Thinking about money

When it is considered that the US, with 5% of the global population consumes 25% of global energy supplies, we see the sheer impossibility for China or India to begin to approach US levels of consumption within the existing global political and financial market settlement that has been maintained since Bretton Woods in 1944.

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If we look at the current structure of the global energy market, we are conditioned to think that the "big bad wolf" is a "cartel" of OPEC members. However, the fact of the matter is that while there has indeed been a cartel extracting extraordinary profits from energy markets in recent years, this has consisted of intermediary investment banks and energy traders, who control the global market platform on which oil is traded and benchmark prices are set. In other words, the derivative tail has been wagging the oil market dog.

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It was instructive to hear the response at an industry event last June of both a panel of senior energy traders and their audience when asked for an assessment of the likely success of emissions trading. "Slim to zero" was the consensus of both, and even more telling was the analogy from the floor: "If you want to keep a donkey healthy you don't take care of what comes out of it, you take care of what goes in."

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We take for granted that we need banks to create credit but perhaps do not realize that this bank-created credit constitutes the bulk of our money supply. The effect of a monetary unit created as a debt is that -- to take the UK as an example -- more than 97% of all money in circulation has come into existence through the creation of loans (two-thirds of them in respect of mortgage loans secured against property) by "credit institutions" such as banks and building societies.

However, when credit institutions create money through a loan, they do not create the money necessary to repay the interest on that loan. So the simple and inexorable mathematics of compound interest on the loans backing our money drives the unsustainable imperative for economic growth at the heart of our malaise. We also take for granted that banks are entitled to charge interest on the credit they create.

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A new website, which links would-be borrowers together with would-be lenders essentially on a peer-to-peer basis, does for banks what Napster did for the music industry -- it dis-intermediates them. But the Guarantee Society or Clearing Union goes further than this: credit is granted bilaterally and interest-free, and the only costs to the system user are the administration/accounting costs and a share of any defaults. Furthermore, there is no reason why transactions in a "Clearing Union" need be settled in central bank-issued money, since users may quite simply agree that they will accept "money's worth" in (say) energy or commodities instead by reference to a value unit.

While banks, credit unions or ratings agencies may be the managers of the system and credit creation in this model, banks would no longer be able to charge us for their use of our credit. Some commentators, notably Susan George and George Monbiot, are advocates of an "International Clearing Union" as a solution. However, while an "International Clearing Union" is undoubtedly capable of being part of the solution, it is also necessary to address the nature of the monetary unit itself so that we may achieve a global monetary unit based upon "value" -- such as an absolute amount of energy -- rather than its antithesis -- the Fed-issued Dollar.

Sorry to have to tell you (again) that I don't "get" finances. (All I know is that the Bretton Woods meeting set up the current banking system to keep small bankers from getting a piece of the pie and permit the greatest amount of profiteering for the few who put the game in place.) Maybe this is something that would make finances follow some natural laws that would be easier to understand. If you're interested, the article is here.