Beautiful countryside in southern California

Capital for the future

Making the economy sustainable may require an unprecedented amount of capital in the form of knowledge and outfits like solar panels, sustainable farms and energy-efficient transportation systems. It is hard to imagine that it can be done. And imagining it is still a lot easier than really doing it. It is going to require some economic magic to divert investment capital from destructive activities to the future of humanity. We may need more useful capital and less consumption.

Perhaps the invisible hand can be of some help. It is easier to finance a great endeavour from investments than from taxation because nobody wants to pay taxes but everybody is happy to invest. It is the secret of 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, but with the use of investment capital.1

Europe won out 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.1 The same logic may need to be applied to making the economy sustainable. The challenge is so enormous that it may never be possible to finance it by taxes. Nowadays interest rates are so low because there is plenty of investment capital.

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 individuals 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 could be. The following example from the Strohalm Foundation can illustrate 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.2

Without interest 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.

Living within the limits of the planet

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 shows why. At an interest rate of 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. 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. 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. 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.

Capitalists think that money spent on a frivolous item is money wasted, because when you invest your money, you will have more money that you can invest again. Capitalists hardly care about interest rates. They will save and invest anyway because of their capitalist spirit. Rich people may be encouraged to save even more if luxuries that use a lot of natural resources and energy aren’t available any more. One can think of luxury yachts, private jets, but also of travel by airplane for holidays. When energy becomes a constraint, local products may replace long-distance trade.

Featured image: Beautiful countryside in southern California. James McCauley (2005). Wikimedia Commons. Public Domain.

1. A Brief History Of Humankind. Yuval Noah Harari (2014). Harvil Secker.
2. Poor Because of Money. Henk van Arkel and Camilo Ramada (2001). Strohalm.

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.

For years I didn’t own a car and used public transport as much as possible. At some point I realised that it was pointless. My efforts were thwarted by other people. For instance, more and more people started driving SUV’s. These people didn’t care it seemed. What’s the point in making such a sacrifice if other people don’t. A car makes your life a lot easier. People tend to chose comfort and I am not different or better than most people.

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 may be how 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. 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]

Illustration for the first edition of Utopia

Welcome to Utopia

Until very recently nearly everyone lived in abject poverty. Most people had barely enough food to survive. In 1651 the philosopher Thomas Hobbes depicted the life of man as poor, nasty, brutish, and short.1 Yet, a few centuries later a miracle had happened. Nowadays more people suffer from obesity than from hunger while the life expectancy in the poorest countries exceeds that of the Netherlands in 1750, which was the richest country in the world in the wake of the Industrial Revolution. And we may soon have nuclear fusion providing us with unlimited energy for free. That may be the end of poverty as poverty is basically a lack of access to energy.

In 1516 Thomas More wrote his famous novel about a fictional island named Utopia. Life in Utopia was nearly as good as in the Garden Of Eden. The Utopians worked six hours per day and took whatever they needed. Utopia means nowhere but the name resembles the word eutopia which means a good place. The pun may have been intended. His book inspired a lot of writers and dreamers to think of a better world while leaving the hard work to entrepreneurs, labourers and engineers. Today many of us have more stuff than they need. So why do we work so hard and feel insecure about the future?

The answer lies within the dynamic of capitalism. The capitalist economy must grow. It is not enough that people just work and buy the products they need. They must work harder to buy more otherwise businesses will go bankrupt, investors will lose money, and people will be unemployed and left without income. To forestal this disaster, we are made to believe that buying stuff makes us happy. As Yuval Noah Harari points out in his book Sapiens: A Brief History of Humankind2:

To make sure that people will always buy whatever new stuff industry produces, a new kind of ethic appeared: consumerism. Most people throughout history lived under conditions of scarcity. Frugality was thus their watchword. A good person avoided luxuries, never threw food away, and patched up torn trousers instead of buying a new pair.  Consumerism has worked very hard, with the help of popular psychology to convince people that indulgence is good for you, whereas frugality is self-oppression.

In the affluent world of today one of the leading health problems is obesity, which strikes the poor (who stuff themselves with hamburgers and pizzas) even more severely than the rich (who eat organic salads and fruit smoothies). Each year the US population spends more money on diets than the amount needed to feed all the hungry people in the rest of the world. Obesity is a double victory for consumerism. Instead of eating little, which will lead to economic contraction, people eat too much and then buy diet products – contributing to economic growth twice over.

Most previous ethical systems presented people with a pretty tough deal. They promised paradise, but only if they cultivated compassion and tolerance, overcame craving and anger, and restrained their selfish interests. This was too tough for most. The history of ethics is a sad tale of wonderful ideals that nobody can live up to. Most Christians did not imitate Christ, most Buddhists failed to follow Buddha, and most Confucians would have caused Confucius a temper tantrum. In contrast, most people today successfully live up to the capitalist-consumerist ideal.

Capitalism brought us prosperity so most of us won’t ask questions like why are there still poor people or are there limits to our desires? It might feel like biting the hand that feeds you. Answers aren’t easy to come by either. Alternatives to capitalism weren’t successful. Perhaps capitalism helped to reduce poverty more than anything else. But the capitalist dynamic of growth appears to be slowly halting. People are going into debt to buy stuff so they can’t buy more in the future.

Before long we may live inside our own make-believe fairy tale virtual realities writing our own life’s stories. In that case we won’t need a lot of real stuff any more. Finally there could be enough for everyone, and perhaps far more than we desire. Machines may do most jobs in the future so most people might become unemployed. That may require a new ethic. In the future there may not be an economy or money but for the time being we may need an economy that can flourish without growth.

Featured image: Illustration for the first edition of Utopia by Thomas More.

1. Leviathan. Thomas Hobbes (1651).
2. A Brief History Of Humankind. Yuval Noah Harari (2014). Harvil Secker.