The future of interest rates

The short summary spills the beans already. There is a relationship between the amount of capital in a market economy, wealth inequality, savings, the level of debt, and interest rates. If an economic depression or a world war can be avoided, this relationship may decide the future of interest rates, and interest rates may go negative. If this makes you yawn, you have read the message already, and you can proceed with more exiting ventures like checking out what your friends are doing on Facebook or Instagram.

If instead you are thrilled by theme of this post, you may continue reading. Interest rates are the result of supply and demand for money and capital. Money and capital differ from consumer goods like coffee and services like haircuts. Money is a medium of exchange. You use money to buy and sell consumer goods and services. And capital isn’t consumer goods or services either. Capital is used to make these consumer goods and services. Hence supply and demand for money and capital need a separate explanation.

The price of money

A kilogram of coffee might cost € 7 in France and $ 8 in the United States. But what does that mean? Is coffee more expensive in the United States than in France? That entirely depends on the price of the dollar and the euro. If one dollar is worth € 0.80 then $ 8 is € 6.40, which is less than € 7. The price of the euro and the dollar change every day because of changes in supply and demand in the market for euros and dollars. But the price of euros and dollars is not the price of money, at least according to economists.

When economists talk about the price of money, they do not mean the price of dollars and euros. They talk about the interest rate. The supply and demand for money determine the interest rate, hence the interest rate is the price of money. Money isn’t produced and consumed like coffee. If you borrow money, you have to return it with interest. Borrowers pay for the use of money, not for the money itself.

There are people and corporations that have savings as well as people and corporations that need money for consumption or investment. So there is supply and demand for money. But what determines the supply and demand for money and therefore the interest rate? It begins with the choice people have when spending their income. They can choose between consumption and saving. Savings can be used for investments in corporations to make products and services in the future.

Consumption versus investment

Economists sometimes use a simple model consisting of only households and businesses to explain things like consuming and saving. Households consume the stuff businesses make. In order to make that stuff, businesses need investment capital provided by households from their savings. It is important to notice that some households borrow and some businesses save, but on balance households as a group save while businesses as a group borrow to invest.

Households can do two things with their income. They can either use it for buying stuff, which is consumption, or save it, so that businesses can invest. For example, if you are a plumber and need to buy a new van for your business, which is an investment, you may have to forego a new car for your family, which is consumption, to save money for the van. You could also borrow the money for the van so that you can buy the family car too, but in that case someone else has to save so that you can borrow.

If people spend a lot of money on consumption, businesses sell a lot of stuff and make great profits. Businesses may be willing to invest so that they can sell even more and make even more profits. But if there are only a few savings because people spend a lot of money on consumption, so businesses might fear they can’t borrow and may be willing to pay higher interest rates, so that interest rates go up.

When interest rates go up, some businesses may abort their investment plans as they don’t expect to make enough money to pay for the interest. At the same time, more households may be willing to save. So when interest rates go up, the demand for money goes down and the supply of money goes up.

On the other hand, if households save a lot of money and do not consume, there are a lot of savings, but businesses are not willing to invest because they have trouble selling stuff and making profits. In that case households fearing that they don’t receive interest on their savings are willing to lend at lower interest rates, and interest rates go down. But how do households choose between consuming and saving?

Time preference

Economists believe that your choice between saving and borrowing depends on your time preference as well as the interest rate. Time preference is your willingness to forego your needs or desires in the present in order to fulfil your needs or desires in the future. An example can illustrate this. Assume that you want to buy a new car. You want that new car now but you don’t have the money. You can either wait and save to buy the car later or you can borrow to buy the car now.

Assume the car costs € 10,000. If the interest rate is 10%, you may realise that borrowing money to buy the car will cost you dearly. If you pay back € 1,000 each year, you repay the loan in 10 years. Over that period you pay € 5,500 in interest so the car will cost you € 15,500 instead of € 10,000. The alternative is to wait and save money to buy the car.

If you can manage saving € 1,500 per year and the interest rate on savings is also 10%, you could buy the car after less than six years. But then the car only costs you € 8,250 because you receive € 1,750 in interest. At an interest rate of 10% borrowing money to buy this car costs nearly twice as much as saving.

That may convince you to save and drive your old car for six more years. If the interest rate is lower, you may find borrowing more attractive than saving because you would rather have the new car now. Your time preference tells how strong your desire is to have the car now rather than later. It determines the interest rate you are willing to pay. Not surprisingly, different people have different time preferences.

Time preferences affect interest rates. Suppose that you want to borrow money for a new car. Suppose that you can only borrow the money from John. John has € 10,000 but he wants to buy a car too. Time preferences are going to decide whether or not John is going to lend you this money. If your time preference is 7% and John’s time preference is 5%, he will keep his old car for a while and lend the money to you. He may do this because he expects to buy a bigger car once you have repaid your loan with interest.

The interest rate could be anywhere between 5% and 7% depending on your and John’s negotiating skills. You won’t borrow at interest rates above 7% and John won’t lend at interest rates below 5% but any interest rate between 5% and 7% is acceptable to both you and John. In this way time preferences affect interest rates.

When interest rates go down, more people may borrow and fewer people may save because of their time preferences. If the interest rate is 4%, John may buy that bigger car now and borrow the money to buy it. If the interest rate is 8%, you would save to buy the car. When interest rates rise, more people may opt for saving instead of borrowing. The interest rate may move to where supply equals demand, which depends on the time preferences of lenders and borrowers but also on the demand for investment capital.

Capitalist spirit

Time preference only works for ordinary people. There are other people too. They are called capitalists. You probably have heard about them. Capitalists think differently. They suffer from a condition called capitalist spirit, which is having little or no time preference. Capitalists think that money spent on a frivolous item is money wasted, because when you invest your money, you end up with more money that you can invest again.

Capitalists save regardless of the interest rate. They rather invest in the distant future when they are dead than spoil their money on frivolous items during their lifetimes. Consequently capitalists end up with a lot of money when they die. What’s the point of that? Capitalists invest in businesses that make the frivolous items ordinary people enjoy. Ordinary people wouldn’t have invested their money, but spent it on frivolous items instead so that these items wouldn’t have been produced in the first place.

Perhaps you think that all capitalists are wealthy. But that isn’t true. Anyone who saves as much as he or she can regardless of the interest rate can be called a capitalist. What is important here, is that the capitalists as a group own most capital, and because capitalists own so much money and capital, and keep on saving and investing, there is a surplus of savings. And if there is a surplus of savings at an interest rate of zero, the interest rate should be negative according to the law of supply and demand.

Convenience

When you lend money to someone else you can’t use it yourself. There may be a new mobile phone you want to buy, but alas, you have lent out your money. This is not convenient. But then you remember with a smile on your face that you will be able to buy the phone but also an additional hip phone cover next year because you receive interest on that loan. So, if you don’t receive interest on your money, you may not bother lending it out because you may suddenly need it. Interest rates on long-term loans are higher than interest rates on short-term loans because the longer you can’t use your money, the less convenient it is.

When you deposit money at a bank, you lend it to the bank but you can still use it any time. That is possible because when you make payment, for example for legal advice, this money ends up the account of the lawyer. The bank will then be borrowing this money from the lawyer instead until she uses it to pay someone else. This is convenient so you are willing to lend money to a bank. For that reason interest rates on current accounts and checking accounts are low. Having money in a bank account is more convenient than cash so the bank may even charge you for having an account.

Risk

Lending out money can be risky. There are two types of risk. First the borrower may not pay back the loan. That could make you reluctant to lend. So if someone of questionable integrity wants to borrow money from you, and you fear that she may not pay back, she could offer you a very high interest rate so that you might think, “Well, she may not pay back, but the interest rate is very attractive, so I’ll take my chances and do it anyway.”

Second, money may become worth less in the future. This is called inflation. If there’s a lot of inflation then the money that buys a mobile phone today may only buy a phone cover next year. In that case you may spend your money right away on a mobile phone before it is too late. That is unless someone wants to borrow the money from you and offers a very high interest rate, so that your can buy a better model next year.

The business of a bank is to know its customers. For that reason lending money to a bank is less risky than lending out money to an individual or a corporation. And because banks are supposed to be good at managing risk, they can borrow at lower interest rates, meaning that interest rates on bank accounts are lower than those on loans.

And because banks know their customers and lend to many different people, they can manage risk better than you can and lend at lower interest rates than you are willing to because if you lend money to a someone you don’t know, you may desire a higher interest rate because you don’t know whether he or she is going to repay the loan.

Returns on investments

If you have money, you could invest it in corporations or real estate. Corporations pay dividends and real estate pays rent. If the rents and dividends are higher than the interest rate you get by lending out your money, you may prefer investing to lending. But investing is more risky than lending. If sales are sluggish, profits may go down and dividends may be cut, but lenders still get their interest. Nevertheless investments are an alternative to lending, so if investments offer better yields, you may opt for investing.

If someone wants to borrow money from you, the interest rate must be high enough otherwise you may invest this money instead. Other people who have money are in a similar position. Borrowers need to offer attractive interest rates in order to be able to borrow. Similarly, if dividends and rents are low, people with money may prefer lending to investing, so that borrowers can negotiate lower interest rates. In this way the returns on investments affect interest rates on loans.

The type of money used

The properties of money can affect interest rates. Just imagine that apples are money and you are saving to buy a house. If someone wants to borrow 1,000 apples from you, and promises to repay those 1,000 apples after 10 years when you plan to buy your house, you would gladly accept this generous offer. You may even accept an offer of 900 apples because that is better than letting your apples rot. In this case you would settle for a negative interest rate. But you would only do so if there are no alternatives.

If you could make 10% per year in the stock market, you could exchange your apples for Apple stock because their gadgets are in great demand and outrageously expensive. In that case, it doesn’t matter that apples rot and you could demand interest on a loan. But if returns on the stock market are low or when stock prices are fluctuating so wildly that you can’t sleep at night, you may prefer the offer of 900 apples.

If the money had been gold, you would never accept such an offer, even when the stock market is doing terrible. You can always keep your gold in a safe deposit box. Similarly, you wouldn’t accept negative interest rates on euros or dollars because you can take your money from the bank and store the bank notes in a safe deposit box. The problem with this is that if you put money in a safe deposit box, other people can’t use it for buying and selling stuff. And this can cause an economic depression.

Central banks

It is often said that central banks set the interest rate. But how do they do that? Central banks can print money. If central banks believe that the interest rate is too high, they print more money so that there is additional supply and interest rates go down. On the other hand, if central banks believe that the interest rate is too low, they print less money so that interest rates go up. If the central bank says that it sets the interest rate to 3%, this means that it will print precisely enough money to keep the interest rate at 3%.

Why do central banks print money? Money isn’t produced and consumed like coffee. If you borrow money, it has to be returned with interest. Most money is debt so where does the interest come from? Capitalists let their money grow on their bank accounts so the money to pay the interest from must come out of thin air. Individual borrowers may be able to repay their debts with interest but on aggregate borrowers can’t.

More money needs to be borrowed to pay for the interest. That’s why the total amount of debt increases each year. And if people aren’t borrowing enough, the central bank may print more money to prevent a financial crisis.

Sometimes people don’t borrow enough to keep the economy going and sometimes they borrow too much so that the economy is overheating. Central banks adapt their money printing to prevent these things from happening. Central banks raise interest rates and print less money (or stop printing money or even destroy money) when they want people and businesses to borrow less and they lower interest rates and print more money when they want people and businesses to borrow more.

The future of interest rates

Interest rates went down because capitalists acquired more and more capital over the years and kept on saving and investing regardless of the interest rate. In the past returns on capital have mostly been higher than the economic growth rate while most returns were reinvested so that a growing part of total income was for capitalists. As capitalists reinvested most of their capital income, this had serious long-term consequences.

interestvers
Capital income (red) versus total income with capital income growing faster than total income

The graph above shows how total income and capital returns (in red) develop if the economic growth rate is 2%, the return on capital is 5%, capital income starts out as 10% of total income, and all capital income is reinvested. After 25 years the economic pie has grown faster than interest income and more is available for wages. At some point interest income starts to rise faster than total income, and less becomes available for wages. And after 80 years there’s nothing left for wages.1

This graph explains a lot about what is going on in reality. When wages started lagging, people couldn’t afford to buy all the stuff corporations made. As a consequence business profits, which is capital income, went down. In the short run it was possible to prop up business profits by allowing people go into debt to buy more stuff. But at some point people couldn’t borrow more unless interest rates went down. As capital income went down, capitalists became willing to lend money at lower interest rates, allowing people to borrow more to buy stuff. As interest rates went lower, more and more people went into debt because interest rates moved below their time preferences.

Nowadays most people are borrowing from the capitalists, for instance via mortgages, car loans, and credit cards, but also via governments as governments borrow from the capitalists too. Many people and governments can’t afford to borrow more. Interest rates are already near zero and may need to go negative if the law of supply and demand is going to do its job. In that case capitalists may start handing out money to the rest of us so that we can keep on buying the stuff their corporations make.

Capitalists may only lend at negative interest rates if money is like apples and not like gold.2 When interest rates are negative, people may buy land or real estate so that the prices of these properties may rise. Property taxes are often based on the value so properties may become less attractive at higher prices. Alternatives are gold or bitcoin, but at some point gold or bitcoin may become so expensive that the risk of losing money on these investments could deter people from buying more. Nevertheless, these alternatives put a constraint on how low interest rates can go. Interest rates must remain attractive for investors.

1. The End Of Usury. Bart klein Ikink (2018). Naturalmoney.org. [link]
2. Feasibility Of Interest-free Demurrage Currency. Bart klein Ikink (2018). Naturalmoney.org. [link]

Amazon Blue Front Economist

Supply and demand

There is a saying, teach a parrot to say ‘supply and demand’ and you have an economist. Economics is about supply and demand. In order to understand how the invisible hand of a market economy operates, you should be familiar with the law of supply and demand. Not surprisingly, this is one of the most important laws in economics. This law states that the price is where supply and demand are equal. An example about the market for coffee can clarify the magic of the invisible hand.

If coffee would be free people might like to drink lots of coffee but producers can’t make coffee for free. Producers go bankrupt if the price is zero because they have costs, for instance employees and equipment. If the price of coffee is low, for instance € 3 per kilogram, that may not cover all the costs. Some producers can produce cheaper than others because they have more efficient production facilities, so when the price is € 5 a few producers might start producing coffee because they can make a profit.

That may not be enough to satisfy all the demand that is out there. The low-cost producers have a limited production capacity so they may be able to come up with 650 kilograms of coffee. Consumers might want to indulge themselves in 1,700 kilograms if the price is only € 5 per kilogram. In that case there would be a shortage of coffee of 1,050 kilograms. Consumers who fear that they are going to be left out of the action might then offer more money so that the price of coffee rises.

When coffee becomes more expensive some consumers might not be able to afford coffee. Others may buy less because they have other expenses like beer and milk. On the other hand, some producers might start making coffee because they can make a profit at these prices. So when the price goes up, supply goes up and demand goes down.

At € 10 per kilogram every producer may be able to make a profit, even those who have high costs, and producers may come up with 2,000 kilograms. However, consumers may only buy 600 kilograms if coffee costs € 10 per kilogram so there may be a surplus of 1,400 kilograms. Producers may then try to sell off their surplus at lower prices before it gets spoiled in order to recover some of their costs. When prices are lower, consumers are willing to buy more, but high-cost producers can’t make a profit and may stop making coffee. So when the price goes down, demand goes up and supply goes down.

The price may settle where supply equals demand. When the price is € 7 producers may make 1,200 kilograms and consumers may gobble up 1,200 kilograms. So € 7 per kilogram could be the price of coffee according to the law supply and demand. Of course, things in reality are a lot more complicated than that, but the law suffices for a basic understanding of markets. A graph can illuminate what has been discussed so far.

supplydemand2

The graph above shows the quantities of coffee demanded and supplied at different prices. When the price goes up, demand goes down and supply goes up. The downward sloping black dashed line represents demand. The upward sloping black line represents supply. If the price is low the supplied quantity is low and the demanded quantity is high, leading to a shortage. At a price of € 5 there will be a shortage of 1,050 kilograms as demand is 1,700 kilograms while supply is only 650 kilograms.

If the price is high, demand is low and supply is high, leading to a surplus. If the price is € 10, there will be a surplus of 1,400 kilograms as supply is 2,000 kilograms and demand is only 600 kilograms. The lines of demand and supply cross at 1,200 kilograms and a price of € 7. Supply and demand are both 1,200 kilograms at a price of € 7, which must be the price according to the law of supply and demand.

Simple examples like this one are used to explain how a market economy works. In reality things often differ in some or more aspects. There may be different qualities of coffee and each may have its own price. In some markets there is a lot of competition and corporations hardly make a profit. In other markets there is little or no competition and corporations make huge profits. The amount of competition often depends on how easy it is to enter a market. When you need little capital and expertise to start a business, it is easy to enter the market, but competition is often intense.

Featured image: Ara Economicus. Beverly Lussier (2004). Wikimedia Commons. Public Domain.

Picture of my invisible friend taken near Nijverdal

Our invisible friend

Market economy

To understand market economies, you need to know about our invisible friend, the invisible hand. Somehow market economies can distribute goods efficiently without anyone planning this. According to the economist Adam Smith it is as if an invisible hand makes this miracle happen. His critics like Karl Marx didn’t believe in invisible friends. Not surprisingly Marx also didn’t believe in God. Smith claimed that if everyone pursues his own personal interest, the interest of society is often best served.

I’m the invisible man
Incredible how you can
See right through me

– Queen, The Invisible Man

The following tale demonstrates how the invisible hand does its magic. Whether or not it is actually true doesn’t really matter. The story goes that the mayor of Moscow once visited London in the 1980s. Back then Russia didn’t have a market economy. The mayor received a tour around the city and noticed that no one had to queue up for bread like everyone did in Moscow. There was an ample supply of bread at cheap prices while no bread was thrown away. Somehow bread was produced in the right quantities in the preferred tastes and supplied at the right places.

The mayor was truly amazed about this feat so he said to his hosts: “Back in Moscow our finest minds work day and night on the bread supply and yet there are long queues everywhere. Who is in charge of the supply of bread in London? I want to meet him!” Of course, no-one was in charge. That’s the secret of the market economy. Every baker decided for himself or herself how much he or she was planning to make and sell and at what price. A few years later Russia switched to a market economy.

It is the individual decisions of bakers and the businesses working in the supply chain, for instance farmers and flour mills, that make this miracle happen. They all decide for themselves. If a baker could sell more than is produced he or she would miss out on profits. The same is true when bread is thrown away. And people are willing to pay more if the bread tastes better. Hence, every individual baker will do his or her best to make exactly the right amount of bread in the tastes people desire. It is in their best interest.

In Russia the state planned how much of every item was produced, where these items were shipped and what prices they were sold. Corporations couldn’t decide about prices. They received a compensation for their costs but they weren’t allowed to make a profit. Employees received a fixed salary. If a corporation produced more or better products, it still didn’t make a profit nor did the employees receive higher wages. Corporations also couldn’t go bankrupt when they did a bad job. This resulted in poor quality products, a shortage of nearly everything and even outright famine from time to time.

It doesn’t always work out well

There are instances where a market economy doesn’t produce the best outcome for society as a whole. Economists call them market failures. One can think of the following situations:

  • People may have far more desires than the planet can support and the market economy may fulfil those desires at the expense of future life on the planet.
  • Some people are not able to make in a living in the market economy, for instance because they lack the skills or have little bargaining power.
  • Corporations use lobbyists and bribe politicians to pass legislation that favours them.
  • A government may be a more efficient producer of products that do not benefit from competition, for instance roads and the power grid.
  • Corporations may abuse their power to charge higher prices, most notably if it is hard for competitors to enter the market.
  • Some products cause harm to people or the environment but these costs are not paid for by the producers. For example, cigarettes cause health costs.

In most countries governments interfere with the economy in order to deal with market failures. These are situations where pursuing personal interests doesn’t bring the best outcome for society as a whole. What the best outcome is, is sometimes a matter of taste, but often it is obvious. Government intervention can make things even worse, so decisions about interfering are made after weighing benefits and drawbacks. In many democratic countries public expenses are about 50% of national income. People in these countries probably believe that market economy doesn’t always work best.

An example can demonstrate why. People in the United States live as long as people in Cuba.1 Cuba is a poor country without a market economy. The United States spends more on health care than any other country in the world. Every possible treatment is available in the United States. Still, in more than 40 countries people live longer than the United States and Cuba.1 Cuba doesn’t spend a lot on health care, only 10% of what the United States spends per person. Healthcare in Cuba therefore appears extremely efficient compared to healthcare in the United States. How can this be?

The available treatments in Cuba are free for everyone. In the United States people may not receive treatment when they can’t afford it because the United States has a market economy. There may be other causes too, for example differences in the diets in Cuba and the United States. There is no fast food in Cuba because Cuba has no market economy. Still, Cuba isn’t a great country to live in. People have been fleeing Cuba for decades and many Cubans moved to the United States. Cuba is a dictatorship and most Cubans are poor. Healthcare is one of the few things that Cuba has organised well.

The story about the visit of the mayor of Moscow demonstrates that the invisible hand of the market shouldn’t be ignored. Successful societies have market economies. Many public expenses are paid for by taxes on income generated in market economies. A market economy still needs a government to set the rules and to enforce them. Governments of successful societies aim at making the market economy work better where it is beneficial for society and constraining it where it does more harm than good.

Capital

Market economy and capitalism are so closely related that many people believe them to be the same. Capitalism is about capital. Capital consists of the buildings and the machines corporations own, but also the knowledge of how to make products and how to bring them to the market. Knowledge of how to make a film entertaining might be capital for a film company. Networks of customers and suppliers can be capital too if they contribute to the success of a business. The same applies to contracts and brands. For instance, the brand Coca Cola has a lot of value because people are willing to pay more for cola when the logo of Coca Cola is printed on the bottle.

Building capital can be costly but in a market economy the value of capital doesn’t depend on the cost to build it but on the future income it is expected to produce. This can lead to peculiar situations. When investors have no faith in the future of a corporation because it is expected to make losses, the buildings and the machines on their own may be worth more than the corporation as a whole as those buildings and machines could be used by other corporations for more profitable purposes.

In most cases more capital means more wealth because capital produces the things people need or desire. Corporations tend to be more profitable if they fulfill those needs and desires better. Therefore, the value of capital in a market economy often depends on how good it can fulfill the desires of consumers. Investors are willing to invest in corporations that fulfill those needs and desires because they expect to make money by doing so.

It is sometimes argued that when investors are free to invest in the corporations of their choosing, the invisible hand channels investment capital to the most useful corporations because they are the most profitable. That’s why the value of corporations is important in a market economy. Businesses ‘create value’ for investors by making consumers happy. Still, the value of a corporation might not reflect the benefits for society as a whole. For instance, if the profitability of a corporation comes from exploiting people or harming life on the planet, a high value could be a bad sign.

And capital can be useful without being profitable, for instance in the public sector. A hospital in the public sector may have no market value because it doesn’t make a profit but it can be useful nonetheless. Capital in the public sector might even be more valuable than in a market economy. For instance, making hospitals private enterprises for profit might not benefit society as a whole. Hospital care may not improve from competition as it is often best to have one hospital serving a particular area. And patients might receive unnecessary treatments when hospitals can make a profit. Healthcare in the United States may create a lot of value for investors but it doesn’t always benefit the patients.

As there are basically two types of people, capitalists who save and invest and ordinary people who borrow and spend, it is hardly surprising that capitalists tend to be wealthier than ordinary people. Capitalism can create wealth because it is the capitalists who finance the investments in the corporations that make the items ordinary people enjoy, but this wealth is often unevenly distributed. From a moral perspective, it is a problem that poverty still exists while there could be enough for everyone. So the question that still remains is how to make the economy work better for the benefit of all?

Featured image: Our invisible friend photographed in the moorlands near Nijverdal. Jürgen Eissink (2018). Wikimedia Commons. Public Domain.

1. Life expectancy per country 2017. World Population Review. [link]

The newspaper Pravda dated 29 May 1919

Truthfulness and accuracy

When I was thirteen years old and fed up with the pestering of my sister Anne-Marie, I started a funny newspaper together with my cousin Rob. Rob and I were best friends for more than a decade. During the holidays we stayed at each others home. Rob was good at making drawings while I had a vivid imagination. We depicted ourselves as smart and good while my sister and her friends were made to appear stupid and evil. Made up stories can be a lot more interesting than real ones. The best stories are those in which imagination and reality are mixed up so that it is difficult to discern fact from fiction.

A reason to produce the newspaper may have been a desire to write and make the news. Later on I became part of the editorial team of the school newspaper Ikzwetsia. The name referred to the Dutch word for bluster as well as the official Soviet newspaper Izvestia. Ikzwetsia became a prolific and popular periodical and a bit of a problem for the school board. At the time I entertained a career as a journalist. Becoming a journalist was just one of the options I considered, and it was more entertainment than a serious consideration.

My favourite journalist was the conservative political commentator G.B.J. Hiltermann. He had a weekly radio commentary named The State of World Affairs. His special trick was summarising the most important world events of the week in a short story while making it appear as if there was a connection between them. His last commentary was aired on 22 November 1999 (22-11-99), a peculiar date.

There is another side to me. My sister was more pragmatic than I was and she had a more flexible arrangement with the truth. When it came out that Santa Claus didn’t exist, I was upset. Something I believed in turned out to be a lie. My sister, who was two years younger, just promised she would still believe in Santa Claus as long as he brought her presents. I was rigid when it came down to truth issues.

Many people believe lies if that suits them but I was not like that. This turned out to be a symptom of a social handicap. And in order to stress the frivolous nature of our newspaper, it was issued by the fictitious Bullcrap Newsagency. It was fake news labelled as fake news. Facts and fiction are different domains and should clearly be marked as such in order to avoid confusion. Anne-Marie was amazed at me keeping so strictly to the facts. “Bart never lies,” she said. This might have been an expression of admiration.

But what if the facts turn out to be stranger than anything you ever imagined? In that case you don’t need to make up stories, not even to embellish things a bit. What if it turns out that there is a connection between all events? My history suggests that I might be equipped to deal with that. And it doesn’t appear to be a coincidence either. And so I followed my calling to become a journalist, albeit belatedly, documenting events as good as possible, trying to work out the connection between them, and presenting evidence whenever that is possible. The ultimate feat of a journalist is to uncover the ultimate conspiracy and discover who is pulling the strings. And I may have done just that.

Featured image: The newspaper Pravda (Russian for The Truth) dated 29 May 1919. RIA Novosti archive. Wikimedia Commons. Public Domain.

The last day

The limits to growth

Imagine there is a lake in a distant forest. On the surface of the lake a plant is growing. It suffocates all life below. The plant has already been there for a 1,000 days and it grows at a rate of 100% each day. If the lake is already covered half by the plant then how many days are left to save the remaining life in the lake? The correct answer is one day.

The plant doubles in size in one day. As the lake is already half covered it will be fully covered the next day, even though the plant was there already for 1,000 days. This is the power of exponential growth. And it ends suddenly. As soon as the lake is fully covered, the plant has no more room for growth. For every leaf the plant adds, another leaf has to die.

The lake represents Earth. The plant represents humanity. The leafs are people like you and me. No more room for growth may mean that for every child that is born, someone has to die. It is estimated that as of 1971 humans use more of the Earth’s resources than nature can replenish. Currently we use one-and-a-half times as much as nature can replace. By 2050 three Earths may be needed to sustain humanity. Make no mistake, this is the “last day”.

The end may come suddenly. Most people don’t see it coming. Some people believe that the end can’t be avoided. They are preparing for the worst. In 1970 a group of scientists called the Club Of Rome predicted “the end” when natural resources would run out. They expected it to happen shortly after the year 2000. It didn’t happen until now, but that doesn’t mean that the current path of humanity can continue for much longer.

This is the end
Beautiful friend
This is the end
My only friend
The end

– The Doors, The End

The depletion of natural resources and the degradation of our planet are amongst the most serious challenges we are facing. If these challenges are not addressed adequately, billions of humans may die of hunger, pollution, resource wars and ecological disasters. Poverty may spread because of the depletion of natural resources.

Perhaps new technologies will become available in the future that can deal with these issues but we don’t know whether that will happen and when. Even when these new technologies become available in the future, we may still have to bridge a gap in time and adapt our lifestyles until that happens.

Climate change

The average temperature on Earth is expected to rise by three degrees Celsius by the year 2100. It has already risen by one degree Celsius since the year 1900. Such a rise in temperature may alter the weather globally and cause massive harvests fails. Polar ice may melt so that the sea level will rise and low-lying territory where more than 500 million people currently live, may be lost. The main cause of the temperature rise is our use of fossil fuels.

There is a lot of uncertainty about the accuracy of the estimates regarding the consequences of climate change as was the case with the predictions made by the Club Of Rome. The impact of rising carbon dioxide levels on the weather are hard to predict. The estimates of the climate scientists are the best we currently have as were the estimates made by the Club Of Rome in 1970.

Ignoring climate change is like playing Russian roulette with the future of humanity without knowing exactly how many bullets are in the revolver, but sensing that it is two to five out of six. Taking action may result in wasting an unprecedented amount of effort and resources on combating climate change if these predictions are wrong. But you need to pull the trigger to know that.

Drastic actions like ending frivolous uses of fossil fuels and investing massively in clean sources of energy appear unavoidable. Several scientists believe that nuclear energy is cleaner than fossil fuels. There may be accidents and dangerous waste, but they believe that nuclear energy will cause fewer deaths than fossil fuels.

Going nuclear?

An incident in my life makes me cautious about nuclear energy. In 1994 I met my wife Ingrid. In 1995 we spent our first holidays together in the Dutch province of Zeeland. During one of our trips we came across a village named Kwadendamme. The English translation of this name is Evildam. Ingrid was driving. Suddenly she hit the brakes. I was lucky to have my seatbelts fastened. “Antiques,” she cried. By the side of the road was a small shabby shed with a sign “King’s Antiques”. Inside were piles of stuff. An elderly couple entered the shed via a back door. They may have been in their seventies or eighties. They may have the only real antiques in the shop.

Ingrid was browsing the shelves and soon she found a doll. 185 guilders (85 euros) was the price tag. Ingrid kept on staring in bewilderment. “This doll isn’t very old but the price reflects that,” the old lady said. Later Ingrid told me that she had seen this doll a few years earlier in a store chain. Back then the price was 9 guilders (4 euros). We were about to leave, but then the old man said: “Don’t go yet, there’s another hall.” He pointed at the back door. Behind the shed was a small place and another shed. It may have been a henhouse previously. I could hardly stand upright in there. It was filled with even more stuff.

Just after we left Kwadendamme we found ourselves on route N666 (National Route 666) to Borssele. Back then I already found this to be a bit peculiar, not only because of the route N666 passing Kwadendamme (Evildam), but even more so because it was the route to Borssele, which is the site of the only remaining Dutch nuclear power plant. The N666 ends near Borssele next to a village named ‘s Heerenhoek, which can be translated into The Lord’s Corner. With the benefit of hindsight, this probably is not a coincidence, and The Maker may have left this mark.

The other Dutch nuclear power plant was located in Dodewaard. It had been closed in 1997. Dodewaard can be translated into Death Holm, which is a bit spooky considering that Route 666 leads to Borssele. The Dodewaard area is 66.5 square kilometres, close enough to 66.6 to be a bit eerie. If this is an omen with regard to nuclear energy, it isn’t a good one. I would therefore not recommend using nuclear energy using the technologies that are currently available. It may be more dangerous than scientists believe.

Nuclear fusion can be a lot safer than nuclear fission, which is the type of nuclear energy that is currently available. If something goes wrong with nuclear fusion, the process dies out. It can’t go out of control like nuclear fission. The nuclear waste would also be more manageable. Nuclear waste from fission will be dangerous for thousands of years, while nuclear waste from fusion is safe after one hundred years.

There may be energy from nuclear fusion within a few decades, but that’s still far from certain. It is extremely challenging to generate energy from nuclear fusion. It requires working with temperatures of 150 million degrees Celsius. Scientists now estimate that nuclear fusion may be available by 2050, but only if the technical issues are solved.

Nuclear fusion could bring us unlimited energy at virtually no cost. In that case it would be possible to recycle much more than we currently do as the value of the recycled materials is now often lower than the cost of the energy needed to reclaim them. Even though developments in the field of nuclear fusion seem promising, it is still far from certain that it will be available soon. And as long as it isn’t available, living within the limits of our planet may require considerable sacrifices.

Mass extinction

Climate change gets a lot of attention but there are several other environmental disasters happening at the same time. Many species of plants and animals have become extinct or are on the brink of extinction because humans destroy their habitat. On average, there was 60% decline in the size of populations of mammals, birds, fish, reptiles, and amphibians in the last 40 years.1 There is hardly any wildlife left.

To put it into perspective, one can compare the total weight of all humans and their domesticated animals with the remaining wildlife, which are all the wild animals except insects and microbes. The seven billion humans on this planet together weigh 300 million tonnes. All the domesticated animals, such as pigs, cows, horses and sheep, together weigh 700 million tonnes. By comparison, all the remaining large wildlife on planet Earth, such as lions, elephants, whales, crocodiles and penguins, together weigh less than 100 million tonnes.2

And then there is pollution. The list with problems caused by the exponential growth of human activities is long. This is perhaps not a complete list:
– depletion of natural resources, especially fossil fuels;
– shortage of drinking water;
– air pollution, water pollution, soil contamination and noise;
– deforestation and loss of ecosystems that sustain global atmospheric oxygen and carbon dioxide balance;
– loss of arable land and a growth of deserts;
– increased chance of new epidemics;
– low life expectancy in countries with fastest growing populations;
– unhygienic living conditions for many because of water resource depletion and discharge of raw sewage and waste disposal;
– more crime rate as people revert to stealing in order to survive;
– conflict over scarce resources leading to wars;
– fewer personal freedoms and more restrictive laws.

Why produce garbage

Why produce garbage if it is thrown away?

Wealthy countries are throw-away societies. There is an excessive use of disposable items. Why should we recycle garbage when we can use more durable goods? Why are there so many packaging materials? For instance, liquids be transported in tanks and consumers could fill up their bottles at the supermarket. Why isn’t anybody dong this? Marketeers believe that the packaging and not the content is what makes a product unique. This is irrational. The amount of packaging can be reduced significantly.

There may be no other option than to curb polluting activities, the consumption of raw materials and carbon emissions. Frivolous consumption may need to be banned if it uses too many scarce resources. Harmful activities that are difficult to end may need to be taxed and the proceeds of these taxes may be used to reduce taxes on labour, so that labour can replace energy and materials consumption where possible. These changes can make it more attractive to recycle and to make products longer lasting. Tariffs may need to be put on products from countries that do not comply to these standards.

Population control

A mother in waiting once asked the biologist Midas Dekkers what she could do to raise her child as environmentally friendly as possible. Dekkers then said that nothing affects the environment more badly than having a child. For the environment it is better to cut down one hundred hectares of tropical rainforest than to have a child, he added. It may be a good idea to limit the number of children, for instance to one child per couple.

Apart from people wanting to have children, many poor people seek security. They worry about making ends meet. The depletion of natural resources is probably not on their mind. The only long-term plan of many poor people is having children who can care for them when they are old. Even though poor people do not use a lot of resources, they often have many children, and if we like them to prosper, that could be a problem.

If the rights of a couple to have a child can be sold, wealthy people may bid up the price of these rights, and poor people can have a pension out of selling them. There are some ethical issues with such a measure as it may result in poor people having fewer children and people from specific ethnicities opting for this more often than others. The limits of our planet are such a serious issue that these consequences may need to be accepted. And on the bright side, fewer children may be raised in poverty.

Meat consumption

Meat consumption causes animal suffering. Meat has other disadvantages. Animals used for consumption eat food humans could eat. It takes three to seven kilograms of grain to produce one kilogram of meat. Meat production also contributes to climate change. It will be hard to change human diets unless substitutes for meat become available that taste nearly as good as meat itself.

It’s the economy stupid!

It is often argued that the economy is unsustainable because of short-term thinking. The economy must grow in order to have positive returns on investments, and it is believed that returns on investments need to be positive otherwise the economy would collapse. The economic time horizons of individual people are reflected in their time preferences. The time horizon of the economy as a whole is reflected in the interest rate.

The lower the interest rate, the longer the time horizon of the economy can be. The following example from the Strohalm Foundation illustrates this.

Suppose that a cheap house will last 33 years and costs € 200,000 to build. The yearly cost of the house will be € 6,060 (€ 200,000 divided by 33). A more expensive house costs € 400,000 but will last a hundred years. It will cost only € 4,000 per year. For € 2,060 per year less, you can build a house that lasts three times as long.

After applying for a mortgage the math changes. If the interest rate is 10%, the expensive house will not only cost € 4,000 per year in write-offs, but during the first year there will be an additional interest charge of € 40,000 (10% of € 400,000).

The long-lasting house now costs € 44,000 in the first year. The cheaper house now appears less expensive again. There is a yearly write off of € 6,060 but during the first year there is only € 20,000 in interest charges. Total costs for the first year are only € 26,060. Interest charges make the less durable house cheaper.3

The example shows that without interest charges there is a tendency to select long-term solutions. Interest charges make long-term solutions less economical. Interest promotes a short-term bias in the economy. It may explain why natural resources like rainforests are squandered for short term profits. If interest rates are high, it may be more profitable to cut down a rainforest and to put the proceeds at interest rather than to manage the forest in a sustainable way.

Only, things are not as simple as the example suggests. For example, the building materials of the cheap house might be recycled to build a new house. And technology changes. For example, if cars had been built to last 100 years, most old cars would still be around. This could be a problem as old cars are more polluting and use more fuel. Nevertheless, the example shows that long-term investments can be more attractive when interest rates are lower.

This also applies to investments in renewable energy. For instance, a solar panel that costs € 100, lasts 15 years, and generates € 150 worth in electricity in the course of these 15 years, is feasible at an interest rate of 5% but not at an interest rate of 10%. Many investments in making the economy sustainable may have low returns and are only feasible when interest rates are low. Low and negative interest rates can also deal with low economic growth. That may be needed for living within the limits of the planet.

Currently the economy is fragile and prone to crisis because of usury and the impossibility of negative interest rates. A tax on cash can negative interest rates possible. Combined with a prohibition of usury or positive interest rates, this can make the economy robust and shock-proof as there could always be liquidity in financial markets. Natural Money may make it possible to start radical economic reforms.

Living within the limits of the planet

It’s easier to finance a great endeavour from investments than from taxation because nobody wants to pay taxes but everybody is happy to invest. This explains the success of the European empires that conquered the world after the Middle Ages. England, France, Spain and the Netherlands were much poorer and smaller than China, India or the Ottoman Empire, but they didn’t finance their conquests with taxation like the other empires, but with investment capital.

Europe came out on top because European conquerors took loans from banks and investors to buy ships, cannons, and to pay soldiers. Profits from the new trade routes and colonies enabled them to repay the loans and build trust so they could receive more credit next time.2 This logic can be applied to making the economy sustainable. The challenge is so enormous that it may not be possible to finance it by taxes.

Taxes could be used to discourage harmful activities. Banning harmful activities may be even better if that is feasible. For instance, gas guzzling SUVs, large mansions and private jets can easily be prohibited because you can’t use them without being seen. That may not apply to activities that can easily go underground. If a tax or a prohibition fosters crime and illicit markets, more harm is done than good.

When interest rates are negative, the time horizon of the economy could go to eternity so that it makes sense to invest in making the economy sustainable. A few examples from history can illustrate this. In the Middle Ages some areas in Europe had currencies with a holding fee like Natural Money. As there hardly was economic growth, interest rates were negative. It was the era of Europe’s great cathedrals. These cathedrals were built for eternity. As better investment opportunities were absent, wealthy towns people spent their excess money on cathedrals.3 For similar reasons, the people of Wörgl planted trees as the proceeds of the wood were expected to occur in the distant future.3

A bit of calculus can show why the time horizon of the economy can go to eternity when interest rates are negative. If the interest rate is 5%, putting € 1 in a bank account turns into € 1,05 after a year, so you would rather have € 1 now than in one year’s time, even when you need the money in one year’s time. That’s because you can put the money on a bank account at interest. At an interest rate of 5%, € 100 in one year’s time is worth € 95.25 now. The distant future has even less value. The same € 100 in one hundred year’s time is worth only € 0.59 now. And € 100 after 1000 years has no value at all in the present.

At an interest rate of -5%, you would prefer to have the money when you need it, otherwise you would end up with less. At an interest rate of -5%, € 100 in one year’s time would be worth € 105. The same € 100 in one hundred year’s time would be worth € 13,501 now. And € 100 after 1000 years would be worth more than everything there is in the present. That may explain why townspeople in Europe in the Middle Ages spent their excess money on cathedrals. This peculiar logic may help us to come into terms with the limits our planet poses on human activities.

Living within the limits of the planet may require unprecedented investments in the future. These investments may require low or even negative interest rates as their returns may be low or even negative. Only low and negative interest rates can make these investments economical. Everyone who has money to save can help by shifting money from consumption to saving and investing. The more people act like capitalists, the lower interest rates may go, and the more sustainable the economy may become.

Nothing but flowers

The challenge is so huge that it seems impossible. It can only succeed when we believe that we can make it happen and that we are going to make it happen. In the past no appropriate action has been taken so drastic measures may be inevitable. It probably will not be easy to make you accept the proposed measures. They may require a sacrifice you never imagined you would make. The economy may become like a wartime economy where every scrap is saved for victory.

The measures can have undesirable side-effects. For instance, China had a one-child-policy for decades. Many parents preferred a son so baby girls were often killed. Nowadays many men in China can’t find a wife. Another example is tropical rainforests making room for palm oil plantations that produce ‘renewable energy’. We need to deal with undesirable side-effects as soon as they emerge.

Only God knows what the future will look like. When everything ends well, you may not be satisfied with the outcome, even when you realise that the alternative would have been worse. The Garden Of Eden was a Paradise for Eve and Adam, but it may not be for us. Most people will adapt over time. And if you have trouble adapting, you can think of the children of the future. They won’t remember this era from personal experience. They may be happy with the way things will be.

Here we stand
Like an Adam and an Eve
Waterfalls
The Garden of Eden
Two fools in love
So beautiful and strong
The birds in the trees
Are smiling upon them
From the age of the dinosaurs
Cars have run on gasoline
Where, where have they gone?

[…]

And as things fell apart
Nobody paid much attention
You got it, you got it
I dream of cherry pies,
Candy bars, and chocolate chip cookies
You got it, you got it
We used to microwave
Now we just eat nuts and berries
You got it, you got it
This was a discount store,
Now it’s turned into a cornfield
You’ve got it, you’ve got it
Don’t leave me stranded here
I can’t get used to this lifestyle

– Talking Heads, Nothing But Flowers

Featured image: Judgement Day. Royal Museum Of Fine Arts of Belgium. Rama (2008). Wikimedia Commons. Public Domain.

Other image: Why produce garbage when it is thrown away all the same. Loesje. Loesje.org.

1. Living Planet Report. World Wildlife Fund (2018). [link]
2. Sapiens: A Brief History Of Humankind. Yuval Noah Harari (2014). Harvil Secker.
3. The Future of Money: Creating New Wealth, Work and a Wiser World. Lietaer, Bernard (2001). Random House.