Thursday, December 22, 2011

2012, the year of Ecological Economics? Exploring the mad rationale for asset price bubbles

Hello everyone,

It's been a while -- almost five months now -- since I last posted anything. There are various reasons for this, none of which I want to go into here. Considering this long silence, it's rewarding to see that Eco-Transitions has kept being visited from all over the world.

The need for thought on, and action towards, the transition to a new economy certainly has not diminished. However, there has been massive displacement from issues of ecological and economic sustainability to issues of keeping the globalized financial system from collapsing. As we collectively struggle to continue bailing out banks, financial institutions, and governments whose debt-ridden demise would mean disaster for hundreds of millions of households and firms, we shove climate change, peak oil, and transition into the background again. Doing so, we are in fact severing the link that exists between an economically unsustainable financial and monetary architecture (based on debt overhang as the main source of mainly scriptural profit-mongering, massively disconnected from the real economy) and an ecologically and anthropologically unsustainable production and consumption system (based on the structural need to overshoot available natural and human resources by denying finiteness and remaining deaf and blind to both bio-environmental externalities and anthropo-environmental internalities). Severing this link and worrying primarily about how to keep the financial and monetary scaffolding from crashing down on workers, families, small and medium enterprises, and governments is a massive diversion. Not that we shouldn't be worrying about this -- indeed, we should, and urgently so. But the very fact that we have to be worrying about this and are, in the process, losing the broader picture of what's wrong with that scaffolding even when it "works well," simply shows the degree to which we have collectively become hostages to a debt-money and leveraging mechanism that has long catered to our wild dreams and illusions of sustainable quantitative growth.


In fact, as I explained in earlier posts, one of the main reasons why this growth-oriented system of production and consumption is unsustainable -- that is, generates actions that systematically ignore that the economy is a sub-system of a finite, non-growing biosphere -- lies in the financial and monetary architecture that supposedly "finances" this system. Far-sighted (that's Newspeak for "prophetic") analysts like (a.o.) Bernard Lietaer, Margrit Kennedy or Richard Douthwaite have been hammering this message for two decades -- and have been joined more recently by a new generation of younger and no-longer-so-young people such as (a.o.) Richard Heinberg, John Michael Greer, Charles Eisenstein, Stephen Belgin, Marek Hudon or myself. Not that we all agree on all the specifics of how a new monetary and financial architecture could emerge and what it would look like. We don't. However, we agree on the basic premise that the hubris -- the denial of physical limits, the built-in refusal of human finiteness -- characterizing the current money system is largely responsible for the consistent overshooting of natural resource utilization and the equally consistent damage inflicted on so-called human resources. In other words, we agree on the fact that the way money is being created, circulated, and spent in today's globalized economy violates the basic tenets of the paradigm of Ecological Economics due to Nicholas Georgescu-Roegen, Kenneth Boulding, and Herman Daly.

Ecological Economics doesn't deny the need for money -- meaning, simply, the existence of one or several means of exchange that are accepted for payments by all members of a community, including the government -- nor does it reject the necessity of financing economic activity. It doesn't question the usefulness of markets as devices that support a healthy division of labor. What Ecological Economics simply and straightforwardly rejects is the unholy cocktail of bank-debt-money and competitively oriented "innovation" that makes globalized financial capitalism into a forced-growth system. The unavoidable finiteness of the biosphere -- which various mainstream growth models tend to minimize through the tricky idea of "decoupling" -- implies that "prosperity as growth" needs to be replaced by "prosperity as development without growth," to borrow Daly's terminology. More precisely, it's all about creating possibilities for qualitative flourishing that don't depend on quantitative accumulation. By now, this idea has almost become a commonplace platitude. The question is, Why does it motivate so few of us?

A by and large stationary economy such as the one Daly calls for is incompatible with massive leverage (i.e., debt financing predicated on future value growth), since the latter relies on the tacit assumption that asset values measured in dollars or euros can keep growing essentially into infinity. Moreover, this value growth can't possibly be purely inflationary, since this would mean that no additional purchasing power is generated and all value growth is due only to rising prices. Speculators of all walks of life rely on asset-price bubbles in order to quickly siphon off sufficiently high numbers to their own bank accounts -- but once that money has landed on their accounts, by God they want to be able to count on it in order to buy more stuff! Huge amounts of money that aren't backed by material stuff to purchase (at least potentially) become totally useless. So the basic message of the financial and monetary system to the rest of the economy is: Now that we've generated this huge overhang of pending means of payment, now that all our banks have created this flood of scriptural cash based on speculators' bets -- and therefore debts -- we expect the real economy to make the goods and services available for all this cash to be spent. Remember that this was the reason why Fed Chairman Alan Greenspan encouraged, or at least totally condoned, the subprime lending spree: It was supposed to help already over-indebted households spur on the real economy through new home-building projects. In a sense, this was "financial Keynesianism": the Fed allowed vast quantities of cash to flood the economy, hoping this would (just like Keynes had hoped public expenditure would) generate spending, employment, and growth.

The housing asset-price bubble was used as a strategic tool. It was encouraged and consciously sustained. It was, in a sense, the ultimate bet: Let a localized inflationary craze generate sufficient bank-account wealth for a sufficient number of people, so that when they start to spend this as yet unbacked monetary wealth, the material wealth that was needed to back it would start getting produced. Greenspan's bet, rooted in his deep faith in self-regulating markets and in the "prosperity as growth" paradigm, was that this would jump-start a virtuous process through which the real economy would rally to quickly close the gaping chasm created by the financial and monetary logic of money creation. It didn't work. It eventually forced most States to create even more debt in order to bail out the perilously exposed banks and financial institutions that had speculated on the continuation of growth. And now that the sovereign-debt crisis is threatening the whole architecture, the immediate reflex is to try to spur on growth through yet another "trick": no longer through a new asset-price bubble, but through a massive "austerity" plan based on the idea that since private-sector economic agents are better able than the public sector to generate real wealth quickly, so that public spending has to be reduced drastically in order to free up resources for investors, private employers, and privately employed households to spur on growth. Austerity measures are thought to be a growth-creating measure by which the reduction of public deficits will supposedly increase private opportunities, so that supposedly efficient competitive markets will generate the needed economic growth.

Does that sound like the remedy is awfully similar to what caused the disease? Only because it is. And it couldn't be any different as long as the basic architecture of the financial and monetary system remains what it has been. Prosperity as forced growth is simply how this system defines the possible horizon. As I was watching the documentary "Inside Job" yesterday night (you can stream it on, I clearly felt the extent to which the main actors of the financial crisis in fact staunchly believe that there is simply no other possibility than to keep pursuing the same old macroeconomic project -- what can vary is the kind of tool (whether a new asset price bubble or a wave of austerity measures) that is best used in order to pursue it. Is it any wonder that, in parallel with this scramble for yet another jump start, we are witnessing such ecological regressions as Barack Obama stopping the process of improving air quality in the air traffic sector, or Canada announcing that it is leaving the Kyoto Protocol? It simply seems impossible to fully accept that prosperity cannot -- can no longer -- be bought at the cost of denying the biosphere's finiteness and the fragility of human beings.

Ecological Economics offers an alternative avenue. It argues that the whole architecture of our system, and in particular its monetary and financial aspects, needs to be recast. The bulk of the past posts of this blog are an attempt to suggest directions in which this recasting process might conceivably move. Why are these directions so very, very difficult to accept? I think that this question, more than the content of the measures to be implemented (about which a broadening consensus is actually emerging), needs to be addressed. Ecological Economics clearly questions what it means to be "rational" nowadays. It therefore needs to face squarely the existential issue of why its basic macro- and microeconomic assumptions -- all resting, basically, on the all-pervading fact of finiteness -- generate such deep distress. Why do they trigger such fears and anxieties? Why do so many of us perceive that the new assumptions fly in the face of the very meaning we've learned to give to our lives? Why is ecological rationality so quickly brushed under the carpet as soon as economic growth stalls? These are crucial questions. And this is why Ecological Economics needs to be supplemented by what I call Existential Economics -- the analysis of how deep-seated fears, as well as non-investigated worldviews about what existence means, condition what we consider to be economically rational, feasible, and realistic.

Without such an investigation, the "next step" we need might be either too timid, or deemed unfeasible from the beginning. More on this as we move into the New Year.

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This post from the "Eco-Transitions" blog by Christian Arnsperger is licensed under a Creative Commons Attribution-NonCommercial-NoDerivs 3.0 Unported License.

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