Throwing Rocks at the Google Bus: How Growth Became the Enemy of Prosperity (18 page)

In country after country where local moneys were abolished in favor
of interest-bearing central currency, people fell into poverty, health declined, and society deteriorated
12
by all measures. Even the plague can be traced to the collapse of the marketplace of the late Middle Ages and the shift toward extractive currencies and urban wage labor.

The new scheme instead favored bigger players, such as chartered monopolies, which had better access to capital than regular little businesses and more means of paying back the interest. When monarchs and their favored merchants founded the first corporations, the idea that they would be obligated to grow didn’t look like such a problem. They had their nations’ governments and armies on their side—usually as direct investors in their projects. For the Dutch East India Company to grow was as simple as sending a few warships to a new region of the world, taking the land, and enslaving its people.

If this sounds a bit like the borrowing advantages enjoyed today by companies like Walmart and Amazon, that’s because it’s essentially the same money system in operation, favoring the same sorts of players. Yet however powerful the favored corporations may appear, they are really just the engines through which the larger money system extracts value from everyone’s economic activity. Even megacorporations are like competing apps on a universally accepted, barely acknowledged smartphone operating system. Their own survival is utterly dependent on their ability to grow capital for their debtors and investors.

Central currency is the transactional tool that has overwhelmed business itself; money is the tail wagging the economy’s dog. Financial services, slowly but inevitably, become the biggest players in the economy. Between the 1950s and 2006, the percentage of the economy (as measured by GDP) represented by the financial sector more than doubled, from 3 percent to 7.5 percent.
13
This is why, as Thomas Piketty demonstrated in
Capital in the Twenty-First Century
, the rate of return on capital exceeds the growth rate of the economy.
14
Money makes money faster than people or companies can create value. The richest people and companies should, therefore, position themselves as far away from working or creating things, and as close to the money spigot, as possible.

Some companies, such as General Electric in the 1980s, understood this principle quite well and acted on it. They came to realize that their core enterprises were really just in service of the much more profitable banking industry. GE’s CEO Jack Welch determined that the company made less money making and selling washing machines than it did lending money to consumers to purchase those washing machines. So he began selling off GE’s factory businesses and turning the corporation into more of a financial services company. The washing-machine companies were sold to the Chinese. The new GE made loans, sold insurance, and provided capital leasing.

This worked quite well for the company and for those who followed in Jack Welch’s footsteps.
15
His approach was canonized by Harvard and other top business schools, which began training their graduates to see productive industries as mere stepping-stones to becoming holding companies. The further up the money chain you can get—the more like a bank issuing money—the better.

The American economy became almost entirely dependent on its companies’ and citizens’ willingness to use credit. It didn’t matter what they bought with that credit. Most of it went to Chinese goods, but that didn’t matter. We were growing not the real economy of goods and services but the synthetic economy of money itself. The Western companies at the top of the food chain were selling credit, not consumables. The perfect productless product. Those unwilling to participate were researched by psychologists, then subjected to techniques of “behavioral finance” until they got with the program.
16

To many of us, the whole system seemed to be working. Regular people began taking mortgages out on their homes every time real estate values went up, as a way of generating more capital for themselves. Even Alan Greenspan thought the triumph of capital and credit meant we had embarked on a new era of riskless investing. As the former chairman of the Federal Reserve remarked in 2000: “I believe that the general growth in large [financial] institutions has occurred in the context of an underlying structure of markets in which many of the larger risks are
dramatically—I should say, fully—hedged.”
17
That is, right up until the crash of 2007, when there turned out not to be enough real economic activity to support the overcrowded field of moneylending.

Like other market crashes, this one was blamed on dodgy deals and abuse of the system. Unwilling or incapable of looking critically at money, chroniclers of capitalism’s excesses focus instead on human greed. The evil CEOs of Enron or WorldCom, the heartless bankers of Wall Street, or the overzealous traders at Goldman Sachs are indicted for fleecing shareholders and undermining an otherwise functional system. Parading them in handcuffs before the press makes us feel good for a moment, until we take in the truly clueless expressions on their faces. They thought they were just doing their jobs—trying to grow their companies at the rate dictated by their debt structures. Their behavior is normative, not an aberration.

Not that these characters are blameless, but when we fault “corruption” for our economic woes, we are implying that something initially pure has been corrupted by some bad actors—like a digital file that was once intact but whose data now has errors in it. That is not the case here. Rather, an economic operating system designed by thirteenth-century Moorish accountants looking for a way to preserve the aristocracy of Europe has worked as promised. It turned the marketplace into one giant debtors’ prison. It is not only unfit for the needs of a twenty-first-century digital society; central currency is the core mechanism of the growth trap.

This is the real cause of the severity and longevity of the 2007 crash. Rather than figuring out how to compensate for central currency’s extractive bias, a highly digital finance industry chose to exploit it. The digital perspective that allows us to see money as an operating system doesn’t necessarily motivate people to revise the core code so that it serves people better. That would be a pretty heavy lift, even for the most idealistic among us. So instead, bankers and financiers sought to leverage the structural flaws of the money system for their own gain.

They understood that return on capital outpaces real growth and that in a digitally accelerated marketplace a disconnect between winners and
losers was inevitable—just as on iTunes and Amazon. Only here, the winners would be those who had capital, and the losers would be those stuck in the real economy of goods and services. So they sold money to borrowers, then sold those loans to less-intelligent lenders. Meanwhile, they insured
and
bet against those original loans. This created a win-win for those with capital—they got paid their regular interest rates for lending money, but they also won their bets against the people and companies they were counting on to fail.
18
The lucky winners benefited not only from the return on capital but also from the inability of real growth to keep up with interest.

Instead of our cynically profiting from the failure of people and business to keep up with the needs of capital, might there be a way to change the way capital functions? Might money have gotten too expensive for its own and our good? We’ve seen how individual companies can wind down from the growth imperative by lightening their debt loads, changing investor expectations, and becoming more adaptable to market conditions on the ground. But the economic operating system on which these corporations are required to function cannot enjoy the luxury of voluntary slowdown. Unlike natural systems or even human society, an interest-based economy must grow in order to survive. This worked for centuries, as long as there were new regions to conquer, resources to extract, and people to exploit. An expansionist economic system both necessitated and inspired the colonizing of the Americas, Africa, and Asia. As long as more money was being borrowed, there was more money to pay back the bank and keep the currency afloat.

In the absence of new continents in which to expand growth, industry strived to speed up rates of production or to make existing processes more capital intensive. Industrial farming, for example, generates more crops in the short term than do traditional, less-intensive methods. It also requires more machinery, fertilizer, and chemicals. By abandoning the practice of rotating crops, industrial farming also depletes topsoil faster, which in turn generates even more dependency on chemicals and pesticides. More money is required—and that’s the object of the game. If Big
Agra processes lead to a less-healthy population or higher cancer rates, Big Pharma is ready with costly fixes, fueling another source of economic expansion.

But we’re all getting depleted in the process. Our real world of humans, soil, and aquifers replenish themselves more slowly than the impatience of capital can accommodate. “Housing starts” can accelerate only as fast as the market for new homes. When the marketplace isn’t being artificially goosed by speculators, humans just can’t keep up with the housing industry’s need for excuses to cut down more forests, irrigate more land, and construct more homes. Moreover, as Naomi Klein has more than demonstrated in her book
This Changes Everything
, climate change is a direct result of an expansionist economy: the physical environment can’t service the pace of capital while also sustaining human life.
19

Economic philosopher John Stuart Mill identified this problem as far back as the 1800s. “The increase of wealth is not boundless,” he wrote.
20
He believed that growth wasn’t a permanent feature of the economy because nothing can grow forever. No matter what the balance sheet may be asking for, economic growth is limited by the finiteness of the real world. We can generate only so much activity and extract only so many resources. Instead, Mill saw the end of growth concluding in what he called the “stationary state”—a sustainable equilibrium in which there would be “a well-paid and affluent body of labourers; no enormous fortunes, except what were earned and accumulated during a single lifetime; but a much larger body of persons than at present, not only exempt from the coarser toils, but with sufficient leisure, both physical and mental, from mechanical details, to cultivate freely the graces of life.”
21

Mill didn’t see this stationary state as devoid of improvements to society, technology, and overall satisfaction. It would merely mark the happy end of the era of big investment and associated extraction and growth. Capital will have fulfilled its purpose in building out our society and bringing us to the “carrying capacity” of our planet. In other words, people might produce and consume different or better stuff, but they won’t be able to
produce or consume
more
stuff. They won’t have to, though, because the “progressive economics” of capitalism will have been abandoned and replaced with something else.

Digital technology, computers, networks, and miniaturization at first appeared to herald a shift toward these more steady-state approaches to life. Telecommuting would mean less gas consumption, and computer screens would mean less printing. Neither prediction came true. Worse, though, speculators saw in digital technology a gateway to a new, virtual form of colonialism: a new place to lend and deploy capital, new territory for growth.

Alas, the big data profiles of teenagers can’t support the same robustness of growth as entire continents of slaves and spices. Besides, consumer research is all about winning some portion of a fixed number of purchases. It doesn’t create more consumption. If anything, technological solutions tend to make markets smaller and less likely to spawn associated industries in shipping, resource management, and labor services. They make the differential between real growth and return on capital worse, not better. This means they push the banks and investors even further away from anything like real earnings until eventually there’s a complete disconnect between capital and value.

So how can an entire economy that is based on an arithmetic premise of perpetual, infinite, and impossible growth somehow deleverage itself? And even if there’s room for more growth, how do we unpack some of the accumulated frozen capital and get it back into circulation so people can buy and sell more goods and services?

Policymakers have painfully few good stimulative tools at their disposal, and the ones they do have aren’t particularly good at getting money into the hands of real people, where it’s needed. Helping people transact isn’t the sort of activity their operating system was built to support in the first place. Central currency was intended to extract value from the economy, not pump it in. That’s why it’s more intuitive and superficially consistent to demand austerity and belt-tightening from debtor nations than it is to ease policy or lower interest rates. If countries or regions can’t pay
back the interest on the currency they “borrow,” then shouldn’t they be given less of it? That’s the justification against bailing out failing eurozone nations. It sounds logical on the surface, but if the struggling nations are loaned less, then how are they to pay back more—especially if they’re not allowed to print their own money to foster some economic activity?

Central banks weren’t built to fix this. The Federal Reserve’s primary function is to protect the wealthy—those who are holding cash—by preventing the inflation that would make that cash less valuable. During hard times, a compassionate central bank can choose instead to pump more money into the economy—but it really has only two ways to accomplish that. It can lend money to banks at the lowest interest rate possible—even zero—or it can buy the banks’ stashes of bonds (what’s known as “quantitative easing”). But for this money to reach the real economy, the banks still have to lend it to people and businesses. Nothing is forcing them to do that part, and in a low-interest environment, their profit margins on lending are squeezed anyway. Most banks would rather invest the money in more leveraged financial instruments or buy the stock of existing companies. Moreover, given the slow-growth economy, many banks refuse to take money from the Fed, loath to take on credit that they know they’ll have to pay back. They already have more money sitting around than they know what to do with, and if they take on additional capital, their ratio of profit over net worth only gets worse.