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Every schoolboy knows that the American economy is the
engine of the world economy. There is an ominous knocking sound coming from under
the bonnet, and to those who can hear it, it sounds like a Big End. The
facts are that the economy of the US in the position of one of its cartoon characters
who has run off the edge of a cliff but does not yet realise that there is nothing
between its feet and the ground except a thousand feet of thin air. Like an aircraft,
the economy can keep airborne so long as it keeps moving, but if it stalls, it
falls. The bad debts of America's sub-prime mortgages are beginning the stall
process, and the turbulent flow will spread like a disease to other countries. The
first signs of institutional problems are showing in Bear Sterns in the USA, and
RAMS Home Loan Group in Australia. Baseless rumours hit the prestigious Barclays
Bank in the UK, soon after the near collapse and government-led Bank of England
bail out (to the tune of £23 billion) of the Northern Rock mortgage lender.
This is likely to be the first in a series of financial wobbles, as the financial
sky darkens with the wings of sub-prime chickens coming home to roost. For
"sub-prime" loans read "ill-judged". Lenders have been overly
keen to lend money, because they know that most loans are nice little earners.
All the lender has to do is to judge whether the loan applicant is a good risk,
and write some numbers on a sheet of paper. Controversy still rages in my mind
as to whether the lender has to drwa in money from somewhere else, or whether
he creates it out of thin air, limited only by the amount of gold his company
has stashed away at Gringott's. I suspect that the latter is the case. Anyway,
it falls to the debtors to stump off to their humdrum work each day for the next
few decades to earn the money to pay off, first the interest, and eventually the
equity on their loan. So keen were the lenders, that they forgot to take a reality
check on the capability of the borrowers to pay back. Now we have a black hole
at the heart of the home loan market in the US. House prices are falling in the
US, and will probably start to fall soon in the UK, leaving borrowers in the unpleasant
position of negative equity - repaying unfeasibly high loans that will never be
realised in house value. Heartbreaking and demoralising. Enough to make you want
to give up. The problem is that lenders believed that loans created value. Greed
blinded them to the fact that it was a negative value. To
make matters worse, the world's macro economy is no better. The great nations
of the world look like people with a McJob who have taken out a mortgage on a
£750k house with a swimming pool. The External Debt of the USA is $10 trillion
(that's 10 million million, or 10 to the power 13). As usual, the UK is flying
along in America's slipstream in second place with a stonking $8 trillion debt.
The US debt is equivalent to only a single year's GDP. The UK external debt is
equivalent to 4 years' GDP. Things do not look healthy for the Anglo economies
in particular, nor for the world in general. Of the 198 countries in the world,
only 5 have no external debt. One of these is Brunei. The others include such
big hitters as Palau, East Timor and Leichtenstein. Well done those countries! The
current world economy recalls the old story of a ring of people who were blackmailing
each other. One got so fed up he went to the police. The others rounded on him
"Why did you do that? We were all doing fine". Maybe
the world economy will continue to do fine. Maybe Northern Rock is a minor wobble,
and the famous Power of the Market will reassert itself. Maybe also, the Market
will meet the challenges of continually rising energy prices as demand for oil
begins to exceed supply, survive the buffeting of increasingly energetic storms
as Gaia strives to win the argument with ExxonMobil/Esso about atmospheric physics,
and will survive such other unexpected quirks as fate comes up with, such as an
outbreak of pandemic flu. Maybe the world economy will ride all these ups and
downs. Maybe. Or maybe not. Monetary value is built
on confidence, and confidence can easily give way to anxiety, which can give rise
to defensive money movements, which can give rise to global slump. After all,
the Great Depression of 1928 was caused at least in part by widespread debt in
the world economy. Military planners always look
at the worst outcome, so that anything else looks relatively pleasant. Our Governments
should have a contingency plan ready in case the financial knitting begins to
unravel. What would a great depression look like?
It is a total failure of the economic system, characterised by a succession of
negative feedback loops. Incomes fall, trade falls, prices fall, profits fall,
tax take falls, mining, logging and heavy industry falls, and banks fail. About
the only thing not falling in the Great Depression was unemployment which reached
one in four of the population. The only silver lining to the cloud is the fact
that world CO2 output will fall, which will give us a chance to get to grips with
global warming. This reminds us of the need always
to consider the economy in its ecological setting. The picture in 2007 is that
the world is just waking up to the reality of global climate change as a result
of man-made greenhouse gases, primarily CO2 from the burning of fossil fuels.
An second reality is just beginning to dawn: we are entering the age of Peak Oil,
when slurping noises are coming from the bottom of the world's oil barrel. There
is a finite amount of oil under the ground, and we are somewhere near half-way
through. Despite brave protestations from parts of the oil industry that there
is more oil to be found, the amounts of new discoveries are failing, at a time
when demand is rising. Any schoolboy know that rising demand and falling supplies
means Trouble, in the form of rising prices. These are critical times.
Crises
offer us threat and opportunity. The threat is on a recession, leading into a
global economic depression, characterised by economic stagnation, widespread poverty,
civil unrest and the possibility of war, as in 1939, this time over dwindling
resources and shrinkage of life supporting land.
The opportunity is that
a breakdown of the current economic order could lead to a phoenix-like economic
renewal, a rapidly rising ecological economy based on Green Keynesianism that
would stimulate action to protect and heal the planet's damaged biosphere. That
is an immense job of work. There is no room for unemployment in a Green economy,
but unemployment is the hallmark of a depression. Therefore green work will heal
the depression and heal the environment at the same time. John
Maynard Keynes advocated using the economic power of the State, through deficit
funding if necessary, to end depression by stimulating demand in the economy.
His theories were put into practice first in Sweden, then by President Roosevelt
(the New Deal programmes), and finally and tragically in the frenetic activity
of the Second World War, which created a huge demand for production of the instruments
of death.
In 2007, Global Warming is the threat equivalent to that posed by
Nazi Germany in the 1930s. It threatens humanity with drought, flood, hurricane,
famine, mass starvation, and mass migration. It can be met only through intense
economic activity, primarily in the fields of energy conservation, renewable energy
technology manufacture, production of energy efficient motors, ecologically sensitive
re-afforestation, and carbon sink technology. Victory in this enterprise is possible,
but only if levels of state spending worldwide are equivalent to, and indeed in
place of, current military spending.
How should
this money be spent? The key area of spending should be direct, in stimulating
employment in the green sector of the economy, by producing a Green Wage Subsidy
in the following way:
1. Tribunals are set up who are able to judge whether
the processes and product of an enterprise is of net benefit to society and environment
(see Box).
2. businesses and public enterprises who think they might qualify
go to the Tribunals seeking "Green" Accreditation.
3. Businesses
that get Green Accreditation may take on new workers (i.e. in addition to their
present establishment) from the unemployment agencies, and the intake are allowed
to keep their unemployment benefit. Unemployment benefit changes into a Green
Wage Subsidy (GWS). In this way the Unemployment Benefit (UB) behaves exactly
as Citizens Income (CI)
4. It will be illegal for employers to replace previous
establishment with GWS workers, and if a worker thinks s/he has been so replaced
they can make a complaint to the Tribunals, who would be able to reinstate the
worker or, if necessary, revoke the offending company's accreditation.
5.
The GWS specifically stimulates the Green Sector of the economy during the Depression.
6. The GWS money is money that would otherwise have been given to unemployed people
on condition that they do nothing, which is the present status of Unemployment
Benefit (UB). GWS changes the same amount ov money from being a dead dole to a
stimulus for greening the economy.
7. Although at first there would be little
difference to public sector finances, apart from the stimulus to the green sector,
because the GWS is permanent (as opposed to being time limited, as analogous benefits
are currently structured) there would be a long term cost analogous to that of
CI.
8. These costs are consonant with Keynesian doctrine of the state stimulating
work in times of economic depression.
9. GWS is therefore a way of introducing
CI gradually in such a way as to green the economy at the same time.
In Keynesian terms, in 2008 the demand is for industry and activity that protects
and rebuilds the biosphere, just as in 1940 the demand was for the instruments
of war. The Green sector of the economy is intrinsically labour-intensive, several
reports from Friends of the Earth have shown. In 1996
I showed that the jobs available to be filled in the green sector of the UK
economy were standing at between one and two million, which as it happens was
equivalent to the number of unemployed in Britain at that time.
This
is not the only green economic response to a global economic slowdown. Local Exchange
Trading Schemes (LETS), or TimeBanks, where people exchange their services and
skills using the help of a non-currency numerical system. These a complementary
response at the level of the local community.. Depression
also raises the question of who is the right agency to create the money supply,
and indeed of what kind of money should be created. During the Depression of the
1930s, the town of Worgl, in Austria, produced its own local currency that required
a stamp to be added to each note on a monthly bases in order to maintain its value.
This meant that it was better to spend the money than to save it, and the money
circulated 13 times faster than national money. In the middle of depressed Europe
of the 1930s, Worgl prospered, creating many infrastructure works in the town,
and unemployment fell from 30% to low levels. The experiment was eventually killed
by an unholy alliance between local leftists and national banks. There
is a never-ending debate about the creation of money. The amount in circulation
is clearly increasing, so it is being created somewhere. Governments only create
the cash, which is about 1% of the total. Most of the rest is created as debt
by lending banks. There is not reason therefore that Government should not also
lend to ecologically and socially beneficial enterprises and public services. In
conclusion, if the world economy slips into a recession or depression, it will
present the Green movement with a unique opportunity to green the economy, to
address the causes climate change, to stimulate local communities, and even to
reform the way money is created. (c) Richard Lawson
8/11/2007
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