Driving an economy on GDP - this is your economy on speed

This image is from the movie speed, a twentieth century fox production

An economy is the system by which a society decides how to distribute resources.  You’d think such a system would start by measuring those resources, but rather, our economy is driven by money.  Instead of creating and distributing money where it will do the most good, however, in our economy, money is printed for profit by banks looking to charge interest which won’t exist until someone borrows that, too.  This interest means our economy always has to keep growing by more than the rate of interest, pursuing infinite growth on a finite planet.  This is why our politicians (here in Australia, but also elsewhere on our pale blue dot) are continually talking about jobs and growth, meaning the growth of GDP (regardless of whether this means growing the pollution in our air, water, or food).

In the movie “Speed”, the bad guys have strapped a bomb to a bus that will blow up if the bus ever slows below 100Mph.  The movie has Keanu Reeves playing the role of our politicians driving our economy, watching only the speed gauge (GDP), because if that needle ever drops (or even stays the same), the whole economy blows up.  Meanwhile, he’s too busy to notice we’re running out of gas (and topsoil), the temperature keeps rising, and every now and then, the bus drives right over liberals in their priuses, immigrants in their cheap imported cars, and any of the other expendable bit players… Unfortunately, we all know how this movie has to end, and it’s up to us to get off this bus while it’s still moving, by building a smarter car.

Old Systems: A casino story

“Economy” is just a word, a concept, and not some unalterable force by which we all have to live. It is a man-made set of rules that puts us in the position we are now, rules that can be changed.  Since a lot has been said about Governments, banking, corporatocracy, and democracy, allow me to paint an analogous picture for you instead…

Imagine if you ran a casino, and people came in to have a gamble.  Rather than have people gamble with their own assets, they simply drop off the keys to their cars as they come in, and in exchange, you loan them some chips – at interest.  They can play whatever games they like, so long as they bring you back more chips than you loaned them, otherwise you take their car.

The house always wins, but so long as the games seem fair, this works well.  Since you are making money on the interest, you don’t need to actually run all the games, so you leave that outsourced to a respectable, reliable institution, to maintain order at all the tables.  The people running the games, you loan them some money too, enough so everyone feels they have a chance to win the interest they owe you on their chips.

Since everybody owes interest, some people will always fall short, but so long as you keep lending out more chips, it seems to all work out. You like the high stakes games best, of course, they usually involve people gambling over other people’s stuff.  You work out you seem to do best out of the “Defense” and “Natural Resources” games, the highest stakes of all the games.

People lose from time to time, and occasionally some of these people complain the games weren’t fair to begin with.  The people in charge of running the tables start arguing loudly about how to solve these problems.  On the left side of your casino, those running the tables keep coming to you to borrow more, so they can help players pay off their interest at this or that table.  On the right side of the room, they start blaming the losers for being losers, and for not playing hard enough, telling people it’s everyone’s responsibility to play harder.  Then they start taking chips off the tables until the games start to break and players can’t get their winnings.   When that happens, they pick the player with the most chips at that table, and get them to buy their way to being in charge of the game and make up their own rules.

Why is interest a bad thing?

You may have heard that banks create our currency through lending to the government, or people.  When a central bank loans the government money, it’s created as a deposit in other banks, which then go and lend most of it out, creating more deposits at other banks, which lend most of that money out again and so on.  This means the money created by the central bank gets multiplied several times over because banks don’t have to keep their deposits on hand, but can simply lend it out again, creating new money in the process.

Most OECD countries determine the proportion of deposits banks can lend by something they call the “Cash Reserve Ratio”, but here in Australia, there isn’t one, here, our banks use capital requirements instead.  In practice, it tends to be the interest rate which determines the amount of money created by banks more than the ratio in any case.  When banks need more money, they simply ask the central (or reserve) bank.