Clutching at a straw

When I was eighteen years or so I once read The Limits of Growth. That’s depressing stuff, most notably if you’re young and expect to live for another sixty years or so. Doom seemed imminent and I would probably live to see it happen. That was the moment when my views about the future turned grim. Before that I hardly had any views about the future at all. A few years later I became an environmentalist and a member of Friends of the Earth in Groningen. Friends of the Earth does research and tries to convince people that they should change their lifestyles. Friends of the Earth also lobbies with politicians and pressures corporations. And sometimes we protested.

One day we blocked the entrance of Groningen Airport to protest against the government subsidies for the airport. The city council felt that Groningen needed an airport but Groningen wasn’t big enough to make it profitable. When we were sitting there, the police came to remove us, and it suddenly became clear to me that activism didn’t help. Politicians will be voted out of office when they are serious about solutions. Businesses will go bankrupt if they take appropriate action unless all other businesses do the same. The required measures are extremely costly and will affect our lifestyles so profoundly that it would never happen in the current political and economic system.

Desperate times require desperate measures. Once being over a cliff, a cartoon character can only clutch at a straw. And only in cartoons the straw might hold. Friends of the Earth in Groningen worked together with the Strohalm Foundation. The meaning of the Dutch word strohalm is straw. According to Strohalm, the economy must grow because of interest, and that’s destroying the planet. It is ‘grow-or-die’ because interest rates need to be positive. Any solution begins with ending interest, they believed, and interest causes a lot of other problems like poverty and financial instability. Strohalm’s idea was banning interest and charging a fee on money as Silvio Gesell had proposed, so that it would be attractive to lend out money without interest.

Economists didn’t take interest-free money seriously. If you can receive interest then why lend out money without interest? And if you can borrow money at an interest rate of zero, you would borrow as much as you can and put it in a bank account at interest. Therefore, interest-free money with a holding tax would never work, at least so it seemed, and it didn’t take long before I realised that too. Only, that wasn’t satisfactory. Accepting doom is not much unlike committing suicide. If interest is the root of so many social and environmental problems, and may even destroy human civilisation, you can’t ignore that. And perhaps Natural Money could work. During the Great Depression it had been tried in a small Austrian village and it was a stunning success.

A few years later, in 1998, I became a freelance IT specialist. I made a lot of money so I had some money to invest. My first investments were small and not very successful. That was because I believed that the profits of corporations matter. But investments in loss-making internet startups did very well while profitable corporations did poorly. And so I came to believe that I had to stay informed about the developments in the financial markets. In 2000 I joined the investment message board Iex.nl.

On the message board was a day trader who shared all kinds of conspiracy theories with us. For instance, if the markets were about to collapse, a secret group called Plunge Protection Team would come to the rescue. He was ridiculed, but after the internet bubble popped, the markets often miraculously recovered when they were about to crash. And gold often crashed because of some mysterious overnight selling. The day trader believed this happened because central banks wanted to keep confidence in their currencies and gold was an alternative to central bank currencies. As long as the gold price didn’t rise, he claimed, people would trust central bank currencies. I had no idea about what happened in the financial markets so this was new to me but I already had bought some gold because I didn’t trust financial markets and the people operating them.

In 2001, after the Internet bubble had popped, I felt it was time to pitch the idea of interest-free money on the message board. My lack of knowledge was eclipsed by my zeal so lengthy discussions followed. On the Internet people from different backgrounds and different knowledge can be in one virtual room and participate in the discussion. I was rebutted time after time, but as these discussions went on, my knowledge of the financial system gradually increased, and I became aware of many of the issues that had to be resolved in order to make interest-free money work.

As a gold investor I became familiar with the Austrian School of Economics, which was a group that questioned money creation by banks and the use of central banks. They pointed at the inflation caused by money creation and central banks. At some point all the debt banks created would eventually collapse the financial system and money would be worthless, they believed. They didn’t think that negative interest rates are possible.

And so two opposing fringe ideas, interest-free money with a holding tax and Austrian School, were challenging each other in my mind, which is the way Hegelian dialectic is supposed to work. In 2008 that became the start of the theory on Natural Money as it is both negative interest rates and ending debt expansion. The initial discovery was that the economy can do better without interest so that returns for investors can be higher. As positive interest rates are not allowed, the money may rise in value faster than interest accrues on interest-bearing currencies, so that interest-free money can give better returns. Hence, interest-free money was possible or even inevitable.

Later I figured out that the economy may not crack even when drastic measures are taken to save the planet and humanity from an ecological collapse. That is because the holding tax will provide a stimulus and ensure liquidity in financial markets. The maximum interest rate can curb lending so there may be no inflation but deflation. Both interest-free money with a holding tax and the Austrian School are a century old schools that hardly have seen any development ever since. In the decade that followed I have integrated modern main stream economics into the theory of Natural Money.

Featured image: Roadrunner and Wile E. Coyote. Warner Bros. [copyright info]

2 thoughts on “Clutching at a straw

  1. You mention that the economy must grow because of interest. Some people claim that this is not true and that the economy doesn’t have to grow to pay for the interest.

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    • There is a relationship between interest and the need for growth, but not necessarily so. There is no need for growth under the following conditions:

      1. There is relatively little capital and there are few interest-bearing debts.
      2. The rich consume their surplus interest and dividend income so that money continues to circulate. The rich tend to save and invest most of their income so this doesn’t happen (enough).
      3. Interest rates are below the inflation rate. That is a negative interest rate, which implicitly demonstrates the relation between interest and growth compulsion.
      4. Writing off is possible, but this is problematic in the current financial system for if you write off bank debts on a large scale, you may have a systemic crisis.

      In the past interest rates were mostly above zero and economic growth occurred voluntarily. Under those conditions you can hardly speak of growth compulsion, even though it is still there in the background. A lack of economic growth can easily lead to a crisis because debts, and the interest on these debts can’t be repaid if growth is too low. Even in those conditions you can’t force the economy to grow. The growth compulsion is therefore a need for a growth to pay for the interest but that doesn’t produce growth in itself, only problems in the financial system.

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