A monetary system for a sustainable society – the BIG question.

I spent a couple of hours this evening watching Chris Martenson’s Crash Course. For those interested in financial or environmental matters, and believe there is any connection between the recent ‘financial crisis’ and the peak of oil production it is very interesting. For others, it is probably still quite interesting.

I won’t give it all away, but the lecture series gives a thorough overview of money supply, speculative bubbles (a must see section), debt, growth and all things financial. It concludes that we are in for some tough times due to the coincidence of peak oil, retiring baby-boomers, and the collapse of a speculative bubble in housing.

These intriguing lectures got me thinking about another issue. Why is it that concerned individuals spend so much time looking at the problem, and telling others about the problem, but are rarely discussing potential solutions. And I mean real solutions – the mechanics of it all – not just ‘be nicer’, ‘do your part’. What is nice anyway? And what is the part I should do, and will it work? These are the questions that need answers if change is to happen.

I know I may have fallen into this trap a little in some of my blogs. But I’m in good company. Al Gore’s Inconvenient Truth spent hours on environmental problems, but only flashed up a few dot points on what we as individuals could do, and given my recent research, most of them are a waste of time.

All of this must be leading somewhere. It is. Given the intrinsic relationship between economic growth and environmental decay, and consumption of natural resources, we must reject growth as a long-term proposition. However, if we accept that society will be forced to exist within limits, and that any growth period will be counteracted with periods of degrowth or ungrowth, how will the financial system operate?

By the time you have watched the Crash Course, you will know that for money to stay in existence growth is an absolute necessity. So how can we have a currency that performs the basic functions of money – a store of value, a medium of exchange, and a unit of account – when the quantity of goods produced in the economy may fall for long periods of time? How can interest be charged on loans if there is no extra increase in production with which to pay the interest?

This question has perplexed me for a long time. We need a monetary system that has the flexibility to adjust the quantity of money when the quantity of goods produced changes, but one that will not be prone to periodic episodes of high or negative inflation. If we have a fixed amount of currency, maybe used gold for example, when output increases prices would decline, and then rise again when output decreases. How can money act as a store of value in this case? If you lent money in period of price deflation, no one would be able pay the interest, as the loan would be continuously getting larger in real terms. This is one of the main concerns about the current financial crisis. If deflation sets in, it will become self-reinforcing, and lending will cease altogether, stifling investment of all forms.

Anyway, for now I hope this has raised your interest in the matter of money, and I will endeavour to examine some options in the next blog.