Why Climate Change is such a Difficult Political Issue

TOPSHOTS-PHILIPPINES-WEATHER-TYPHOONIt has finally struck me, albeit in the middle of the night. I have been pondering why, in the face of all the evidence and despite a growing willingness on the part of all nations to address the issue, efforts to reverse climate change are so insipid. Climate change is still in the too-hard basket. Conference after annual conference never fails to disappoint us and Warsaw 2013 wasn’t much different. A Guardian commentator called Warsaw “more like a shuffling of feet”.

OK what is this Road to Damascus discovery? It is to do with affordability. We are trying to add an extra tax, a carbon tax in a context of deflation, where the affordability of everything is declining. Prices are going up relative to disposable income. We are losing our purchasing power (well apart from the 1% I suppose). So it is no surprise the climate change issue is too hard for politicians. Given the choice of putting up petrol and electricity costs when their constituents are already suffering, politicians will kick for touch and argue they need a ‘balance’. Disappointment is inevitable.

Well then how do you solve this political problem? The answer is by addressing the affordability issue head on.

So let’s look at what is reducing the purchasing power of people on this planet? Why, it is the same old two culprits – the bank issued money system and the illogical tax system.

What do I mean? Well if money is issued as interest bearing debt, then interest is built into the price of all goods. How? Every car comes out of a factory whose owners borrowed money at interest from banks. Every piece of furniture, clothing and kitchen goods is manufactured where the owner borrowed money from a bank at interest to do so. Every potato, every steak, every drop of milk and every orange came from a farm whose owners were mired in debt to a bank. The cost of the bank interest is built into the price of all goods. So if we issue money without debt the price of goods relative to wages will drop. Purchasing power will increase. Affordability will improve.

Then there is the incredibly silly tax system. When we tax labour, every manufacturer or primary industry producer has to build the tax in to the price of their goods. Take off income tax and your purchasing power increases. It is the same as GST and company tax and a range of other illogical taxes.

So part of the price of all primary produce and manufactured good is the burdensome tax and the totally unnecessary interest charged when issuing money. Solve those two problems and our purchasing power rises.

Our solution of having a parallel national currency spent into existence without interest and unburdened by these deadweight taxes will dramatically give more purchasing power. Affordability will improve. See this slideshow or read this site for more on this.

So when we change the tax system away from taxing labour and sales and towards charging rents on the right to use the commons, including the biosphere, it will be politically more possible to do something significant about climate change. After all, in proposing a carbon tax, climate change activists are only asking for a regular rental on the right to use the biosphere to get rid of their greenhouse gases.

If a currency flows freely through the economy and only meets opposition when it comes up against the constraints of the commons, it will stimulate innovation in producing and manufacturing clean liquid fuels and give impetus to the whole post fossil fuel economy. The term “green growth” will transform from rhetoric to reality and innovation will thrive.

Why we need a parliamentary enquiry into the best methods of making banks stable

Submission of Deirdre Kent in support of petition 2011_78 to Parliament

This submission is substantial. It outlines why banks are unstable, includes charts on banks assets compared with their exposure to derivatives and on housing bubbles. In a hyperconnected world New Zealand’s four Australian owned banks are not going to be immune to shocks. Now instead of taxpayer bailouts, it seems depositors will bailout the banks. The Reserve Bank has in place a system called Open Bank Resolution. We would rather the banks were stable in the first place.

What the Chicago Plan Revisited proposes

The Chicago Plan Revisited
Michael Kumhof

1. This is a proposal for the most profound monetary and banking reform in centuries. It is based on the work of a long line of distinguished economists, including Irving Fisher, Milton Friedman and the founders of the Chicago School of Economics, who advocated laissez-faire in industry but not in banking.
2. The work is motivated by Irving Fisher’s 1936 book “100% Money”, with actual quantitative results worked out for the US economy today.
3. The paper was written by two IMF economists, Jaromir Benes and Michael Kumhof. Kumhof was a Barclays Bank PLC manager for five years.
4. An extensive section on monetary history shows that government control over money creation has generally been superior to private control.
5. There is also an exhaustive explanation of the current money creation process, supported by many statements from eminent economists and central bankers.
6. The Chicago Plan ensures that the central bank, rather than private banks, creates the country’s money supply.
7. Deposits in banks would no longer be backed by loans, which are volatile because they depend on banks’ willingness to lend.
8. Deposits in banks would instead be backed by 100% of government-created money – indestructible money.
9. Credit creation would remain private, but could no longer be financed by private money creation.

How it is done
1. The government creates sufficient indestructible reserve money to provide 100% backing for all deposits. It lends this money to banks at a small interest rate. The government is left with a very large claim against banks.
2. The reserve money represents equity in the commonwealth, not debt.
3. The government repays part or all of outstanding government bonds, against the cancellation, or the transfer to households, of part of its claim against banks.
4. The government pays a one-off citizens dividend, through a transfer to households of part of its claim against banks. Households use this to repay a large portion of private debt.
5. The credit part of banks is separated from the deposit part. The bank becomes a true intermediary that has to attract reserve money before being able to lend it. This makes it much easier to prevent credit-driven business cycles.

1. Money creation no longer requires private debt creation.
2. The quantity of money is directly controlled by the central bank, not by private banks.
3. Credit creation remains private, and on a much sounder long-term basis than before.
4. Banks become true intermediaries that can be run conservatively for the public benefit.
5. Financial crises do not affect the quantity of money or the safety of the payments system.
6. Dramatic reduction or even complete elimination of the public debt.
7. Dramatic reduction of private debt.
8. Credit-driven business cycles are not eliminated but significantly reduced if the Chicago Plan is combined with quantitative lending guidance, a policy that can be much more effective in a world where banks cannot create money.
9. No bank runs are possible because all money is 100% backed by public reserves.
10. There can be no liquidity traps, as central banks can always stimulate a severely recessionary economy through money injections or through below-zero interest rates.
11. Inflation can drop to zero without posing problems for monetary policy.
12. Real interest rates drop dramatically because equity, not debt, becomes the norm.
13. The government can use revenue from money creation to dramatically lower taxes.
14. Lower interest rates and taxes lead to potentially very large output gains.

If you look on youtube you will see some presentations by Michael Kumhof. The most recent of his slideshows is one he did in Stockholm on Sept 12, 2013 and it is here.

However, despite its good intentions and sound theory, I believe with others that it is politically unrealistic to think it could be implemented. There are three high level bank lobbyists for every elected member in Washington. Moreover, the New York Times article of 21 October 2011 said the banking industry had spent $2.3billion on campaign donations from 1990 to 2010.

Lietaer, Arnsperger, Groener and Brunnhuber in their Club of Rome book Money and Sustainability 2012, also point out that “although it would eliminate the risk of widespread banking crashes and of sovereign debt crises, there would still be monetary crises. ..The 2008 monetary crashes would not necessarily have been avoided.” They also point out that nationalisation of money creation process can’t be done on a small scale and any change involves risk. Large scale change involves greater risk. Moreover there could still be a risk of inflation if governments were the only ones in charge of creating money. The hyperinflation of the Zimbabwean dollar could happen if another Mugabe got into power.

What money is, why it’s important and why food is more important still

One of the delights I have had recently has been talking to a guy who has done a PhD in communication during financial crises. Naturally he had been reading Marx and Minsky and a thousand other authors over his ten years doing his PhD. He said that Marx talked about a M-C-M circuit. This means money to commodity to money. Money helps people buy and sell items of value. Then in 1971 Nixon delinked the dollar from gold and we had the rise of the financial industry.

As the financialisation of the economy has grown where money trades directly with money it is a M-M circuit. While in the M-C-M circuit has in it time lags, the M-M circuit is quicker. You make money out of money. The M-M circuit is more efficient and more profitable. The dotcom bubble was about money transactions, Enron got into finance. The M-M circuit has superceded the M-C-M market.

Hyman Minsky said that on a system level you go from a hedged position to a speculative position and eventually to a Ponzi state. The bubble has to keep growing. You have walked too far across a frozen pond and can’t go back. The mood swings to irrational exuberance and greed. Eventually the bubble bursts, asset prices drop and down you go.

Money really isn’t supposed to be a commodity. It is something we use to trade with and we agree to accept from one another. Fundamentally, because it is a human invention, it is and always will be secondary to the real world it serves. It is the flows of resources that are important in a system, not the flows of money. It is in the resource flows that a thriving economy should have no waste.

weimarplayAnyway, then I was keen to find out about the Rentenmark, because my friend Adrian Wrigley had told me he believed there lay a key of how to get a currency backed by land. But since Adrian has now died and I was curious, I decided to find out as much as I could myself. I found quite a lot on the web, with authors Adam Fergusson writing When Money Dies and Gustavo Franco, The Rentenmark Miracle, Michael Kumhof and Jaromir Benes had obviously studied it while writing the Chicago Plan Revisited. Edward Norman Peterson had written Hjalmar Schacht: For and Against Hitler. All on the web, which is great these days.

Hjalmar-Horace-Greeley-SchachtThe Rentenmark was an emergency currency brought in by Germany in November 1923, when the hyperinflation of the 1913-1923 decade had brought the country to its knees. Reading about the social chaos during that post World War One period makes your hair stand on end.

Germany up till 1913 had used very stable goldmarks fully backed by gold. In 1913 only a third was backed by gold but by 1914 it was unbacked and called papermoney. Towards the end the First World War Germany set up private loan banks were set up to protect the country’s gold reserves. These were to give credit to businesses, to the state, municipalities and to new war corporations. (It is often wrongly stated that the government created all this new money, but it was in fact private banks) Loan bank notes were made legal tender. The Reichsbank could include three month Treasury bills in its note coverage, so that unlimited amounts could be rediscounted against bank notes. (Have I lost you? I can’t understand that either, but I gather the discounting was a disaster).

Then Germany proceeded to its descent into hell. Inflation picked up speed when the British demanded reparation in gold of 2 billion goldmarks a year, plus a quarter of their exports. Each year and with each crisis, more money was printed until by late 1923 $1US was worth 4.200,000,000,000 papermarks.

What happened during those years was a complete nightmare. Those who had precious items like gold, furniture, jewels, artworks exchanged it for food. A doctor’s wife gave her piano for a sack of wheat, a gold watch was given for four sacks of potatoes. Artworks were exchanged for bread.

Those long on gold, land and other real assets were seen enjoying Germany’s finest restaurants while wearing the most expensive of clothes.

Farmers refused to take any form of paper money for their crops. The harvest of 1923 sat in farmers’ warehouses while supermarkets in the cities were empty. Urban people came to the country to demand food.

The Government had tried everything. In 1922 a private rye rentes bank (Roggenrentebank) had been founded; it issued its first bill of exchange denominated in pounds of rye in December of 1922. In the beginning of 1923 several public bodies – cities, states and public utilities’ companies – started to issue loans denominated in commodities such as rye, coal, and others, but priced and serviced in marks according to the current commodity prices.

Reduced to a barter economy only, far right was pitted against far left, town against country, class against class, race against race, trade against trade and husband against wife. It brought out the worst in everybody, according to Fergusson.

Farmers accused of hoarding food were savagely attacked by urban hungry. Farmers sometimes bought up others crops and sold them for double the price. Jews were resented and blamed. Foreigners with overseas currency lived in luxury. Debtors were advantage over those with assets. There was a massive strike in the worst hit area, the Ruhr valley.

Anyway a very well educated economist and banker Hjalmar Schacht was appointed to fix it during that nightmare of November 1923 and given near dictatorial powers. One account from his secretary said he “sat in his room and smoked. Did he write letters? No he didn’t. He telephoned and he smoked.”

Hjalmar Schacht decided to do something new. He established a Rentenbank which was to create a new currency called the Rentenmark. It issued mortgages to farmers and those with industrial properties. Even though those with mortgages do well during hyperinflation and mortgages are easily paid off, from what I can gather they now badly needed to remortgage their properties to get cash. A huge quantity was printed very quickly and it didn’t cause inflation. So why did it work? Some make no attempt to explain. Many authors simplisticly explain in terms of the restrictions on the amount printed, or, as Michael Kumhof and Jaromir Benes said, the fact that Schacht also stopped the converting of private monies to Reichsmark on demand, he stopped granting Reichsmark loans on demand, and furthermore he made the new Rentenmark non-convertible against foreign currencies. True. He also cut government spending. However remember that in one act the government bank created 2.4 million Rentenmarks, and 1 Rentenmark was equal to a trillion old papermarks. That should have produced inflation. But it didn’t. Not a scrap of it. One writer basically said it was a coincidence, recalling that the Assignats of the French Revolution hadn’t worked, and then shrugging “Then the property backing seemed to give the currency value.”

The effect was dramatic. Farmers released food to warehouses for sale in the cities. The riots stopped. Skilled unemployment, which had risen to 28% by Dec 1923 dropped to 8.6% by May 1924. Real wages grew.

No it worked because if you back a currency with land, you back it with something that doesn’t go away, something solid and permanent. But not just that. If you remortgage the land, the occupier has to pay fees to the bank (in this case a government owned development bank) So the money goes round in a full circle at a steady pace. The mortgage payment, because it is to a government agency goes to the Government and it acts like a land tax in its early years. Sure since there was no way by which property could be foreclosed or distributed, it seems rather a strange way of backing money. But so is gold. You back a currency with gold but owners of gold don’t come for the gold and use that as money. But it works. I am not sure of the relationship between the Rentenbank and the treasury but I guess sometime I will find out.

I think this scheme is the nearest there has been in history to a land backed currency. It is as though the government bought the land (though they did buy the improvements too in this case) and then rented it to the farmer. “We will pay for your land as long as you pay us a fee of 5% per annum.”

So here I am, having realised how utterly critical it is to avoid inflation. I am extremely grateful that during my lifetime there has never been hyperinflation where I live. Thank you central bankers for that. And I realise how critical food is.

But I also believe that the Rentenmark miracle has not yet properly been explained in terms of the theory of money going round an economy. In this case it was created by a public bank and went back to a public bank. Those in the complementary currency movement have always been looking for commodities to back their currency with. Metals are probably better than food products. But what better than having a national currency backed by land? Then those who have the privilege of living on a bit of land can pay their rent to government and the money will go round and there will be no inflation.

Hyperinflation is the hell on earth, food is critical and all food comes from the land. Money is important but food is more important. If money is designed correctly and backed by land, we all benefit.

Incidentally, the rentenmark was never a legal currency, just an emergency one. Another gold backed reichsmark was established in August 1924. The rentenmark continued to be used until 1948.