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Crossroads on Global Infrastructure

Massive Global Infrastructure Projects Could Prevent Achievement of a Sustainable Economy While Undermining Life Support Systems of the Earth

by Brent Blackwelder

BlackwelderPlans by the world’s most powerful countries are well underway to spend trillions of dollars for new mega-infrastructure projects to rejuvenate the global economy. The hope of the G-20 nations, the World Bank, China, and other powerful actors is that the infusion of several trillion dollars for infrastructure will boost the growth of GDP by 2.1% over current trends by 2018 and rescue a “sluggish” global economy.

The new feature of this approach to infrastructure involves expanded use of public money (taxes, pension funds, and aid) to offset the risks involved in huge projects. The approach also relies heavily on public-private partnerships, where the issue of accountability and failed projects has been a serious concern.

Those seeking a sustainable, true-cost, steady state economy should be alarmed at the new approach to global infrastructure because trillions of dollars spent on mega-projects in the energy, transportation, agriculture, and water sectors could put a sustainable, true cost economy further out of reach. Reviews of completed projects in these sectors have raised questions about corruption, cost overruns, fiscal accountability, human rights abuse, and the alarming destruction of natural resources.

Who are the Major Players?

The primary mover of a global infrastructure plan has been the G-20 nations (see here for the list of member countries). Afraid of being marginalized by the G-20, the World Bank has jumped into the scramble. In October of 2014, the World Bank launched a new Global Infrastructure Facility to reclaim the leadership on global infrastructure from the G-20. Just before the G-20 Summit last November, the World Bank and the IMF, along with seven multilateral development banks, issued a press release announcing their intention to provide $130 billion annually for infrastructure financing.

In 2014, China launched the Asian Infrastructure Investment Bank with 21 Asian countries as founding members, along with $100 billion in capital.

The Crossroads

A momentous choice is before us. On the one hand, the G-20, the World Bank, and other international lending institutions want more mega-highway projects, more centralized electric power plants and electricity grids, more mega-dams and gigantic irrigation schemes with huge water transfers, and the like.

On the other hand, an entirely new approach to infrastructure is possible. An approach that, for example, eschews big central electric power plants and relies more and more on decentralized wind and solar investments and avoids the horrendous mistakes made in the past in transportation, energy, water, and agriculture. Those interested in a true cost, steady state economy should advocate change in the massive new infrastructure lending so as to support projects that enable society to stay within the carrying capacity of planet earth. Such projects could lead the way toward a different type of global economy as they shift away from the business-as-usual approach in energy, transportation, water, and agriculture.

We know the impact of too many of these schemes is the destruction of ecosystems and undermining of the life support systems of the earth. They are pushed by the economic or finance ministries that have little understanding of the limits to growth, the significance of biodiversity, and the functioning of ecosystems that make life on earth possible. Environmental ministries are likely to have little influence in the choice of mega-projects.

There is not enough time to present the infrastructure investment choices in energy, agriculture, water, and transportation that would be made in a steady state economy, so I will mention a couple of examples in the transportation sector.

Freight Trucks - futureatlas dot com

We need infrastructure projects that don’t rely on highways at the expense of public transportation and rail. Photo Credit: futureatlas.com

Consider the unsustainability of the US transportation system that has focused almost entirely on highways to the neglect of passenger and freight rail and public transportation. The US is a poor transportation model for the world. Even with state and federal gasoline taxes, the revenues are insufficient to halt the massive deterioration of road and bridge networks, to say nothing of billions of dollars of backlog in deferred maintenance. The United States let passenger railroads go to hell and allowed the movement of more and more freight by trucks rather than trains (which are three to four times more energy efficient than trucks). This proved to be the wrong infrastructure choice.

Decades ago, some US bankers were questioning the viability of maintaining the infrastructure to support sprawling suburbs. A Bank of America report likened the servicing of sprawling suburbs to the nightmare that a military commander would face in trying to keep a 1,000-mile-long battlefront line supplied with food and ammunition.

Take a look, for example, at transportation required to supply our food. One study in Germany focused on a container of yogurt on a grocery store shelf where all of the ingredients were available locally, but in this case had traveled over 1,000 kilometers to reach the distribution center. A greater emphasis on local food production could result in dramatically reduced “food miles” and utilize a much smaller transportation network–an affordable network that could be maintained.

We are at a critical moment where two approaches to infrastructure are diverging. The infrastructure path of a true cost economy can lead to smaller-scale, smarter infrastructure and a healthier earth. The proposed path of the G-20 and World Bank, on the other hand, will replicate and intensify numerous unsustainable projects and cause human civilization to exceed the carrying capacity of the earth. Scientists point out that we are already consuming about one-and-a-half planets’ worth of resources. Infrastructure choices need to be made to alleviate rather than exacerbate this situation.

Note: For more information see the report by Nancy Alexander, “The Emerging Multi-Polar World Order: Its Unprecedented Consensus on a New Model for Financing Infrastructure Investment and Development,” Heinrich Böll Foundation.

Nationalize Money, Not Banks

by Herman Daly

Herman DalyIf our present banking system, in addition to fraudulent and corrupt, also seems “screwy” to you, it should. Why should money, a public utility (serving the public as medium of exchange, store of value, and unit of account), be largely the byproduct of private lending and borrowing? Is that really an improvement over being a by-product of private gold mining, as it was under the gold standard? The best way to sabotage a system is hobble it by tying together two of its separate parts, creating an unnecessary and obstructive connection. Why should the public pay interest to the private banking sector to provide a medium of exchange that the government can provide at little or no cost? And why should seigniorage (profit to the issuer of fiat money) go largely to the private sector rather than entirely to the government (the commonwealth)?

Is there not a better away? Yes, there is. We need not go back to the gold standard. Keep fiat money, but move from fractional reserve banking to a system of 100% reserve requirements on demand deposits. Time deposits (savings accounts) would have zero or minimal reserve requirements and would be available to lend to borrowers. The change need not be abrupt — we could gradually raise the reserve requirement to 100%. Already the Fed has the authority to change reserve requirements but seldom uses it. This would put control of the money supply and seigniorage entirely with the government rather than largely with private banks. Banks would no longer be able to live the alchemist’s dream by creating money out of nothing and lending it at interest. All quasi-bank financial institutions should be brought under this rule, regulated as commercial banks subject to 100% reserve requirements for demand deposits.

Banks cannot create money under 100% reserves (the reserve deposit multiplier would be unity), and banks would earn their profit by financial intermediation only, lending savers’ money for them (charging a loan rate higher than the rate paid to savings or “time-account” depositors) and charging for checking, safekeeping, and other services. With 100% reserves every dollar loaned to a borrower would be a dollar previously saved by a time account depositor (and not available to the depositor during the period of the loan), thereby re-establishing the classical balance between abstinence and investment. With credit limited by saving (abstinence from consumption) there will be less lending and borrowing and it will be done more carefully — no more easy credit to finance the leveraged purchase of “assets” that are nothing but bets on dodgy debts.

Why are private banks controlling this public utility? Photo credit: Steve Rhodes

Why are private banks controlling this public utility? Photo credit: Steve Rhodes

To make up for the decline and eventual elimination of bank-created, interest-bearing money, the government can pay some of its expenses by issuing more non interest-bearing fiat money. However, it can only do this up to a strict limit imposed by inflation. If the government issues more money than the public voluntarily wants to hold, the public will trade it for goods, driving the price level up. As soon as the price index begins to rise the government must print less and tax more. Thus a policy of maintaining a constant price index would govern the internal value of the dollar.

The external value of the dollar could be left to freely fluctuating exchange rates. Alternatively, if we instituted Keynes’ international clearing union, the external value of the dollar, along with that of all other currencies, could be set relative to the bancor, a common denominator accounting unit used by the payments union. The bancor would serve as an international reserve currency for settling trade imbalances — a kind of “gold substitute.”

The United States opposed Keynes’ plan at Bretton Woods precisely because under it the dollar would not function as the world’s reserve currency, and the U.S. would lose the enormous international subsidy that results from all countries having to hold large transaction balances in dollars. The payments union would settle trade balances multilaterally. Each country would have a net trade balance with the rest of the world (with the payments union) in bancor units. Any country running a persistent deficit would be charged a penalty, and if continued would have its currency devalued relative to the bancor. But persistent surplus countries would also be charged a penalty, and if the surplus persisted their currency would suffer an appreciation relative to the bancor. The goal is balanced trade, and both surplus and deficit nations would be expected to take measures to bring their trade into balance. With trade in near balance there would be little need for a world reserve currency, and what need there was could be met by the bancor. Freely fluctuating exchange rates would also in theory keep trade balanced and reduce or eliminate the need for a world reserve currency. Which system would be better is a complicated issue not pursued here. In either case the IMF could be abolished since there would be little need for financing trade imbalances (the IMF’s main purpose) in a regime whose goal is to eliminate trade imbalances.

Returning to domestic institutions, the Treasury would replace the Fed (which is owned by and operated in the interests of the commercial banks). The interest rate would no longer be a target policy variable, but rather left to market forces. The target variables of the Treasury would be the money supply and the price index. The treasury would print and spend into circulation for public purposes as much money as the public voluntarily wants to hold. When the price index begins to rise it must cease printing money and finance any additional public expenditures by taxing or borrowing from the public (not from itself). The policy of maintaining a constant price index effectively gives the fiat currency the “backing” of the basket of commodities in the price index.

In the 1920s the leading academic economists, Frank Knight of Chicago and Irving Fisher of Yale, along with others including underground economist and Nobel Laureate in Chemistry, Frederick Soddy, strongly advocated a policy of 100% reserves for commercial banks. Why did this suggestion for financial reform disappear from discussion? The best answer I have found is that the Great Depression and subsequent Keynesian emphasis on growth swept it aside, because limiting lending (borrowing) to actual savings (a key feature of 100% reserves) was considered too restrictive on growth, which had become the big panacea. Saving more, even with the intent to invest more, would require reduced present consumption, and that too has been deemed an unacceptable drag on growth. As long as growth is the summum bonum then we will find ways to borrow against future wealth in order to finance the present investment needed to maximize growth.

Why would full reserve banking not crash on the rock of the growth obsession again, as it did before? One answer is that we might recognize that aggregate growth today increases unmeasured illth faster than measured wealth, thereby becoming uneconomic growth. How can loans be repaid out of the net illth they generate? Should we not welcome full reserve banking as a needed financial restraint on growth (uneconomic growth)? Another answer is that, thanks to financial meltdowns, the commercial banks’ private creation of money by lending it at interest has now become more obvious and odious to the public. More than in the 1930s, fractional reserve banking has become a clear and present danger, as well as a massive subsidy to commercial banks.

Real growth has encountered the biophysical and social limits of a full world. Financial growth is being stimulated ever more in the hope that it will pull real growth behind it, but it is in fact pushing uneconomic growth — net growth of illth. Quantitative easing of the money supply does nothing to counteract the quantitative tightening of resource limits on the growth of the real economy.

The original 100% reserve proponents mentioned above were in favor of aggregate growth, but wanted it to be steady growth in wealth, not speculative boom and bust cycles. One need not advocate a steady-state economy to favor 100% reserves, but if one does favor a steady state then the attractions of 100% reserves are increased. Soddy was especially cautious about uncontrolled physical growth, but his main concern was with the symbolic financial system and its disconnect from the real system that it was supposed to symbolize. As he put it: “You cannot permanently pit an absurd human convention, such as the spontaneous increment of debt [compound interest], against the natural law of the spontaneous decrement of wealth [entropy].” Wealth has a physical dimension and is subject to physical limits; debt is a purely mathematical quantity and is unlimited.

How would the 100% reserve system serve the steady-state economy?

First, as just mentioned it would restrict borrowing for new investment to existing savings, greatly reducing speculative growth ventures — for example the leveraging of stock purchases with huge amounts of borrowed money (created by banks ex nihilo rather than saved out of past earnings) would be severely limited. Down payment on houses would be much higher, and consumer credit would be greatly diminished. Credit cards would become debit cards. Long term lending would have to be financed by long term time deposits, or by carefully sequenced rolling over of shorter term deposits. Equity financing would increase relative to debt financing. Growth economists will scream, but a steady-state economy does not aim to grow, for the very good reason that aggregate growth has become uneconomic.

Second, the money supply no longer has to be renewed by new loans as old loans are repaid. A continuing stream of new loans requires that borrowers expect to invest in a project that will grow at a rate greater than the rate of interest. Unless that expectation is sustained by growth, they will not borrow, and in a fractional reserve system the money supply will shrink. With 100% reserves a constant money supply is neutral with respect to growth; with fractional reserves a constant money supply imparts a growth bias to the economy.

Third, the financial sector will no longer be able to capture such a large share of the nation’s profits (around 40%!), freeing some smart people for more productive, less parasitic, activity.

Fourth, the money supply would no longer expand during a boom, when banks like to loan lots of money, and contract during a recession, when banks try to collect outstanding debts, thereby reinforcing the cyclical tendency of the economy.

Fifth, with 100% reserves there is no danger of a run on a bank leading to a cascading collapse of the credit pyramid, and the FDIC could be abolished, along with its consequent moral hazard. The danger of collapse of the whole payment system due to the failure of one or two “too big to fail” banks would be eliminated. Congress then could not be frightened into giving huge bailouts to some banks to avoid the “contagion” of failure because the money supply is no longer controlled by the private banks. Any given bank could fail by making imprudent loans in excess of its capital reserves (as opposed to demand deposit reserves), but its failure, even if a large bank, would not disrupt the public utility function of money. The club that the banks used to beat Congress into giving bailouts would have been taken away.

Sixth, the explicit policy of a constant price index would reduce fears of inflation and the resultant quest to accumulate more as a protection against inflation. Also it in effect provides a multi-commodity backing to our fiat money.

Seventh, a regime of fluctuating exchange rates automatically balances international trade accounts, eliminating big surpluses and deficits. U.S. consumption growth would be reduced without its deficit; Chinese production growth would be reduced without its surplus. By making balance of payments lending unnecessary, fluctuating exchange rates (or Keynes’ international clearing union) would greatly shrink the role of the IMF and its “conditionalities.”

To dismiss such sound policies as “extreme” in the face of the repeatedly demonstrated colossal fraudulence of our current financial system is quite absurd. The idea is not to nationalize banks, but to nationalize money, which is a natural public utility in the first place. The fact that this idea is hardly discussed today, in spite of its distinguished intellectual ancestry and common sense, is testimony to the power of vested interests over good ideas. It is also testimony to the veto power that our growth fetish exercises over the thinking of economists today. Money, like fire and the wheel, is a basic invention without which the modern world is unthinkable. But today out-of-control money is threatening to “burn and run over” more people than both out-of-control fires and wheels.

Money and the Steady State Economy

Historically money has evolved through three phases: (1) commodity money (e.g. gold); (2) token money (certificates tied to gold); and (3) fiat money (certificates not tied to gold).

1. Gold has a real cost of mining and value as a commodity in addition to its exchange value as money. Gold’s money value and commodity value tend to equality. If gold as commodity is worth more than gold as money then coins are melted into bullion and sold as commodity until the commodity price falls to equality with the monetary value again. The money supply is thus determined by geology and mining technology, not by government policy or the lending and borrowing by private banks. This keeps irresponsible politicians’ and bankers’ hands off the money supply, but at the cost of a lot of real resources and environmental destruction necessary to mine gold, and of tying the money supply not to economic conditions, but to extraneous facts of geology and mining technology. Historically the gold standard also had the advantage of providing an international money. Trade deficits were settled by paying gold; surpluses by receiving gold. But since gold was also national money, the money supply in the deficit country went down, and in the surplus country went up. Consequently the price level and employment declined in the deficit country (stimulating exports and discouraging imports) and rose in the surplus country (discouraging exports and stimulating imports), tending to restore balanced trade. Trade imbalances were self-correcting, and if we remember that gold, the balancing item, was itself a commodity, we might even say imbalances were nonexistent. But of course the associated increases and decreases in the national price levels and employment were disruptive.

2. Token money would function pretty much like the gold standard if there were a one-to-one relation between gold and tokens issued. But with token money came fractional reserve banking. Goldsmiths used to loan gold to people, but gold is heavy stuff and awkward to carry around. Token money was created when a goldsmith gave a borrower a document entitling the bearer to a stated quantity of gold. If the goldsmith were widely trusted, the token would circulate with the same value as the gold it represented. As goldsmiths evolved into banks they began to make loans by creating tokens (demand deposits) in the name of the borrower in excess of the gold they held in reserve. This practice, profitable to banks, was legalized. Statistically it works as long as most depositors do not demand their gold at the same time—a run on the bank. Bank failures in the United States due to such panics led to insuring deposits by the Federal Deposit Insurance Corporation (FDIC). But insurance also has a moral hazard aspect of reducing the vigilance of depositors and stockholders in reviewing risky loans by the bank. Fractional reserves allow the banking system to multiply the money tokens (demand deposits that function as money) far beyond the amount of gold “backing.”

3. Fiat money came when we dropped any pretense of gold “backing,” and paper tokens were declared to be money by government fiat. Currency is printed by the government at negligible cost of production, unlike gold. As the issuer of fiat money the government makes a profit (called seigniorage) from the difference between the commodity value of the token (nil) and its monetary value ($1, $5, …$100 …depending on the denomination of the paper note). Everyone has to give up a dollar’s worth of goods or services to get a dollar—except for the issuer of the money who gives up practically nothing for a full dollar’s worth of wealth. Nowadays the fractional reserve banking system counts fiat currency instead of gold as reserves against its lending. The demand deposit money created by the private banking sector is a large multiple of the amount of fiat money issued by the government. Who earns the seigniorage on the newly created demand deposits? The private banks in the first instance, but some is competed away to customers in the form of higher interest rates on savings deposits, lower service charges, etc. It is difficult to say just what happens to seigniorage on demand deposits, but clearly that on fiat currency goes to the government. (With commodity money seigniorage is zero because commodity value equals monetary value—except when the mint purposely debased gold coins). Under our present system, money is currency plus demand deposits. Currency is created out of paper by the government, and no interest is charged for it; demand deposits are created by banks out of nothing (up to a large limit set by small reserve requirements) and interest is charged for it. For example, when you take out a mortgage to buy a house, you are not borrowing someone else’s money deposited at the bank. The bank is in fact loaning you money that did not exist before it created a new deposit in your name. When you repay the debt, it in effect destroys the money the bank initially loaned into existence. But over the next 30 years, you will pay back several times what the bank initially loaned you. Although demand deposits are constantly being created and destroyed, at any given time over 90% of our money supply is in the form of demand deposits.

***

If phase 3, our present system, seems “screwy” to you, it should. Why should money, a public utility (serving the public as medium of exchange, store of value, and unit of account), be largely the by-product of private lending and borrowing? Is that much of an improvement over being a by-product of private gold mining? Why should the public pay interest to the private banking sector to provide a medium of exchange that the government can provide at no cost? Why should not seigniorage, unavoidable in a fiat money system, go entirely to the government (the commonwealth) rather than in large part to the private sector?

Is there not a better away? Yes, there is. We need not go back to the gold standard. Keep fiat money, but move from fractional reserve banking to a system of 100% reserve requirements. The change need not be drastic–we could gradually raise the reserve requirement to 100%. This would put control of the money supply and all seigniorage in hands of the government rather than private banks, which would no longer be able to live the alchemist’s dream of creating money out of nothing and lending it at interest. All quasi-bank financial institutions should be brought under this rule, regulated as commercial banks subject to 100% reserve requirements. Credit cards would become debit cards. Banks would earn their profit by financial intermediation only — i.e. lending savers’ money for them (charging a loan rate higher than the rate paid to savings account depositors) and charging for checking, safekeeping, and other services. With 100% reserves every dollar loaned to a borrower would be a dollar previously saved by a depositor, re-establishing the classical balance between investment and abstinence. The government would pay some of its expenses by issuing more non interest-bearing fiat money in order to make up for the eliminated bank-created, interest-bearing money. However, it can only do this up to a strict limit imposed by inflation. If the government issues more money than the public voluntarily wants to hold, the public will trade it for goods, bidding the price level up. As soon as the price index begins to rise the government must print less, tax more, or withdraw some of the previously issued currency from circulation. Thus a policy of maintaining a constant price index would govern the internal value of the dollar (providing a trustworthy store of value and constant unit of account). In effect the fiat money would receive a real backing—not gold, but the basket of commodities in the price index. The external value of the dollar could be left to freely fluctuating exchange rates. These policies are not new—they go back to Frederick Soddy in1926, and to similar proposals by Frank Knight and Irving Fisher, the leading American economists of the 1920s. The fact that bankers and their friends in government and academia have willfully ignored these ideas for 90 years does not constitute a refutation of them, but rather is a tribute to the power of vested interests over the common good.

How would the 100% reserve system serve the steady state economy?

First, as just mentioned it would restrict borrowing for new investment to existing savings, greatly reducing speculative growth ventures—for example the leveraging of stock purchases with huge amounts of borrowed money would be severely limited.

Second, the fact that money no longer has to grow to pay back the principal plus the interest required by the loan responsible for the money’s very existence lowers the general pressure to grow. Money becomes neutral with respect to growth rather than biasing the system toward growth.

Third, the financial sector will no longer be able to capture such a large share of the nation’s wealth, leaving more available for meeting the needs of the poor. A steady state economy is not viable if it means a steady state of poverty for any significant proportion of the population.

Fourth, the money supply would no longer expand during a boom, when banks like to loan lots of money, and contract during a recession, when banks try to collect outstanding debts, thereby reinforcing the cyclical tendency of the economy. Reducing the risk of recession reduces the need to accumulate more to get us through the bad times.

Fifth, with 100% reserves there is no danger of a run on the bank leading to failure, and the FDIC could be abolished, along with its consequent moral hazard.

Sixth, the explicit policy of a constant price index would reduce fears of inflation and the resultant quest to accumulate more as a protection against inflation.

Seventh, a regime of fluctuating exchange rates automatically balances international trade accounts, eliminating big international surpluses and deficits. US consumption growth would be reduced without its deficit; Chinese production growth would be reduced without its surplus. By making balance-of-payments lending unnecessary, fluctuating exchange rates would greatly shrink the role of the IMF and its “conditionalities.” It also introduces more short-term risk and uncertainty into both international trade and investment. Many economists would see this as a disadvantage, but steady state economics favors a greater degree of national production for national consumption, and fluctuating rates would offer a bit of protection in the form of adding an extra element of cost (exchange rate risk) to international transactions. Like the Tobin tax it “throws a bit of sand into the gears” and reduces global commerce and interdependence to a more manageable level.

To dismiss such sound policies as “extreme” in the face of the demonstrated fraudulence of our current financial system is quite absurd. The idea is not to nationalize banks, but to nationalize money, which is a natural public utility in the first place. This monetary system makes sense independently of one’s views on the steady state economy. But it fits better in a steady state economy than in a growth economy.