Posts Tagged ‘economics’

Conversation Of Our Generation

5 June 2018

About a year ago, a young man named Nick Jamell started a blog ConversationOfOurGeneration.com in an attempt to cut through the lack of clear thinking and responsible debate that he saw occurring across the internet and in public life on matters of social importance.

He was recently interviewed by Jack Spirko (at The Survival Podcast, which caught my attention because it deals with Permaculture), and he seemed like a sincere guy who really wanted to see some changes made on this planet. I offered to write a “guest blog” for him, and he graciously agreed to publish it (linked above).

I wrote a piece entitled “My Paradigm Shift Experience” which tried to convey in just a few words the depth of change a person may experience as he shifts from merely studying and discussing the human situation to becoming involved with a group that is actually doing something about it.

I might note that this shift started for me by reading a real book and interacting face-to-face with real people who were involved with the movement we all know as Scientology. I don’t know if an experience like that can be duplicated on the internet. But as this internet is now the place where so many of us connect, I hope that for many people that experience can at least start here.

Advertisements

Energy and Economics

11 January 2018

I wanted to get started on this topic. I may go back and amplify this later.

Balance Sheet for Planet Earth
Years ago I read an article about a man who was attempting to create a “balance sheet” for the planet. I should have kept a copy of this article, but so far have not found it. As I recall, he felt he needed to use some sort of energy unit, or perhaps arbitrary unit, to express values in this balance sheet, as there is no agreed-upon planet-wide currency. I was intrigued. I believe I was doing bookkeeping work when I ran into this, so I found it an interesting concept.

Systems
In science and engineering, we have the concept of a “system.” Scientists and engineers have long dealt primarily with mechanical or only-physical systems. Sociologists, on the other hand, have been interested mostly in human (or animal) systems. It eventually became clearer that these two fields actually overlap, often extensively. The problem was really one of analysis. Our primary way to model a system for analysis is through using mathematics. However, the mathematics involved for a complex system (where there may be hundreds of interrelated actions) were too cumbersome until the advent of computer-based modeling.

Economics
The word “economics” shares its root with “ecology” and similar words, where “eco” comes from a Greek word meaning “house” or “household.” Obviously the sense of the original meaning has been broadened, so that these subjects can be applied to almost any system, but still somewhat using the analogy of a system to a house. Obviously, it is people who run an economy. So that places economics in the social sciences. “Natural” systems, even if living, are seen as self-governing, and – by most researchers – as self-created for that matter, but research in other directions has demonstrated that this is not totally true. Even in purely physical systems, the fact that someone (the researcher) is observing the system seems to have a subtle influence on how the system behaves. This opens the door to treating systems formerly thought of as merely physical to something a little closer to alive.

Permaculture
As I have been looking into the subject called “permaculture” for a while now, it is worth mentioning that this is a good example of an attempt to create a design philosophy – if not a rigorous mathematical model – for a human-built “natural” system. Because the creators of permaculture sought to keep the subject simple and teachable, this is one good way to get a feel for how to approach the problem of applying both physics and economics to a system.

Money is Energy
However, before I was introduced to permaculture, I was introduced by L. Ron Hubbard to the idea that money can be thought of as a type of energy, or as a way to measure energy flows.

When I was trying to re-locate the article I had seen about a planetary balance sheet I ran across several school lessons (an interesting resource that often appears in searches) with the name “Earth’s Energy Budget” or similar terms. These lessons were mainly written to help students wrap their heads around the “greenhouse effect” climate theories. The fact is that without an atmosphere around Earth – including a portion of CO2 – surface temperatures would be much more crazy than they are now, and the planet would be barely livable.

In these lessons, we have an example of a living system that is relatively stable, or in balance. So I thought I’d go through it briefly as an example. The system (as modeled for analysis) has just one input, sunlight. Though this may not be strictly speaking totally accurate, that one input dominates by many orders of magnitude any other physical input into this system. Most of these lessons start with 100 “units” of energy into the Earth system. Basic theory of a balanced system predicts that 100 units of energy should exit the system (be measurable as outputs). Again, this might not be strictly accurate, but in this system, that’s what we see. The measured outputs are:

  • 30 units reflected light.
  • 49 units atmospheric heat lost to space.
  • 9 units water vapor heat lost to space.
  • 12 units surface heat lost to space.

You will see that these numbers add up to 100, confirming that the system is in balance.

The atmosphere and the planet surface convert 70 percent of incoming sunlight to heat. After that the interaction between surface and atmosphere becomes extremely important, with about 100 energy units constantly cycling through that part of the system.

In the lesson I took these figures from, the students are asked to stack pennies on a diagram illustrating these various energy exchanges in order to visualize the size of these different flows. I have not yet come up with an adequate visualization for the system I am more interested in.

A Model for the Economy of Earth

The amount of energy used by the humans of Earth – or even the entire biosphere – is only a fraction of a “penny” in the energy system illustrated above. Yet we humans are quite sensitive to relatively small fluctuations in the flows of our systems. Beyond that, there is no doubt that we, as the most sentient beings on the planet, must take responsibility for the natural systems we interact with. But we have only been able to really monitor those systems for the last 100 years or so. We are babies in the game of managing planets; and our lack of experience is obvious!

Balance sheets concentrate on reporting assets versus liabilities. An imbalance in favor of assets suggests the enterprise being reported on is doing well. An imbalance in favor of liabilities suggests it is in trouble. In business, these reports are made every year, or sometimes even every three months. While it would be good to keep track of the entire planet on a similar time frame, that might not be practical. But the way things are currently playing out, we should know where we stand at least every five years. And we could probably figure out how to reduce the reporting period down to a year or less once a working system was established.

In physical systems, assets – or pools of potential energy – are relatively unimportant. In the above example, the heat generated by the Earth itself can be totally ignored. Similarly, “liabilities” is basically a human concept. So physical systems are mostly about flows, or only look at the energy storage structures that could directly influence those flows.

In fact, even in human systems, “assets” and “liabilities” are actually not that easy to evaluate. Many things counted as assets lose value over time due to wear and tear, etc., but that’s usually only roughly accounted for. The most important long-term asset is land. Probably the least important is cash. Yet both of these have volatile prices. In business – as in physical systems – the more important measures of health are its flows; is it making more than it’s spending?

The daily flow of energy received from the sun is estimated to be about 11,000 exajoules, an enormous number. Humanity needs only about 2 exajoules a day. It takes most of this energy from “fossil fuels” as well as other carbon sources. It is hard to imagine at this point how things would change if we got all the energy we needed by converting solar radiation. Plants perform this conversion every day, yet that mechanism is insufficient to do the job, as we need to leave most of the plants where they are to perform other functions. In any case, energy input is really not the problem for our world balance sheet. It seems to be more a problem of human behavior, which is classically thought of to be governed by “policy” but more often governed by other factors that most managers seem confused about.

How limited are resources?

What ecologists call “resources” is what economists might call “assets.” Yet planetary resources do not appear on the balance sheets of most businesses unless they have direct control over them and are actively exploiting them, such as in mining. Even then, the land might be valued by its cost of purchase, and that purchase might be seen by the company as little more than one of the costs of production.

Yet, obviously, planetary resources are limited. The most obvious example of this is land area. The only way to get around that is to build skyscrapers and huge basements. The air and its quality is also a limiting factor, as are sources of fresh water. With sufficient energy inputs most limits listed so far could possibly be overcome. This might well be true of all important resources.

Thus, we are looking at a “balance sheet” where “assets” could be valued near infinity. Why, then, do so many people feel so “poor?”

Our ability to handle energy flows

It appears, then, that our basic problem must have something to do with our ability to handle large energy flows. Indeed, people who have the ability to handle energy flows sufficient to operate an organization that does billions of dollars of business a year are considered so rare and valuable that they can garner huge wages all out of proportion the the economic needs of even a large and wealthy household.

The ability to arrange for the energy flows that would be necessary to make this planet work well for all life forms currently using it as their home is probably a key limiting factor to our economic progress. Even given all the criminal enterprises that drain energy out of the system, or waste it, or use it to damage people or property, we could probably do well anyway if there were enough of us that could conceive of and implement systems that could handle energy (and money) flows sufficient to do the job.

And so we see the situation focusing down to a psychological (and behind that, spiritual) problem that too many people share. L. Ron Hubbard once expressed it as an inability to “think big” enough to solve the problem at hand. One benefit of his technology is that it helps people improve greatly in this ability. I think we need more people like that!

And That Is Banking

18 May 2017

INFLATION IS DETERMINED BY THE RATIO BETWEEN THE DEPOSITED GOODS AND THE NUMBER OF RECEIPTS (money) ISSUED.

…real banking, can all by itself, increase production.

– L. Ron Hubbard
HCO Policy Letter of 2 September 1982
AND THAT IS BANKING

The implication of the above reference is that poor banking practices can cause runaway price increases, while sound banking practices can increase the prosperity of all.

I wanted to write something about this subject because I have been studying about how home loans work, and it helped me realize some things that others have been pointing out for a long time.

Note that on 19 May I rewrote this post to try to make it more accurate; see more about that below.

Financial people tend to speak in terms that are not easily understood, and to assume you know about something that you don’t actually know about. However, most people have heard of the term “balancing the books” and this is a basic concept worth going over.

I suppose the idea that the books have to “stay in balance” is similar to the idea that “for every action, there is an equal and opposite reaction.” In the physical universe, this is true by observation. However, money and finance are conceptual universes, or you could say a kind of mathematical model of the physical universe. If a car exists, it is assumed that someone was paid to make it, whether that’s really what happened or not. So if I buy a car, I basically convert some of my cash into a vehicle. In my books (if I kept books), the price paid moves out of the Cash asset category and into the Vehicles asset category, and they stay balanced. What if someone gave me the car? I basically have to create a special category for gifts, which in a commercial business would be similar to something called “retained earnings”.

Debt

Now, say I’m a bank, and I have some deposits from my customers, and loan a portion of these to someone. This decreases my cash – the pool I make loans from. How do I replenish that pool (other than by getting more deposits)? In normal banking I would have to use part of my income (payments on loans I had already made to other people) and put that back into my cash. In mortgage banking I could do something called “selling the loan.” Basically, the loan turns into a security (essentially a document that can be bought and sold) that I can sell to a company that buys those types of securities.

Where do those companies get their money? They also create and sell securities – stock, basically – to investors. The investors include a lot of firms that help people save for retirement, as well as other investment firms. Those firms buy all sorts of stocks and other securities with that money.

The ultimate source of money for buying debt (making loans) in the U.S. is the Federal Reserve. The “Fed” is part of a network of “Central Banks.” Central Banks get charters from governments to control the money supply for them. They regulate banks, and they buy debt (or make loans, however you want to look at it). The Central Banks deal mostly with the large commercial banks, which are all international corporations. Smaller local institutions deal mostly with the big banks. The chain of purchasing debt works its way down until you get to the borrowers, who are expected to keep up their flow of payments. Governments are also large borrowers. To borrow money, they issue “bonds,” which come with a promise to pay dividends, and the full amount borrowed at the time of maturity. So in the case of government borrowing, the taxpayers, have to pay all that through their taxes. That’s why “bond initiatives” have to be approved by voters. In the end, a lot of what we make at our jobs goes to make profits for the owners of “debt.”

Making Money

Before my recent studies, I hadn’t really heard about this practice of “selling debt.” But debt is a receivable on the bank’s books, so it is worth something. It never occurred to me that you could somehow sell that to another company to get more cash (stay liquid, as the financial people call it). But this is really just another way of saying that the bank borrowed some cash. I’ve heard of companies borrowing to make payrolls, or buy new equipment. I’d just never heard of banks borrowing so they could make more loans. Of course, assuming they continue to service (collect payments) on the loans they sell, they have to forward most of those payments to the new owners of the loans, so that portion of their income is no longer available for lending.

As I wrote this, I came to see that “selling debt” could also be given another meaning. It could also be seen as selling people – governments in particular – on the idea that they should borrow money in order to do things. They shouldn’t save, they should borrow. You shouldn’t “wait until you can afford it,” you should buy it right now, do it right now. With governments, this is particularly pushed as a way to finance wars. Every major war I am aware of was financed with debt – the taxpayers (via the government) borrowed money from banks, then had to pay it all back afterwards. It is a potent way to “make money” in a short amount of time. I don’t know, however, if it really accomplishes anything over longer periods, especially if it involves making war.

Fractional Reserve Banking

Some people believe that this is a new idea. But it is really just a newer term for an old idea. According to Google’s Ngram viewer, the phrase first appeared in literature around the turn of the last century.
As long as banks have been loaning money, they have been using deposited funds (or other assets) to do so. The idea of “Central Banks” was pushed into place after it seemed that unregulated banks had an inclination to dig too deep into their cash. Now Central Banks police what fraction of a bank’s deposits (or cash, to use a simpler term) must be held in reserve so that their depositors will be happy with the illusion that their full deposited balance could be withdrawn at any time. Depositors get to account for their full deposited amounts as “cash,” when in reality only a fraction of that amount is actually available to be paid out from the bank’s reserves.

No one likes “reserves” because they just sit there and don’t do anything. It’s kind of like a having a Fire Department in your town. In a perfect world, they would never have a fire to fight, or even a cat to get out of a tree. In this real world, you need to have one because “stuff happens.” Same goes for reserves.

Some would argue that amounts held is reserve should be quite substantial. It gives stability to an economy, and breeds a certain level of confidence, even a certain willingness to take risks. I think there is validity to those arguments. But that does not mean banks need to keep 100% of their “on demand” cash deposits as reserves. This is discussed more below.

The beauty of a cashless system (in the eye of the banker)

In the “old days” money meant gold coins, or ingots of silver, or other precious metals, or gems. Today it can be reduced to a code in a bank’s database. Money (currency, really) had to be manufactured, transported and stored when not in use. Meanwhile, businessmen had grown used to account books, and moving larger sums around using bank drafts instead of currency. This began the move away from “hard” money. The “softer” the money, the easier it was to handle and move about. Banks and their major customers really liked these benefits. And so, national currencies were pushed into place, the use of paper money was greatly expanded, and finally computer systems were developed that just require an ID card to access account records.

Global-scale electronic funds transfer systems now exist, and are very widely used. All accounts at all modern banks are computerized. Banks are now relieved of the problem of having to store precious metals in their vaults, though “modern” money can still be stolen. To the extent that the world goes cashless, banks and stores are relieved of the problem of securing their on-hand currency, and only have to worry about their computers, which can be locked away in their now-empty vaults.

So, what’s so good about cash?

However, the credit or debit card holder now has to worry about the security of his electronic transactions. I once had a bank make a $2,500 error in my favor. They never bothered to correct it, though I told them about it more than once. For them it was insignificant, but that’s a huge amount for me. What if my account suddenly one day had $2,500 less in it? They better be able to correct that!

In a secure and honest world, using a card instead of cash (currency) would be a great way to go. In the world as it really exists, I want to be able to fall back on coins and paper money. If a store’s electronic payment system goes down, I want them to accept my cash. If I need some water out of an old-style vending machine, I need some coins or I go thirsty. If I want to tip a waiter, it’s easier for me to think with using a couple of extra bills.

When money is a commodity, then you can’t have some unless you earn it or physically steal it from somebody. When money is only a number in a database, what happens if I can’t get access to that database? And what happens if someone can get illegal access to it? Or in some other way fiddle with accounts just by making some entries in a computer program? It gives the tech-savvy an advantage I’m not sure they’ve earned. The cashless ideal includes a reliance on technology that is not necessarily as reliable as I need it to be. At the business level, if a transaction gets fouled up, it can be fixed later. At a personal level, it could mean the difference between staying fed or going hungry.

I’m not advocating a return to cash necessarily, though we might be forced into it should the electronic funds transfer systems stop working. But I am pointing out that our turn away from cash did not handle the most important problems we have always had: dishonesty, thievery and avoidance of real productive work.

Reality Check

My original concept of how this scam works was simple, but incorrect:

The bank has my $100. I thought this meant it could loan out $1000. That’s not exactly right. It is only allowed to loan, maybe, $90. Except, that loaned money is going to end up in another bank account, and then about $80 of that could be loaned back out. That whole cycle can be imagined to repeat maybe 5 or ten times. Now a lot more than my $100 has been loaned – deposited – and re-loaned. That’s what people call “creating money.” I discuss this more below.

The other part of my perception of what was wrong with this system was the cashless nature of modern transactions. This possibly provides more opportunity to “fiddle” the system. If you have to provide a borrower with real currency to complete a loan, then if you run out of currency, you can’t make any more loans. If you only have to credit an account on a computer, then you don’t need the currency. So, who’s to stop you from just pumping out loans? Your accountant, if he’s honest. Or a regulator, the next time you get audited. So the real point here is that the removal of hard currency from the system, reducing it all to numbers in databases, has a tendency to degrade the underlying concepts of what money is and represents. It should represent real value, real productive work. You should not be able to “fiddle” it into existence when you have done nothing to earn it.

Interest

I originally linked this trend towards a cashless system to the decline of interest rates, close to their total disappearance. I have a problem with interest because I don’t think most of the explanations for it are correct. It is often described as a payment to the lender based on the risk he takes by loaning money. But what about the risk the borrower takes in borrowing money? And what about loans between friends or relatives? I think the banks just decided to shift the paradigm because they had the power to do so. Look at interest rates on savings accounts, for instance. It used to be recognized that the depositor was actually making the bank a loan, and should earn interest on his unused balance. But depositors had no way to enforce that idea on bankers, so gradually interest payments on savings accounts have reduced to almost nothing.

The abandonment of the use of interest rates to control inflation in certain markets, and the subsequent increase in the supply of money in those markets, are bits of history not totally explained by the factors discussed above. Though the smaller banks that overextended themselves before the Great Depression could be blamed for what happened, I think that blame would be misplaced. They, however, felt the brunt of new banking regulations, while at the same time, what was to become a huge boom in the mortgage markets can be traced back to those times. I think there remains an untold story (at least it hasn’t been told to me) about how that all came about and about what is unfolding today. My concern is that we will strike out at the wrong targets (called misidentifying root cause where I work) and simply prolong our agony as a result. Benefiting from the suffering of others has never been an honorable way to gain status in a society. Yet suffering continues while a few grow unbelievably rich. Until we begin to apply more effective solutions to problems of finance, the economy, and politics, we will continue on our slide towards a non-sustainable system that will eventually totally break down.

Credit:

I relied heavily on an article written my Kenneth Ballard here:
http://www.kennethballard.com/?p=2322
to get an explanation of how banks account for the loans they make.
I don’t know much about this guy, but he seems to know what he’s talking about…I wish the subject were easier to understand. I have had a terrible time trying to do so…
Wow! Mr. Ballard has responded with corrections here:
http://www.kennethballard.com/?p=4120

Follow-up notes for those interested

According to the Federal Reserve’s own website:
“Reserve requirements are the amount of funds that a depository institution must hold in reserve against specified deposit liabilities. … Depository institutions must hold reserves in the form of vault cash or deposits with Federal Reserve Banks.”

Notice that this says nothing about loaning money. The “reserve requirement” is a fraction of total monies on deposit. So, that means the rest of the monies on deposit are available to loan out. I think the first stumbling block here is the term “deposit liabilities.” Who, who isn’t accounting trained, knows what this really refers to? It’s like two conflicting ideas in the same term. This goes back to the fact that there are two balancing sides to every transaction. When a bank receives money from a depositor, it’s not a gift, but on the other hand, the depositor gets nothing in return, except a receipt. As the reference I cited at the beginning states, in the “old days” that receipt acted as money. Nowadays, the fact that a person has money “on account” gives them the right – or ability – to buy things with it.

The depositor counts his bank balance as cash – as a liquid asset. He can do this because there is an implied promise (perhaps written somewhere) that the bank will pay him back “on demand.” More realistically, the depositor has loaned the bank some money for its use. But there is no formal loan contract, as would be the case if the depositor had purchased a CD or a bond. So the depositor is encouraged to not think of his deposits as “on loan” to the bank. However, that is closer to the actual situation. I think this difference between perception and reality is what some people object to. Yet, if the banks do a good job, no one will ever know the difference.

It could be argued that banks should be more honest about what they are doing. It would probably better reflect how they actually operate if they sold bonds or CDs to anyone who wanted to maintain a significant balance with them. Or to make them a “member” like the Credit Unions do.

Private individuals are never going to fully realize that a portion of their deposited funds is being loaned to others unless the way their account at the bank works actually makes that clear. In the past it has been a workable system in spite of this. But since interest rates collapsed, more and more people are questioning it. The “multiplier effect” would still work, but perhaps the banks should be made more responsible for both the positive and negative aspects of it. Having to “insure” bank accounts is not something that should be necessary. If the banking system were more honest with the public about how it actually operates, I think the public would support it – especially if it resulted in real economic growth at the local level. Right now something is suppressing that growth. Questionable ethics levels in the banking community does not help matters any. The banking system has a lot of power to do good in society. Or harm. It is not currently demonstrating the good side of that power.