Tag Archives: Richard Douthwaite

Three Distinct Crises now Point to the Urgent Need for a New Economic System

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The current economic system, where money is created as interest bearing debt by banks, is coming to the end of its useful life. Three distinct movements all tell us this – those concerned about climate change, those concerned about global declining economic growth (the ones who understand its connection with peak oil), and those who know that rising private debt is dangerous and sure to end in tears.

1. The Demand for Economic Growth means Climate Change is not tackled properly.

In 1972 the world’s first whole-country environmental party, the New Zealand Values Party, questioned whether economic growth was making us better and happier. Economist Richard Douthwaite in his book The Growth Illusion wrote about the need for economic growth to be at least as high as the interest rate banks charged on money. Charles Eisenstein eloquently outlined the way the growth imperative financialises and thus depletes both our natural and our social capital. “The financial crisis we are facing today arises from the fact that there is almost no more social, cultural, natural, and spiritual capital left to convert into money.” 

The politics of climate change has highlighted the unfortunate situation where, given the choice between doing something meaningful about climate change and championing economic growth, governments will always opt for the latter and claim it is a matter of “balance”. The need for economic growth always trumps the need for climate action. As a result, according to the former United Nations climate chief Christiana Figueres we now only have three more years to turn around emissions or we will not reach the targets of the Paris Climate Accord. Carbon dioxide levels are flat at the moment, but an unprecedented effort is needed from all parties in the next three years.

Naomi Klein in her ground breaking book This Changes Everything says:

“Our economic system and our planetary system are now at war. Or, more accurately, our economy is at war with many forms of life on earth, including human life. What the climate needs to avoid collapse is a contraction in humanity’s use of resources; what our economic model demands to avoid collapse is unfettered expansion. Only one of these sets of rules can be changed, and it’s not the laws of nature.” 

2. We have reached peak efficiency in getting energy from using energy

We seem to have forgotten peak oil issues. Globally conventional oil production peaked in 2005 and unconventional oil peaked in 2015. But peak oil didn’t play out as we expected. We had omitted to factor in debt; because they had to spend more energy to get energy, fossil fuel firms had to go into debt and this kept growing. Two authors worth reading on this topic are Nafeez Ahmed and actuary Gail Tverberg. The former writes articles like this. It says we need a new economic system because we can no longer get the required economic growth. This is because the energy return on energy invested (EROI) has been on the decline since the 1940s. We used to get 50 times the amount of energy out of using 1 barrel full of oil to extract it. We now get only about 15 times that amount. This number will continue to decline. And it’s the same for gas and for coal. The decline is irreversible. The consequences for the global economy are profound and widespread.

Because we need more and more energy to keep the system going, less is left for the real economy. Tverberg carefully concludes that declining productivity growth is a result and also stagnant wages. Ahmed says James D Ward of South Australia argues that, although it was widely believed we could, GDP growth cannot really be decoupled from environmental impacts. Ward says what has happened is that we have financialised the GDP through the creation of new debt without increasing material or energy throughput. (That was done by Quantitative Easing. CNBC said it was a total of $12 trillion, and you can expect that to have a huge effect on the global economy. It did.) He also notes growing inequality of income and wealth. He demonstrates that GDP cannot be sustained indefinitely.

As far as growing inequality of wealth is concerned, Ward hasn’t yet spelt out that this is caused when we have a huge blowout of credit from QE at the same time as we fail to collect the land rent on rising land prices. The huge asset bubble created by QE has blown up house prices and the sharemarket. With a tax system that fails to tax assets (or at least land and natural resources) the wealth gap continues to rise.

Those without access to land and natural resources and natural monopolies fall into poverty and homelessness. Add the fact that wages remain low, jobs precarious and a punitive benefit system, many are in abject poverty.

All these factors combine for political instability resulting in the election of Trump and in Brexit. The growing section of population with casual work or precarious work are called the Precariat. Those with low wages with house buying beyond their wildest dreams are desperate. During elections they will now be clutching at straws, as there seems no hope for progress.

So we are now getting scholars who understand the fossil fuel energy issue and its effect on global growth saying we need a new economic model. This is new.

3. The third movement is those who know about the consequences of creating money as interest bearing debt. It produces instability as outlined by economists who follow the late Hyman Minsky.  The Minsky moment is the point at which excess private debt sparks a financial crisis. Minsky said that such moments arise naturally when a long period of stability and complacency eventually leads to the build up of excess private debt and overleveraging. At some point the system collapses and it can happen quickly.

Followers of the new economics movement are generally aware that there has to be a big system change and have been saying this for decades now. However with the demand coming from three different directions, it is  just a guess as to which will prevail. Maybe with the rise of the basic income movement something may change. Those who recognise the irony of politicians who turn a blind eye to $12 trillion dollars appearing from nowhere to rescue banks yet say we can’t afford a basic income will push this thing forward. Maybe environmentalists will stick to their environmentalism and monetary reformers will continue on recommending the same thing decade after decade while the planet burns and fascism threatens. . 

Summary

The New Economics Movement people who met between 2011 and 2015 to discuss a new economic system have produced ideas. These are crystallised to the best of my ability in my book The Big Shift: Rethinking Money, Tax, Welfare and Governance for the Next Economic System whose website is deirdrekent.com It can be bought here

Tradeable Ration Coupons to Address Climate Change and Alleviate Poverty

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On Sunday at 4pm I was lucky enough to hear a wonderful talk on sustainability and economic growth by economist Gareth Morgan on Radio New Zealand, followed by an interview with Kim Hill.

Gareth listed some horrifying facts about how badly New Zealand was doing in reducing its carbon emissions. He referred more than once to the importance of having tradeable rights for emissions. That reminded me of something I have been reading from an excellent little 1999 book called The Ecology of Money by the late Richard Douthwaite. Chapter 4, which is on the web, outlines his proposal for an international currency, the EBCU (environmentally backed currency unit) designed to reduce carbon emissions.

He says “We want to link our monetary unit to something that discourages fossil fuel use even when there is pressure for an expansion of the amount of money in circulation.”

He says set the global limits and share them out among the nations of the world on the basis of their population in a certain base year. Ration out the rights to all human beings on earth. “Some nations would find themselves consuming less than their allocation, and others more, so it is proposed that the under consumers should have the right to sell their surplus to more energy intensive lands.”

Like Gareth Morgan, Richard says make the rights tradeable, but in a suitably designed international currency. (if we use the existing currencies the poor countries will still be cheated by the rich ones and will end up no better off. He explains that most countries keep their US dollars and Euros for reserves so that wouldn’t end up with the right effect) Then after they have all been traded in for emissions and cancelled, issue less the next year in the same way.

And the ration coupons are something called Special Emission Rights SER assigned by the IMF. It all gets a bit confusing and I struggle to understand it.

If you read Douthwaite’s chapter 4 it is clear that he has based it on the Contraction and Convergence model of the Global Commons Institute (GCI). He also talks about the work of an independent economist David Fleming. Fleming envisaged that perhaps 45% of each country’s allocation would be shared out equally among its population in the form of ‘domestic tradable quotas’ (DTQs). These would have to be surrendered in addition to cash whenever people purchased electricity or fuel.  And if you want to find more a search will lead you to a paper by Molly Scott Cato and Tony Cooper of the GCI. This gives some figures.

In my efforts to understand it better, I emailed Molly but she hadn’t done any more work on it since she wrote it. It seems David Fleming died in 2010 and Richard died last year. So I am trying to track down Tony Cooper of the Global Commons Institute. Maybe someone else can help me understand it better?

So I was thinking about this in relation to our country’s carbon emissions. We could issue ration coupons to all New Zealanders, enough to allow for the current carbon emissions. Then we should allow people to sell their rights, but not in New Zealand dollars. They can be bought and sold only in our proposed domestic-only currency, the Zeal.

The effect would be that there would be a transfer of wealth from the high carbon emitters to the low carbon emitters.

We had ration coupons during the Second World War. I remember my mother taking her ration book to the shop to buy sugar, meat and clothing. You needed them as well as money. You couldn’t trade them then. And of course petrol was rationed.

European debt crisis and oil affordability

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Well it looks as though it wouldn’t be much fun being the next Prime Minister of either Greece or Italy right now. It is a poisoned chalice. Who wants to introduce austerity measures and remain electable? Any concerned citizen can see what is coming for New Zealand when our trading partners are in this sort of trouble.

Richard Douthwaite, the green economist from Ireland, has written the most amazing chapter in FEASTA’s book Fleeing Vesuvius. He explains the connection between declining oil supplies and the trend of rich countries to run deficits. Taking Ireland as an example, he lists the cost of mineral fuel imports, the value of exports and then works out the fuel cost as a percentage of export earnings. It rose from 2.4% in 2001 to 7.6% in 2008. Exports are the only means by which the country can earn the money it needs to pay the interest on its overseas borrowings.

He explains that a country that runs a deficit on its trade in goods and services for several years will find that its firms and people get heavily in debt because a dense web of debt has to be created within that country to get the purchasing power, lost as a result of the deficit, back into everyone’s hands.

After a careful explanation, one of his conclusions is that it is dangerous and destabilising for any country, firm or individual to borrow overseas and net capital movements between countries should be prohibited. This is rather startling, but when you think about it foreign capital creates problems when it enters a country and when it leaves the country. When it comes in it boosts the exchange rate, thus hurting firms producing for the home market by making imports cheaper. It also hurts the exporters, reducing their overseas earnings when they convert them into national currency. As a result, when the loan has to be repaid, the country is in a weaker position to do so than it was when it took the loan on.  And managing borders obeys one of the laws of Nature.

The late Rod Donald, former co-leader of the Greens, used to go on and on about the balance of payments in New Zealand and I can see why. Both the National Party and the Labour Party seem to be taking our country into more and more debt. We have borrowed around $40 billion in the last three years.

Someone should work out our trend over the last few years. We need to find a list of the fuel cost as a percentage of export earnings and the ratio of total external debt to exports.