own response to others.  Let me explain. I have a huge respect for several people who know a lot about the faulty money system and how its flaws cause so much pain, misery and environmental devastation. I also have a huge respect for those who have led the movement for tax reform so we tax what we hold or take rather than what we do or make. Nowadays in New Zealand income tax, sales tax and company tax comprise more than 80% of our government revenue and our local authority’s funding system is more and more regressive.

There are a growing number who know about both the shortcomings of the privately created money system AND the flaws of the tax system.

To save myself pain, I have focused my attention on only those who see the shortcomings of both systems. Yet when I broached the topic of tackling both issues together I received the reply “Of once we have done monetary reform we can get into land tax issues” or “Land tax will deal also to the faulty money system” or “Monetary reform will stop housing bubbles”. And these answers from people I respect.  Why did my hunch say NO?

So it was a relief the other day when researching systems thinking to watch a 20 minute interview of  the brilliant Frijtof Capra by Hazel Henderson. Capra was talking about living systems. He talked of the need to educate people eco-literacy and said there are multiple reasons why we are destroying our natural environment. A major one is that we are thinking linearly and not holistically. It is all too mechanical and Cartesian. He asked why do we want to save the spotted owl? The answer is because of the relationship of the spotted owl to humans. It is actually the relationships that we want to preserve.

Ecosystems are communities that have organised themselves over billions of years. There is true wisdom in them. Capra says we are thinking in fragments and we need to connect the fragments. We need to think in terms of relationships not objects.  And in Nature each living system is self-organising. We need to move from thinking about content to thinking about patterns, from content to context, says Capra. He says we can't divide up a living system because it breaks those relationships and destroys the patterns.

So I have been thinking about the relationships between the various BIG PROBLEMS we face in the global economic system and the global environmental system. Though there are points of difference or scale, on the whole the big problems we in New Zealand face as a nation are similar to those faced by other nations.

If we focus on just one issue, say affordable housing, and forget about its relationship to bank created credit and a tax system which favours real estate investment, we will miss the target. Spain built more houses and it didn’t solve their affordable housing problem. If we think about the big problem of low wages for the working poor and just ignore its relationship to the tax system, the lack of investment capital for jobs and growing debt, we can come up with a temporary solution of a higher minimum wage. But it won’t solve the problem of  the declining affordability of food and housing. You see if you ignore the living system in which the problem is embedded, the problem persists. If we focus on climate change only and forget the flawed money system which demands economic growth, we won’t get very far at all. The next international conference will deliver exactly the same result where politicians favour economic growth over habitat protection. If you focus on getting a Universal Basic Income and forget about the fundamental reasons for tax havens (a faulty tax system) and the growing private debt issue, you won't get very far.

So I believe my instinctual response to those monetary reformers who insist we tackle one problem at at time is actually well founded. It is time we all looked at the system as a whole and then worked out where to change it, where to tweak it. Family therapists do this every day. They don't just focus on the difficult adolescent, they look at the family as a whole. Systems thinking works!

I have done a rough sketch of the what I see as the BIG PROBLEMS and the relationships between them. It gets really complicated and someone may do a better sketch. But here goes. Let’s look at this picture of a broken economic system and ask what small changes we can make that have the biggest effect on the whole system to restore it to health. The answers may be surprisingly simple. Here is my sketch:-

The economic system network

How everything is connected. Fix one thing and then attend to the knock on effects? No treat it as a whole system

 

A systems approach to Universal Basic Income, monetary reform and tax reform

images-2 One of the biggest political challenges is to clean up the welfare mess. So many people have known for so long that means tested welfare is not working. We have seen good people not able to earn more than $80 a week or their benefit would be docked. We have seen de facto couples split up so they can get more combined income, a terrible situation if we want to foster intimacy and honesty. The movement for a Universal Basic Income – a proposed system of social security that regularly provides each citizen with a sum of money unconditionally – has been going for many decades now. Advocated by both socialists and libertarians, to my knowledge there is still no sign that any political party is taking it seriously. The long list of benefits can be found on Wikipedia. I couldn’t help reflecting on the absence of a UBI when Parliament recently debated the Bill to pay those who care for highly dependent adult children the minimum income. All sorts of other questions arose from that debate. The government was clearly terrified that this precedent, forced on them by a Court of Appeal decision, was going to lead to an uncontrollable blowout of claims for government support for those who care for dependents. When you do the sums the cost of UBI is enormous. Bringing in a full basic income would shock the economy. It is the same with changing from a system where income tax and sales tax and company tax dominate the sources of Government revenue to a tax system where you are taxing the monopoly use of the commons, in particular the use of the land.  It would be a massive shock the economy. And then again there is another one. Carry out massive monetary reform of the national money system and whoosh, it is all too much of a shock to the economy. imagesI was on a skype call the other day with a wonderful young permaculturist from the Canary Islands, Stella Strega Scoz. She was enthusing about the systems approach to big problems – look at the problem as a system and tackle it as a whole.  And during the online course that Stella ran (Eonova), I learnt that Hazel Henderson also enthuses, and that the wonderful Donnella Meadows (Limits to Growth) had written a book called Thinking in Systems: a Primer quite a while ago. Hazel told me that the influential economics professor Jeffery Sachs is also a now a convert to systems thinking. The challenge to our political creativity is to face these three big problems together. So let’s look at the permaculture teaching that new growth comes gradually from the decaying old system. Hazel says “Breakdown brings breakthrough”. Leave the old system to die and start up a lot of new initiatives. The Living Economies Educational Trust has been a pioneer in its support of complementary currencies like time banks, and now of a growing number of savings pools which leave out banks. images-1I believe we (both in New Zealand and in the world) are capable together of finding a solution to all three of these big problems together, and in a way that doesn’t shock the economy. Our solution must introduce a scaled-up complementary system that creates a healthy interest free currency, puts a full ground rent on at least some land and which redistributes this income in the form of a small per person Citizens Dividend. Who said creativity is confined to artists and scientists? Political creativity seems to be underrecognised and undervalued.    

The energy return cliff and the end of growth

When we first started talking about peak oil (I heard about in 2004) we were worried about the price of oil going over $100 a barrel.

Many people say “They will find something”  They hear a radio item about shale gas being plentiful and are happy. Or others might dismiss it as a plot by the left. As oil gets discovered in so many new corners of the globe, people now say the concern about peak oil was unnecessary. But actually, because of climate change, almost all those resources have to be left in the ground!

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Once a barrel of oil would be enough energy to extract 100 barrels of oil. But nowadays we need much more energy to get energy.

Then we had the Global Financial Crisis in 2008 and all got busy worrying about housing bubbles, derivatives, debt bubbles, too big to fail banks and bailouts. This is all important stuff. The price of oil declined as the global economy declined and now keeps repeating these waves. Affordability oil became the issue.

In 2012 that same brother in law commented that my worry about oil was unfounded as the oil price hadn’t gone up as much as forecast and “they were always finding something”.

Now I realise what is happening and there is no better little book to explain it than the one former Green Party leader Jeanette Fitzsimons recommended in a recent talk run by the local Quakers. The book that blew her mind was The Perfect Storm – Energy, Finance and the End of Growth by Tim Morgan, Global Head of Research at finance broker Tullett Prebon. It is freely downloadable at http://ftalphaville.ft.com/files/2013/01/Perfect-Storm-LR.pdf. I have printed it off and had it bound.

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The Net Energy Cliff according to Tim Morgan

Morgan says: There are four factors bringing down the curtain on growth. The economy as we know it is facing a lethal confluence of four critical factors – the fall-out from the biggest debt bubble in history; a disastrous experiment with globalisation; the massaging of data to the point where economic trends are obscured; and, most important of all, the approach of an energy returns cliff-edge.

When oil bubbled from the ground in Saudi Arabia a century ago, only one barrel of oil was required to extract 100 barrels of oil. The energy return on energy invested (EROEI) was 100:1. But for tar sands it is 20:1, North Sea oil today 5:1, shale oil 5:1 or less and biofuels 3:1. He says below an EROEI of 15 the profitability falls off a cliff. For decades EROEIs are declining. Few discoveries today offer much more than 10:1. So as time passes economies are spending a larger percentage on energy. At the household level when petrol and power costs rise we have less and less for other essentials. A nasty little graph  of oil’s dying EROEI is shown at http://deepresource.wordpress.com/2012/11/22/eroei-estimates-for-shale-oil/

The economy is a surplus energy equation not a monetary one. Too much energy has to be reinvested into energy extraction and too little energy is left for the essentials of food, government services, housing and investment.

The interesting thing is that Tim Morgan works for Tullett Prebon. It is the messenger which is unusual saying all these things. It isn’t Richard Heinberg or some sandal wearing, folk dancing greenie. In a way Tullett Prebon seems to be taking over where Matt Simmonds left off.

I think the most scary thing in his whole book is the graph of the energy returns cliff. While we blithely go into debt to build motorways and while we waive civil rights to protest at sea about deep sea oil drilling, it must be worthwhile paying attention to what this energy firm is saying.

 

How safe is your bank?

When you have your money in a bank, the money is legally no longer yours. It belongs to the bank and you become an “unsecured creditor”. This is the legal situation and it has been confirmed by the Reserve Bank in an email (27 March from Sonia Speedy) to Sue Hamill of Positive Money. When the bank has your money it can do what it likes with it, including take risks you don’t know about. So putting your money in a bank is a “customer beware” activity it seems. If you have your money in Bank of New Zealand, Westpac, ASB or ANZ, then you run the risk that you don't know too much about what your bank is up to. The latest thing is covered bonds, which is just one of these risks. They are packaging their ‘high quality residential mortgages’ up and selling them off as ‘Covered Bonds’ to investment funds. Then if the bank gets into trouble, the investment funds are ‘secured creditors’ and are ahead of you in line when the liquidator takes over. This means that Kiwi households will be forced to help bail out banks while overseas lenders have their money protected. If you think Kiwibank is an exception, then think again. They started selling off their mortgages as covered bonds in April 2013. But authorisation from Government doesn’t seem to matter to banks. When I rang Parliament on 9 May 2013, I found the Bill on covered bonds was still at committee stage, having passed its Second Reading on 22 February. Then there is the small matter of Interest Rate Swaps (IRS) which all these banks (and the Co-operative Bank too, not sure about TSB) engage in. If you can imagine taking out a variable-rate mortgage and then paying a bank to make your loan payments fixed, you've got the basic idea of an interest-rate swap. They comprise 80% of our derivatives market and are widely used by local authorities to hedge against the risk of interest rate changes. In April 2013 the US futures regulator was reported to be investigating allegations of manipulation of this popular derivatives benchmark and had issued subpoenas to market participants including the interdealer brokerage ICAP and several global banks. It seems the rates are set by 20 exhorbitantly paid brokers at a desk in Jersey City, New Jersey. A year earlier they had discovered that the LIBOR rates were being manipulated and this investigation has now been widened. LIBOR sets the actual interest rate that banks charge each other. Since mortgages, student loans, financial derivatives, and other financial products often rely on Libor as a reference rate, the manipulation of submissions used to calculate those rates can have significant negative effects on consumers and financial markets worldwide. At the time LIBOR was though to be the biggest financial scam ever. Two big banks have been fined for this including the Swiss bank UBS which was fined a record $1.5billion in Dec, 2012. Interest rates swaps are a gigantic market. Would you believe this figure, or even be able to imagine how big it is? It is $379 trillion in June 2012 (Bank of International Settlements website accessed May 1, 2103). The size of the global economy is $70 trillion, so it is more than five times this. The risk manager of the Co-operative Bank told me when I visited him in early 2012 that they were involved in interest rate swaps because it was safe and it saved them money. The Financial Manager of Kapiti Coast District Council told me they had made money from interest rate swaps and had no plans to drop the practice. So this leaves us with the possibility of putting your money with a credit union. Unfortunately all credit unions must use a bank for their overnight transfers, so that one is a dud too. There is one other possibility. When I rang the Reserve Bank some time ago about which banks were involved with Open Bank Resolution (where the customers bail out a distressed bank and which will be in place by July 1 this year) I was told there are two small Indian banks which were too small to be involved in the scheme. So there are the facts. The choice is now yours. I am sticking with the Co-operative Bank and TSB.