Reconnecting the Monetary Economy to the Real Economy

This article was excerpted from my June, 2022 Newsletter which you can view in its entirety at my Mailchimp site. You can also sign up there to receive future newsletter editions.

Reconnecting the Monetary Economy to the Real Economy
Money is the “hole” that is defined by the “doughnut” of real goods and services; it is the nothing that serves only to account for that which is available in the real economy. When pseudo-money can be created by fiat, apart from anything of real value, confusion and madness ensue. — T. H. Greco, Jr.
 
I’ve been arguing for more than 40 years that the global system of money, banking, and finance is fatally flawed, and now its condition has become acute. Since 2008 it has been on life support. The connections between the monetary economy and the real economy have long been tenuous, but in recent years have been severed to the point of non-existence. When banks and governments can create quasi-money out of nothing without any real value basis and allocate it selectively to advance political agendas, you know the end is near. The last vestiges of budgetary restraint on federal government spending have been eliminated along with any concern about what people really need and want. The results have been the ever-increasing centralization of power at the federal level, central planning of the economy, worsening price inflation, declining purchasing power of fiat money, increasing corporate ownership of real assets, especially residential real estate, zero or negative returns on people’s savings, and increasing disparities of income and wealth. The only way this system can be perpetuated is by the complete elimination of any semblance of democratic government. As E. C. Riegel observed almost 80 years ago:
“Society is in the twilight of a passing day. The state now undertakes to finance the
economy, and, since a free economy is manifestly impossible where the state assumes the responsibility of supplying the money circulation, the politician is compelled to choose between fascism and communism.” – Private Enterprise Money
 
“Quantitative easing,” bank bailouts, and central bank purchases of securities from the debt and equity markets have been desperate, last gasp measures to try to save the dysfunctional and destructive system. At first the inflation was confined mainly to financial assets, particularly corporate stocks, as central banks intervened in the markets on the buying side. Then, with the massive bailouts and handouts that were doled out during 2020 and 2021, and the accompany lockdowns and forced closures of small businesses, price inflation shifted over to real estate prices, residential rents, commodities, and consumer goods and services. The system is doomed and must eventually give way to new, more sustainable and equitable systems of exchange and finance. Though barely noticeable, that process has been underway for some time at the micro level of communities and small businesses, but changing circumstances are now stimulating major changes at the macro level of national governments and global trade.
   
The connection between the real economy and the money economy must be inherent in any sustainable system of money and finance. The creation of sound exchange media (money) requires that money be spent into circulation by trusted producers of real valuable goods and services that are in the market and available to be delivered in the near-term. Money then is a mere place holder for real economic value; it is a credible promise that will be accepted as a form of payment.

            The Banker’s Last Gasp and the Great Monetary Reset
 
While the past several decades have seen the emergence of many successful approaches to decentralizing the control of credit through private currencies and independent commercial credit clearing circles, economic and financial corporatization and globalization have proceeded to place ever tighter control into the hands of an elite class who have used their money power as a weapon of war. The Breton Woods monetary agreement established toward the end of World War II made the US dollar the world’s reserve currency and allowed the US and its western European allies to dominate and control the machinery of money and finance. But with the breakdown of that agreement and the increasing application of financial and economic sanctions we now see that some countries, notably China and Russia, are taking independent action to protect their own economies and security interests.
 
These countries are moving to back their currencies with real commodities as Alasdair Macleod describes in his recent article The Commodity Currency Revolution, and in this YouTube interview Commodity-Backed Currencies to Challenge Dollar Yen & Euro?. This phenomenal shift is further elucidated in various other sources, including David Stockman’s Monetary Madness Among the Central Bankers, and Alastair Crooke’s post about the decline of the western financial system and the US dollar as the world reserve currency. The latter makes the point that “… the financial war on Russia gave the West an unmistakable lesson from Moscow that the hardest currencies are not USD or EUR, but rather oil, gas, wheat, and gold. Yes, energy, food and strategic resources are currencies [in the real economy].”

Another sobering thesis is being articulated by Dr. Tim Morgan at his website Surplus Energy Economics, in which he argues that, “the economy is an energy system, not a financial one,” and that “The concept of limits is replacing the paradigm of ‘infinite growth,’” and “What lies ahead is a process of adjustment – we might call it realignment – to the new reality of an economy in which the scope for expansion is constrained by limits, both to energy value and to environmental tolerance.” Morgan’s economic model, which he calls SEEDS [Surplus Energy Economics Data System], is based on the idea that continual economic growth has been possible only through the availability of the surplus energy that comes from fossil fuels. But that surplus (energy out minus energy in) is continuing to decline. For the moment, I will leave it to the reader to ponder what the implications of that might be.

This shift toward commodity backed national currencies, while not a total solution to the money problem, is a positive step toward reconnecting the means of payment to real economic value. I expect that it will eventually lead to the emergence of a new standard of value against which the value of currencies can be objectively measured. That standard will not be gold, as it was in the past, but a wide assortment, or “market basket,” of useful commodities like the one I’ve been proposing for the past 40+ years. History shows that, as exchange systems evolve, credit instruments become the primary payment media because their quantity is able to expand and contract in step with actual supplies of goods and services. Then, the commodities serve only as the measure of value and unit of account to quantify credit. Just as happened in the past with gold, I expect the commodities in a standard “basket” will serve as a new measure of value, but payments will be made using credit instruments and the credit clearing process, with perhaps, occasional settlement of residual account balances by the transfer of actual commodities. As I’ve repeatedly explained elsewhere, it is crucial that these credit instruments (currencies) be spent into circulation interest-free and on the basis of an adequate real value foundation.
 
            The Usury Conjecture on the centralized, interest-based, debt-money system
 
In this article (available on my website or on Medium), I describe the growth imperative that is the fatal flaw inherent in the global central banking, interest-based, debt-money system; I summarize the observations that have led me to conclude that it is utterly destructive and must ultimately be replaced; and I call upon systems analysts to create realistic models of the system to prove the conjecture beyond any reasonable doubt.

This is the Usury Conjecture in a nutshell:
The central banking, interest-based, debt money system that is dominant around the world today is neither stable, nor sustainable, nor fair. The creation of money based on bank lending with interest creates an imperative for debt to grow exponentially with the passage of time. That debt-growth imperative drives artificial economic growth as borrowers compete with one another to acquire enough money from the always insufficient pool of money to service their “loans.”  
 
When I first began my intensive inquiry into money, banking, and finance more than 40 years ago, it did not take long for me to discover the essential nature of money, where it comes from and how it is created, allocated, circulated, mismanaged and abused. I was astonished that this system had been allowed to become such a dominant force that has wreaked enormous devastation upon the world over such a long period of time despite many attempts to reform it. One champion of monetary reform was Congressman Wright Patman who, as chairman of the  Committee on Banking and Currency of the US House of Representatives during the 1960s, sought to educate the public about the money and banking system through the publication of the committee report titled, A Primer on Money, and a shorter extract titled, MONEY FACTS – 169 Questions and Answers on Money. These reports were produced and distributed through the Government Printing Office and were important in my early research. You won’t find any mention of them on Wikipedia, but if you want to cut through the fog of obfuscation and learn how the system really works they can be accessed through my website.

Addendum of Tuesday, June 28, 2022:

One of my correspondents recently asked if the interest that banks charge when they create money by making loans causes inflation. Perhaps this response will help to clarify the picture of our current monetary and economic predicament, and add some precision to my usury conjecture.

First of all let me make clear that, while the money needed to pay the interest on a particular loan is not created when the loan is made, the banks must create sufficient money (by making additional loans) to enable the aggregate money supply to stay ahead of loan principal repayments, otherwise the money supply will contract and cause economic depression (defaults, business failures, unemployment, etc.). Thus, the creation of money by banks on the basis of interest-bearing loans biases the entire system towards deflation (too little money), as I described in my Usury Conjecture document, https://beyondmoney.net/2022/06/03/the-usury-conjecture-on-the-centralized-interest-based-debt-money-system/.

To compensate for that, banks push hard to induce private borrowers (corporations and individuals) to take on additional debt. But there is a limit to their willingness to borrow more and to their ability to repay, therefore the national government steps in to play the role of “borrower of last resort.” From the banks’ perspective that is ideal because when a bank lends to the government (by buying government bonds, notes, or bills) it gets a guaranteed return and takes no risk of default. Politicians are all too willing to go into debt to dole out money to their corporate patrons (especially weapons and drugs makers) who fund their election campaigns, and to curry favor with the voters by throwing a few crumbs their way. The government therefore goes way beyond borrowing the amount needed to keep the money supply sufficiently pumped up to avoid deflation, and thus creates inflation by funding many things that are pure waste from a consumption and environmental standpoint. So, does interest on bank loans cause inflation? No, not directly, but indirectly as I’ve just explained.

As economist Milton Friedman has famously said, “Inflation is always and everywhere a monetary phenomenon,” and on that point, I agree with him. It’s not just the amount of money that causes inflation; it’s the basis upon which the money is issued. Price inflation is mainly caused by money debasement, which is the creation of money on an improper basis. An improper basis is any loan that is not made to enable the sale of goods and services that are readily available in the market in the near term. Thus, improper money creation is based on loans that are made to finance speculation, or to finance long term capital improvements that create consumer goods only in the far distant future, or to purchase debt instruments of the government. None of those put additional goods or services into the market for purchase in the near term; therefore you have “more money chasing the same amount of goods and services,” or money being put into circulation faster than goods and services are being produced.

It is possible for some price inflation to be caused by reductions in supplies, but that is usually limited to particular products. However, in today’s global economy there are various factors that are affecting supplies more generally, so that has become a contributing cause of the inflation that is being experienced at this time.

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