LIFE SPAN – 2011.05.01

LIFE SPAN 2011.05.01 – First Edition of the new LIFE newsletter – subscribe now!
Situation – Nu-clear Power. Policy – No Alternative to Voting. Analysis – The inflation tiger is out of it’s cage and walking around the world economy with a gaggle of central bankers holding onto it’s tail.

LIFE SPAN 2011.05.01

Situational Policy Analysis & News from LIFE

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Situation – Nu-Clear

Even before you factor in the pollution, proliferation and profligation of nuclear power, the most important thing to understand is the distraction that nuclear power represents.

The situation at Fukushima in Japan has brought the world’s attention to one aspect of the dangers of nuclear power generation, without even touching on the dangerous pollution resulting from mining and producing the nuclear materials in the first place, or dealing with the storage, recycling and disposal of nuclear waste at the other end of the cycle. But these dangers are not even the most dangerous thing about nuclear power, the most dangerous thing about nuclear power is that it distracts us from investing in the development of really sustainable renewable power generation.

Every single dollar invested in nuclear power could be used more productively invested in renewable power or improving efficiency. Every single physicist researching nuclear power could be more productively researching sustainability, deep chemistry or efficiency. The time for stop-gap measures has passed, we must aim straight for the finish line now.

Last month the world also committed to spending $1Bn on putting another protective cap over the leaking Chernobyl nuclear reactor. That has to be done, but it is just another example of time, money and effort that cannot now be spent on developing the sustainable energy infrastructure we need. Will we need to the same thing to Fukushima in 25 years from now?

A new clarity is developing in which we can see that any power source that is not re-newable is going to have insurmountable waste problems providing the energy we need to run a planet with 6, 7 or 8 billion prosperous people on it.

Now we can see Nu-Clear – we don’t want nuclear!

Policy – No Alternative to Voting

This week the UK will hold its second national referendum ever to decide whether to change the vote counting process used in national elections from decrepit to deprecated. It’s a miserable choice that incorporates almost nothing learned from the last 100 years of democratic practice. If the “no” camp wins it will probably be the end of the Liberal-Democrat Party in the UK, but, other than that, either result will make almost no discernible difference to the quality of democracy in the UK. Minority political parties will still be able to win elections, safe seats will remain safe and the diverse, multi-layered needs of citizens will remain unrepresented.

Citizen empowerment through democratic process is at the root of dealing with the most pressing issues we face, and apathy about how our votes are counted and who gets to vote for what betrays a complete failure to grasp the importance of this subject. Voting is not a dry subject for “policy wonks”, it is the most vital issue at the heart of our evolution! Efficable democracy that harnesses the collective wisdom of everyone’s input is the vital building block on which we can make the changes necessary to move to a sustainable prosperity. This is too important to be be left to the whims of incumbent politicians, so the citizenry must take the lead on moving to the best available models for voting and representation.

If we are to retool our civilization for sustainability, the extent, depth and breadth of the changes we need to make to our economic and social structures will require us to have a massively more participatory and effective political structure than we have today. The politics we need must include:

  • self-selected constituency boundaries defined by the resident citizens, not by the politicians
  • multi-layered, multi-constituency, multi-member democratic structures that reflect all the glorious diversity of humanity spread across the surface of the planet
  • bottom up power structures that allow jurisdiction to originate at the bottom and move up and back down the layers, locating decision making power at the appropriate layer for the scale of the decision

These are not difficult structures to imagine or implement, but they will only come about when we, the citizens for whom democracy is supposed to work, take control of the agenda and require proper, modern and comprehensive change. A referendum proposed and framed by incumbent politicians is not the way to change this properly, real change will come as part and parcel of the policy framework of a government specifically elected to make the changes. Over to you, citizens.

Analysis – Tiger Tails

Inflation. Inflation is the increase in prices without any corresponding increase in value, i.e. when the same thing costs more. There are three possible causes for an increase in price: an increase in the underlying cost of producing the thing, an increase in the demand for a thing that is constrained in supply, or an increase in the price just because there’s so much money lying around. The first two cases are not within the control of bankers or politicians and are simply a fact of life as materials, products and services become more or less available, and demand for them falls or rises. The important thing about the first two types of price changes is that they represent real changes in wealth, in other words the price changes are aligned with the change in the value of the thing. It is the last case, the one where the price of something changes without any change in its value, that presents a real problem for capitalist economies and politicians. This kind of inflation can only occur in a “capitalist” economy because the value of the currency in a capitalist economy is not based on anything real – the money supply is managed by special banks called “central banks” who are also responsible for minting the paper/coin money we use to pay for things and controlling the credit which commercial banks use to lend out.

The job of a central bank is manage the amount of money that is flowing around the economy such that it is roughly equal to the amount of value, or wealth, that is recognized in the economy. As you might imagine, this is a pretty tricky thing to get right because the central bankers have to have a really keen grip on the state of the economy, the quantity of transactions and the amount of wealth being generated. If central bankers print too much money, or allow commercial banks to lend too much money, and that money is not matched to real increases in wealth, then the wealth that does exist simply gets revalued in terms of how much money is available: this is called “inflation” because the price of the same thing gets inflated over time without any real change in the value of the thing itself. If the central bank doesn’t print enough money or allow commercial banks to lend enough money, then the economy cannot grow at its natural pace and the lack of money can gum up the works. Not having enough currency can even lead to the strange situation where the price of a thing goes down even though its value remains constant, because the currency has gone up in value to reflect an increase in wealth that has not been matched by an increase in the supply of available currency. In fact, to stop this kind of problem happening, central bankers err very slightly on the side of extra money and allow for a minimal rate of inflation as normal, typically this inflation is considered controllable when it is less than 2% a year.

There are two tools in the central bankers’ briefcase that have proved invaluable for getting this tricky balancing act right: caution and confidence. Normally central bankers are very cautious about increasing the money supply and spend most of their time trying to make lots of small changes over time in response to continuous monitoring of the state of the economy, changes in wealth, and keeping a really keen eye on what the commercial banks are up to. The central bank controls the commercial banks by forcing them to keep a certain amount of cash on hand, as a deposit against what they are lending out – these are called “reserves”. Also, because in a capitalist system the commercial banks can lend more money than they have taken in deposits, there is always the risk that they might get asked by their deposit customers for the return of more money than the bank has on hand; so commercial banks can always turn to the central bank and borrow the money they need at an interest rate set by the central bank. This interest rate, that a commercial bank may at any time have to pay for money they borrow from the central bank, effectively sets the floor on interest rates charged by the commercial banks on loans they make to their borrowers, and in this way the central bank controls the “cost of money” in the marketplace. If the central bank is cautious in managing the supply of money, and keeps the commercial banks on a tight leash, then everyone’s confidence in the ability of the whole system to properly represent their real wealth in paper money is maintained and everyone stays calm.

Now, if things start to go wrong they can head south pretty quickly: prices inflate, depositors loose confidence in the value of their savings, they withdraw their money from the banks, more customers get worried about the ability of the banks to give them their money back; traders lose confidence in the ability of the currency to represent their wealth and start jacking up their prices, or start asking to be paid in other things that they think will maintain their value, like gold or some other country’s currency. It can get really messy really quickly and will cause an economy to collapse with wholesale destruction of wealth and confidence. It is the job of central banks to stop this from ever happening, and that’s why they typically operate independently of politicians so that they don’t get asked to do silly things like just start printing money to pay for things the government wants but doesn’t have any real wealth to pay for. Caution and confidence, caution and confidence: the watchwords of effective, modern, monetary management.

When caution is defrayed, confidence is sure to follow at some point, and that is what happened in 2008. After a couple of decades of deprecated caution, a sudden fall in the perceived value of assets on which the commercial banks had staked their reputations led to an almost complete collapse of confidence overnight. The commercial banks were bankrupt and the central banks were on the hook for keeping the whole system running – the massive fall in real wealth was absorbed by the taxpayers, in the form of loans and gifts to the commercial banks, to stop the commercial banks from actually going bankrupt. At this point in the debacle there was a choice: recognize the loss of wealth and reorganize the banking system, or try and cover the bases until the loss of wealth was regained. The central bankers and politicians chose the latter, and that is the world we live in now. Money was printed and credit expanded on a massive scale to shore up commercial banks around the world, especially in the US and Europe, on the grounds that the depreciated assets would regain their value and any permanent loss in asset value would be made up for by increases in wealth derived from other activities in the economy. In the meantime there shouldn’t be an inflationary risk because all the extra money printed was just going to be absorbed by the balance sheets of the commercial banks and wouldn’t leak out into the rest of the economy. In theory, as assets values recovered and economic activity picked up, the commercial banks would re-establish their balance sheets and the central banks would simply draw back in all the extra money they had printed, so that some time down the road the total wealth and the total amount of money sloshing around would be back in equilibrium again. Neat, tidy and easy, eh? Not quite so much.

In other parts of the world, like China, that weren’t directly affected by a collapse of their commercial banks, they did still feel a pinch from the slow down in economic activity that occurred. In those places they increased the money supply by letting their banks lend out tons of extra credit so that people and business could spend lots to make up for the lost demand that previously came from the economies that are now having banking problems. In these countries they figured they could control the inflationary risk of printing all that money by making sure that the money went into activities that resulted in real increases in wealth, like railways and other infrastructure investments. The trouble with that plan is that real increases in wealth only occur naturally with the development of better things and ways of doing things, wealth does not simply increase in response to expanded cash spending. Just boosting the amount of cash in the system leads to people making silly decisions about what to spend that money on, and too often those decisions fail to generate any real increase in wealth; so the money is wasted and sloshes around looking for a quick bet, like the “inevitable and certain” rise in the price of property or other assets like gold.

Now its 2011 and here’s a summary of where we have ended up. The commercial banks have taken all the cheap money the central banks gave them and used it make huge “profits” using activities that do not create any additional wealth, often by lending the money back to the government at a higher rate than they borrowed that same money from the central bank. There has been no re-appreciation in the value of the assets that lost their value in 2008. The extra money injected into the system by the central banks has found its way into “quick bets” on assets around the world, jacking up the prices of property in Asia and raw materials in developing countries. One intended consequence of the rescue plan has come true: there has been relatively little fall in overall demand, a few percentage points here and there but nothing like the 20% revaluation that the other choice in 2008 would have required. Lastly, we live in a very financially orientated world because we are trying to use money to provide for the future security of our old age, and that means that we have a lot of wealth tied up in financial investments we call pensions. All these investments are effectively part of the overall money supply, and in places like the US the total of these investments is greater than the total annual GDP of the country – that’s a lot of free-floating money in the system.

Now, before we bring the strings of this story together, I want to remind you of the other types of price increases that occur naturally in markets: increases in the demand for constrained things (‘materials, products and services become more or less available, and demand for them falls or rises’). We live in a world where demand (population x aspiration) is increasing faster than we are developing new ways of meeting that demand, so the demand for the materials that drive our current way of life (food, oil, metals) is increasing without a commensurate increase in supply. This means that we are living in a world where the price of basic inputs is rising naturally, and will continue to rise until we retool for sustainability. The more successful we are at raising living standards (aspirations) the greater the increase in demand, and the higher the prices go. It is important to recognize this because the effect on the economy of naturally rising prices is the same as the effect of inflationary price increases: workers demand higher wages to allow them to maintain the same standard of living. This is the “price-wage” spiral that central bankers have learned to fear, because once it starts it stokes inflationary price rises through cyclical reinforcement, and it is really difficult to control without severely affecting living standards, which often results in social unrest and upheaval.

Think of money supply management as the tiger than drives the incredible development of wealth in a modern economy; so long as the tiger remains in a cage, or at least on a leash, the economy grows and wealth can appreciate naturally as a result of everyone’s efforts to add value to each other’s lives. The growth in wealth is not constrained by the availability of some fixed material, like gold, and every contribution by every participant can be recognized at the point when value is created. But if the tiger gets out of its cage and off it’s leash, it marauds around the economy spreading destruction and fear. Then it becomes the problem that has to be dealt with, instead of the enabler of greater good.

The inflation tiger is out of it’s cage and walking around the world economy with a gaggle of central bankers holding onto it’s tail.

While we would all like to wish the central bankers the very best of luck in their attempts to hold on to the tiger’s tail, the following factors suggest that they will not be able to hold on for long:

  • demand for finite resources is increasing naturally (outside of their control) and that will result in price increases
  • price increases will lead, and has already, to demands for increases in pay
  • the imbalance in the ratio between available cash and real asset values remains uncorrected from 2008
  • the socio-political system of attempting to provide social security using financial instruments (i.e. pensions) means that there is a lot of money floating around the system that cannot be controlled without degrading the social security that that money is supposed to provide; i.e. in a capitalist economy where social security is provided by pension investments, it becomes politically unacceptable to properly manage the money supply in line with real asset values if the value of those assets falls, effectively quashing the independence of central banking and degrading the ability to keep the true value of monetary investments in line with wealth
  • democratic politics and capitalist economics both require processes for orderly failure, a “permanent” political power structure cannot accept failure so it will inevitably intervene (unsuccessfully and counterproductively) in monetary management to preserve its political hegemony
  • the money in the current system is controlled by a very small percentage of the population who are already wealthy and who do not see the need to maintain the ratio of money to wealth, they simply seek to increase the quantity of money they have; remember that money affects the human brain the same way that sex and drugs do, it acts on the most primitive reward structures of our brain, overriding the newer “thinking” parts of our brains

The benefit of a capitalist economy is the near universal and instant recognition of value added as wealth; the condition of that is the requirement to carefully manage the money supply. If the social security of the people or the political power of the rulers is dependent on the preservation of wealth, then the necessary leeway to control money supply in line with wealth will be degraded and the economic system will collapse. Capitalist economics requires the ability to recognize wealth destruction, and that in turn requires a political system that allows for the destruction of power and a social system that survives the destruction of wealth.

In the end the only way to maintain monetary credibility is to be able to adjust money supply in line with wealth, both up and down, and that will require that we decouple social security from financial investments. In the meantime we/they will try and make the current system work for as long as we/they can, and so we are in for a spectacle of monetary gymnastics over the coming years as the bankers of the world try and keep the tiger from running loose.

News – SPAN gets wings, fly with us!

This the first issue of the new newsletter from LIFE: Situational Policy Analysis and News (SPAN). LIFE SPAN is published online and provides more in-depth coverage of situations at the forefront of public policy at the current time.

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