Citizen Action Monitor

Our debt-based money system is the biggest challenge facing sustainable investment financing

Find out what our “debt-based” money system is, and why, if not changed, it could be a transition show-stopper.

No 2100 Posted by fw, November 16, 2017

To access all other synopses from Prosperity without Growth, click on the Tab titled “Prosperity without Growth” — Links to All Posts in the top left margin of the Home page.

In the previous synopsis, Section 4 of Chapter 8, Jackson called for a “reframing” of our investment strategy to attract the massive funding required to transition to a prosperity without growth economy.

In my synopsis below of Section 5, titled “Money as a social good,” Jackson turns his attention to the challenge of attracting the massive financial investment required to make this transition.

The challenge he depicts is indeed formidable, leading him to conclude:

Tim Jackson

“What’s at stake here is the nature of money itself as a vital social good. Money facilitates commercial exchange; it provides the basis for social investment; it has the power to stabilize or destabilize the economy. Handing the power of money creation over to commercial interests is a recipe for financial instability, social inequality and political impotence. Reclaiming that right in the national interest is a powerful tool in the struggle for a lasting and inclusive prosperity.”

Tim Jackson is a British ecological economist and professor of sustainable development at the University of Surrey.

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Money as a social good, a synopsis, from Chapter 8, “Foundations for the Economy of Tomorrow” of Tim Jackson’s book, Prosperity without Growth, Routledge, 2nd edition, 2016-17

Tim Jackson begins Section 5 by clarifying the difference between the “real economy” and the “money economy” or “financial economy.”

The real economy is concerned with “patterns of employment, production, consumption and investment.”

The money economy is concerned with a “wider set of financial flows on which the real economy depends. … [including] “the flow of money into and out of different economic sectors, the processes of borrowing, lending, creating money (the money supply), and the changes in the financial assets and liabilities of different economic actors.”

Understanding the complexity of the money economy, declares Jackson, is a formidable challenge even to economists. It sometimes seems that it is purposefully designed to be obtuse to conceal from the public a system that “benefits the rich and massively inhibits government’s powers of social investment.” Henry Ford quipped that if citizens fully understood their banking and monetary system “there would be a revolution before tomorrow morning.

Few non-economists realize that the money economy in advanced economies is a “debt based” system created and run by banks.

What does that mean — debt-based economy? And why is it significant?

Banks create money by making loans – “almost literally out of nothing” — to businesses and households: “it simply enters the amount as a loan on the asset side of its balance sheet and the same amount as a deposit on the liability side of its balance sheet. This deposit is then available to spend on goods and services in the economy.”

However, this debt-based money system is the biggest challenge for funding sustainable investment portfolios as outlined in the synopsis to Section 4, “Investment as commitment”. 

As Jackson explains, sustainable investment must compete for funds against all sorts of other, sometimes unethical commercial investments offering highly attractive short term rates of return that are unsustainable in the long term.

Faced with unsavoury competition, sustainable investment portfolios have turned to “impact investing” where investment funds are steered towards ethical, social and sustainable companies, technologies and processes. What is emerging is “a way to leverage secure philanthropic and public sector dollars, while harnessing the power of social entrepreneurs and market-based solutions to solve some of the world’s most intractable problems.

Consider the following positive examples of small scale impact investing at the local level —

Impact investing has teamed up with community banking to “allow people to invest in their own community – for example, in low carbon energy, or in community amenities, and at the same time ensure that the returns from those investments remain within the community.”

A California-based community banking initiative created Regenerative Communities Initiative to develop financial plans for sustainability projects in nine different areas: organic local food systems, water quality, renewable energy, mobility, affordable green housing, education and the arts.

Credit unions have become one of the most popular models for community investment, in which members pool their savings to provide loans to other members. Smaller than banks, credit unions more local and designed specifically to be non-profit-making institutions.

Sadly, as Jackson points out: “the scale of this funding is simply insufficient to make the transformation happen.”

Fortunately, scaled up proposals are emerging —

Some argue in favour of changing our debt-based money system and returning more control over the money supply to government. Even the IMF sees advantages to this proposal.

Others call for an end to banks’ power to create money in favour of the installation of a so-called ‘sovereign money’ system: “governments would no longer have to raise money for public spending and investment on commercial bond markets.” Governments in Iceland and Switzerland are considering proposals to spend directly into the economy.

The stakes are high, says Jackson in his conclusion to Section 5:

“What’s at stake here is the nature of money itself as a vital social good. Money facilitates commercial exchange; it provides the basis for social investment; it has the power to stabilize or destabilize the economy. Handing the power of money creation over to commercial interests is a recipe for financial instability, social inequality and political impotence. Reclaiming that right in the national interest is a powerful tool in the struggle for a lasting and inclusive prosperity.”

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