Money is fundamental to all of our lives, as a means of exchange, a store of value, etc. But do you understand it?
Prime Minister John Key stated in 2010: “Growth is weaker, because people are saving” (http://bit.ly/1GyzIfd).
But surely savings are good for banks, and give people confidence to spend…? Learn about money creation in the modern economy and the issues we face on the road from 2008’s GFC to our current ‘recovery’ and beyond, by journeying with us through the lessons below.
The content is based on the “Money and Society” Massively Open Online Course (‘MOOC’) run by the University of Cumbria’s ‘Institute for Leadership and Sustainability’ IFLAS. Our consultant Nathan Surendran participated in the inaugural run of this course recently, and another course is scheduled for August. We have gained permission from Professor Jem Bendell and Matt Slater to use this content this week, which they have placed in the public domain. If you’re inspired to have a go at the full MOOC, and have the benefit of the longer 4 week timescale, which gives you time to properly consider the presentation materials and develop your own thoughts, you can register your interest by email to email@example.com.
I’ve produced 4 lessons leveraging the content compiled in the MOOC. I put this content on a Facebook group recently and I’m putting it all in one place here so it’s easy to print out and review offline:
Lesson 1: Theory of money.
John Key stated in 2010 that “Growth is weaker, because people are saving”. This runs contrary to most people’s intuition, given their understanding of money, and the banking system. Lets first consider what money is, a medium of exchange, and a store of value in this 5 minute video clip: http://bit.ly/1AbOzoD
Now we understand a bit better what money is, you need to understand that the common view that money is lent by banks against money that they have on deposit has been debunked. The reality, as stated by Bank of England (http://bit.ly/1rfcumz), the Federal Reserve (http://bit.ly/1A2XZ5u), the International Monetary Fund (http://bit.ly/1KwEnku), and yes, even our own Reserve Bank of NZ (http://bit.ly/1A2YRay and http://bit.ly/1A2Z1yB) is very different.
Rather than trawl through the rather dry text at the links above, this video clip from TVNZ’s 7 Sharp programme: http://bit.ly/1AbRpd1
Now read this article in the Guardian newspaper, explaining the same thing (focused on the UK’s banking system and the Bank of England paper, but the system is the same here): http://bit.ly/1rfcumz
So there you go! In the modern economy, almost all money is created by private banking institutions as interest bearing debt…
Some thinking points. Post your thoughts below if you’d like to discuss them:
1. Did you have any idea this was the case?
2. How does this idea sit with you?
3. Is money something valuable, like a diamond, that you can buy and sell?
4. If money is valuable, where does the value come from? Is it edible? useful? pretty?
5. If it costs 5c to print a $5 bill, what happens to the extra $4.95?
6. What happens if too much money is created?
7. What happens if too little is created?
8. who should be allowed to print those bills?
9. But actually, most of the money isn’t in the paper. Where it is?
This material is a snippet from the full public domain ‘Money in Society’ MOOC course, which is aimed at Masters level study. Don’t let that put you off though, it’s fascinating! If the information presented in this lesson has stimulated your interest, you can access the full lesson presentation. Watch the lesson on youtube: http://bit.ly/mis-lesson1-youtube
For a copy of the presentation with notes and links, download the powerpoint slide at http://bit.ly/mis-lesson1-powerpoint
Lesson 2: History of our current money system.
Hi guys, how’s it going? To recap on yesterday’s lesson, watch this 5 minute video featuring a montage of clips from interviews with prominent NZ politicians, that helps to fit the pieces together (ignore the misleading title of the video): http://bit.ly/1AbRdL5
In lesson 1, we explored the reality of money creation in the modern economy. In this lesson on the history of money, we focus on the history of how we’ve got to the current system. There’s a short video clip that explains this really well: “Money as Debt” is a simple animation explaining how the goldsmith invented fractional reserve. Watch from this point, http://bit.ly/1FBVs6c to the 9:50 mark, which is just over 6 minutes in length.
It’s clear from the animation, the process that led to what is now known as ‘fractional reserve banking’. In the next lesson we’ll look at the effects that this system has on our society.
First, however, here’s a 5 minute talk about the possibilities that a good understanding of the history of money can give on the possibilities in our electronic age, once we understand types of money: http://bit.ly/1Gl8BR9 – watch at least the first 5 minutes!
The monetary system discussed in the clip we just watched discusses an abundance based currency whose value declines over time. This is a feature of a possible money system that can be designed into the electronic money that we choose to use, and goes by the name ‘demurrage’ currency. It can be used as a complimentary currency to scarcity based currencies that are controlled by the state or corporations (such as banks), and it encourages the flow of currency (aka the ‘velocity of money’) to increase. We’ll look at demurrage currency more in lesson 4.
In the next lesson, we will look at the effects of our scarcity based money system, and in particular the boom and bust effect of compounding interest. Meanwhile, if you’re wanting to know more about the history of money, there’s lots more in the full lesson 2 presentation linked below.
This material is a snippet from the full public domain ‘Money in Society’ MOOC course, which is aimed at Masters level study. Don’t let that put you off though, it’s fascinating! If the information presented in this lesson has stimulated your interest, you can access the full lesson presentation. Watch the lesson on youtube: http://bit.ly/mis-lesson2-youtube
For a copy of the presentation with notes and links, download the powerpoint slide at http://bit.ly/mis-lesson2-powerpoint
Lesson 3: Effects of our current money system.
Any growth rate gives a doubling time. Doubling times ‘compounded’ give rise to a mathematical effect called ‘exponential growth’. This video of ‘the impossible hamster’ from the New Economics Foundation explains exponential growth and its effect in one minute: http://bit.ly/1ANz4C4
We’ve learnt that money is lent into existence as interest bearing debt, but now we’re going to consider some of the effects of compounding interestand it’s effect on private money creation. This 7 minute video clip explains it well: http://bit.ly/1AbRPQB
Interesting stuff!? What’s your reaction to this information? Does it fit with the observable facts that you see around you, both in nature, and in our financial system?
In the next session, we’ll be looking at a few ways people have explored alternatives to try and fix our current system. In the meantime, if you’re interested in economics, check out the material in the comments below.
This material is a snippet from the full public domain ‘Money in Society’ MOOC course, which is aimed at Masters level study. Don’t let that put you off though, it’s fascinating! If the information presented in this lesson has stimulated your interest, you can access the full lesson presentation. Watch the lesson on youtube: http://bit.ly/mis-lesson3-youtube
For a copy of the presentation with notes and links, download the powerpoint slide at http://bit.ly/mis-lesson3-powerpoint
Further learning on lesson 3:
As Steve Keen, a prominent economist points out: “…If you look at mainstream economics there are three things you will not find in a mainstream economic model – Banks, Debt, and Money. How anybody can think they can analyze capital while leaving out Banks, Debt, and Money is a bit to me like an ornithologist trying to work out how a bird flies whilst ignoring that the bird has wings…” http://bit.ly/1A2ZctG
This article on ‘the shortest economics text book ever’ by Cambridge University’s Professor of Economics, Ha Joon Chang, gives an alternative perspective on mainstream economics, which is often missing from debate in the media: http://bit.ly/1tBSlWi.
It lists 5 main points to consider when thinking about economics:
1. 95% of economics is common sense,
2. Economics is not a science,
3. Economics is politics,
4. Never trust an economist,
5. We have to reclaim economics for the people.
Have you studied economics?
What is your reaction to this perspective?
Challenging mainstream economic analysis:
This series of briefings on ‘Economics for Policy Makers’ (http://bit.ly/nef-econinpolicy) from the New Economics Foundation gives some helpful questions to ask (Briefing 2: http://bit.ly/1Ewfsdl) when presented with an economic analysis (e.g. by your local council):
A few empowering hints, or questions to ask:
- Who wrote the report and conducted the analysis, and why? Be particularly wary of reports commissioned by lobby groups, or even commissioned by government, if it looks like a decision has already been made and only one option is being appraised.
- Don’t be put off by lots of spreadsheets and technical appendices. Just because a report has lots of numbers and lots of valuations doesn’t mean it’s any good. Question its authors on whether they have any evidence or data from the real world, how they have assessed risk and uncertainty, and how they have assessed what would happen without the change.
- Look in detail at what costs and what benefits have been given a value and more specifically who (in terms of groups of people now, as well as the environment and future generations) is included.
Lesson 4: Alternatives to, and constraints on, our current monetary system.
This lesson is a bit of a pick and mix. Based on the materials presented in the last 3 lessons, we are now starting to understand the problems with our current system. The monetary system is based on trust, and an agreed mechanism (currently the NZ dollar) as a unit of exchange. As we can decide to do something else, what are the options? There are many options out there, and there is a comprehensive discussion of them in the full MOOC presentation, linked below. Here’s some information on the most prominent alternative currency capturing the public’s imagination today: Crypto Currencies, including, but not limited to Bitcoin – http://bit.ly/1Ewhiem
From the wrap up to lesson 4 in the MOOC: “In this course we have sought to demonstrate that money issuance is not neutral. Money is a social design that then designs the social. Therefore if we work in currency innovation we need to think about what kinds of behaviours we want to support and then design mechanisms for that into the currency system.” In that context:
The author of this short course is a chartered professional engineer with a focus on energy issues, who blogs about energy issues and the Southland context here: http://bit.ly/sear_blog. Having completed the MOOC myself this week, I thought I’d share a bit of an essay I wrote to take it to the next level and get you thinking about money in the context of the global resource boundaries (particularly energy) evident at this point in time. I did this by way of a critique of the assumptions evident in current discounting practice:
This shortcoming of the discussion of discounting that I identify, is with assuming a positive interest rate or return on investment, over a medium to long term horizon, from this point forwards. There are hard bio-physical limits to continuing expansion of economic activity that creates GDP, that have been manifesting themselves over time:
The 9 ‘Planetary Boundaries’ (Rockström et al. 2015) are all related to by-products / waste from economic activity.
Stratospheric Ozone was identified and brought under control through the Montreal Protocol, but in an age of expanding ‘net energy’ available to society.
Atmospheric CO2: The ‘Unburnable Carbon’ argument means that we are facing the need to reduce carbon emissions by 34% (against 1990, by 2020, as per the Climate Change Act 2008) for the UK. This is incompatible with continuing to grow the economy.
Geological concentration of fossil fuel reserves. The declining concentration means more energy needed to extract the energy, hence declining energy profit from extraction activities (also known as declining ‘energy profit’ or ‘Energy Return on Investment’ “EROI”).
Price volatility is a symptom of this plateau in oil production, and current low prices do not disprove this (Alexander 2015).
Financial Limits related to the above:
Money can be thought of as a ‘claim on future energy expenditure’ (Fredrick Soddy 1926), in that any economic activity (GDP) that produces goods or services, expends energy in the process.
‘Decoupling’ of energy expenditure has definite limits, and is often subject to increasingly complex activities and technologies to increase efficiency. This gives rise to diminishing returns in investment in efficiency, even when net energy available is increasing ().
When net energy available is in decline, it’s probable that collapse of the debt based monetary system will lead to conflict, and possibly failure of industrial civilisation in its current form (Turner 2012), although timescales and eventual outcomes are unclear.
When the monetary economy fails, all the parts of the physical economy and the service economy are still there (Sutton 2015).
In the context of the above, the idea that discounting is a sensible strategy is questionable. Borrowing money at interest implies that there will be higher GDP in aggregate to allow us to pay down the debts (capital plus compounded interest). It is not true, in a full world, that we can rely on future increases in material ‘wealth’.
“The higher the discount rate, the higher the presumed time preference for immediate costs and benefits, and the lower the value placed on future benefits and costs.” (Williams 2013) – we have a duty to our children to not discount the future.
Given my argument above, commodity backed money would appear to be a better solution than paper money, as the limited availability of commodities acts as a natural brake on economic activity, mirroring natural limits, and constrained by them (as the commodity availability has bio-physical limits).
Alexander 2015. The Paradox of Oil: The Cheaper it is, the More it Costs. http://bit.ly/17WtuXs
Fredrick Soddy 1926. Wealth, Virtual Wealth and Debt.
Brian Easton 2015. What Is Happening at the Top of the Income Distribution? http://bit.ly/1FMQOC1
Sutton et al. 2015 To collapse, or not to collapse? http://bit.ly/1FsYJVb (35:30 m:s in the podcast)
Rockström et al. 2015. The 9 Planetary Boundaries. http://bit.ly/1G9BEu9
Turner 2012 http://bit.ly/1wmkxwM Composite image of trends – predicted and observed here: http://bit.ly/1oWDPVY
Williams 2013. Economics in policy making. http://bit.ly/nef-econinpolicy Quote taken from Briefing 5.
This concludes our series of 4 lessons on money, and its role in society. We do hope you’ve enjoyed this short course! Of course, there’s the question of what to do now with this new knowledge. Well many opportunities exist:
- Given how prevalent a false view of the way money is created and it’s consequent effects on us all, one of the most important things you can do is share what you’ve learnt.
- You can also choose to take your knowledge to the next level by taking the full MOOC that these presentations are based on (see below).
- You can just dive in and have a go at using Bitcoin or one of its derivatives for an online purchase sometime.
- Or perhaps most challenging, you could help work towards the implementation of local alternative currencies with more desirable features…
The author of this short course, Nathan Surendran, is actively seeking people who are interested in this, so drop me a message to firstname.lastname@example.org, or via connect via Facebook or Twitter, and lets talk!
This material is a snippet from the full public domain ‘Money in Society’ MOOC course, which is aimed at Masters level study. Don’t let that put you off though, it’s fascinating! If the information presented in this lesson has stimulated your interest, you can access the full lesson presentation. Watch the lesson on youtube: http://bit.ly/mis-lesson4-youtube
For a copy of the presentation with notes and links, download the powerpoint slide at http://bit.ly/mis-lesson4-powerpoint
Further Study / Attribution:
If you’re inspired to have a go at the full MOOC, which runs again in August, you will have the benefit of the longer 4 week timescale, access to the guys who reasearched and compiled this material, and time to properly consider the presentation materials and develop your own thoughts. You can register your interest by email to Matt Slater at email@example.com.
Please share and re-use this material freely, with attribution as below: Adapted by Surendran, N (2015) http://bit.ly/sear_blog from Bendell, J and M. Slater (2015) Money and Society, free course, www.iflas.info