Orlov: Living on Stolen Time
Consider a flame; a jet of methane, forexample, injected into an oxygen-rich atmosphere and set alight. Nowtry to describe the shape and structure of the flame mathematically,in a way that will allow you to accurately predict how its shape andstructure respond to changes in various conditions—oxygenconcentration, gas pressure and so on. You will quickly discover thatthe mathematics of the problem can be derived from basic physicalprinciples but is intractable: there are equations that accuratelydescribe the situation, but they are too difficult to solve. Oftenthe easiest solution, one that is practical in the case of a simplegas jet, is to build a physical model or a prototype, test it, andmake some observations and measurements that characterize the system.But what if that’s not possible? Then the usual recourse is to builda computational model that simplifies the physics in various ways andbrute-forces the solution by crunching through lots of numbers.
Now consider that same flame again froma slightly different perspective: what’s actually going on? Yes, thecharacter and behavior of the flame are difficult to characterize andpredict with great accuracy, but suppose you already know what a gasflame looks like, and just want to know what it is. Here, theequations are simple. First, methane oxydizes tocarbon monoxide, hydrogen and water vapor, giving off energy (heatand light) in the process:
CH4 + O2 → CO +H2 + H2O
Next, the hydrogen oxidizes, giving offmore water vapor and energy:
2 H2 + O2 → 2H2O
Finally, the carbon monoxide oxydizesas well, producing carbon dioxide and more energy:
2 CO + O2 → 2 CO2
This is quite typical of how we goabout explaining just about everything we encounter. To understandthe flow of traffic, we think about individual vehicles and theinteractions between them. To understand epidemics, we think aboutthe course of the disease in individual patients and the spread ofinfection from patient to patient. To understand how an industrialchemical affects an ecosystem we look at its effect on individualcells in individual organisms. We take a specimen, study itsbehavior, and extrapolate it to the population as a whole. Thisapproach gives at least the illusion of explanatory depth; moreimportantly, it often allows us to establish cause and effectrelationships and, based on them, make constructive changes thatdecisively influence the outcome: impose speed limits, quarantinesand environmental regulations, respectively.
Let us try to apply this same approachto a truly complex system: the economies of US and Europe, in thestate in which we currently find them: raging government deficits,staggering levels of bad debt, continuous government bailouts andinfusions of fiat money by central banks, record levels of povertyand long-term unemployment and underemployment, and a lack of anymeaningful economic growth. Specifically, let us try to characterizethe effect of the continuous monetary infusions, bailouts, andstimulus spending. The economics profession has failed to do this andso amateurs are forced to step into the breach. The economists’ usual excuse is that it’s allvery complicated; sure it is, so is a gas flame.
All money is debt. It is created whensomeone takes out a loan, promising to repay it (with or withoutinterest) with proceeds from his or her future labor. If that promiseis broken, the money ceases to exist. In the normal course ofaffairs, the lender then “loses” the money. If the lender losesmore money than he happens to have, then the lender is bankruptedand, economically speaking, ceases to exist as well. What happenedduring the financial collapse of 2008 is that the real estate bubbleburst and many loans went bad at the same time. The response was notto liquidate the lenders who lost more than they had, but to propthem up by issuing further loans that were not supported by anyspecific mechanism or realistic chance of repayment—just thecompulsive thought that big financial organizations must not beallowed to fail because that would irreparably damage the system.Propping up bankrupt institutions by issuing fake money (or, moreprecisely, fake debt) has been assumed to be less damaging to thesystem than doing nothing.
This assumption would perhaps have beenjustified if the financial difficulties were, as was once thought,temporary in nature, that the economy would roar back to life andgrowth would resume. Now, three years later, we find ourselves backwhere we started, and this assumption no longer seems tenable. It isnot clear why growth should resume, as many factors, persistentlyhigh energy prices among them, continue to weigh it down. Weshouldn’t bet on any more economic expansion, at least not in thedeveloped world. As Richard Heinberg argues persuasively in hislatest book, The End of Growth,growth has reached its limits, which are both numerous and insurmountable.
There is a plain and simple distinctionbetween the two kinds of money: real money, which was lent intoexistence with a specific and realistic promise of repayment by aspecific party, and fake money, which was dreamt into existence by acentral banker without anyone specifically promising to repay it.Suppose a person walks into a grocery with fake money in his wallet,and buys something. This is no different from paying withcounterfeit money: the grocer is getting robbed. But there is also adifference: the officially issued fake money is indistinguishablefrom real money. But just because you can’t spot a fake doesn’t meanthat you aren’t getting robbed. And so the fake money mixes with thereal money and sloshes about the economy, robbing each person whotouches it, until everybody is poor. Since poor people can’t pay backbig loans, the central banker’s conceit that the fake money is debtseems rather unjustified. It is owed by the central banker to thecentral banker, and it would be foolish of us to expect him to everwork it off.
I am using the word “robbery” here not to indicate moral indignation or feigned umbrage, of the “I am shocked! Shocked to find that gambling is going on in here!” variety. I might even say that sometimes robbery is justified (“expropriation” or “commandeering” are its more polite, civilized variants). I am using it because the trick—paying with a fake—is an obvious one, and the result—the robbed party becomes poorer—is obvious as well. And so whether it is a retiree spending his deficit-financed social security check at the dollar store or a banker spending his bailout-financed bonus on lavish gifts for his trophy girlfriend, or a construction worker drinking his economic stimulus-financed paycheck at the bar, somebody somewhere is getting robbed—and becoming poorer.
Rest assured, I am not advocatingletting people starve or forego beer or anything of the sort. A warmbed and three squares a day is, to me, a human right. I am notinterested in policy (nor are policymakers interested in me). But Iam interested in making a specific prediction: that government andcentral bank efforts to stabilize the financial system and restarteconomic growth will do the exact opposite: they will destroy thatwhich they are trying to save more completely although a little bitlater. They are living on stolen time.
The alternative (in case policymakers suddenly decided topay attention and were capable of taking on board such a radicalnotion) is a jubilee: full repudiation of all debts public andprivate and a ban on all repayments, repossessions and collectionactivities. This woud force a full shutdown and cold restart of thefinancial system. But it will probably have to happen anyway. In themeantime, do your best to avoid getting robbed.
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