Tuesday, 3 March 2020

Responding to Collapse, Part 16: Shortages of Money, Part 1

A few posts back I said that shortages of electrical power, diesel fuel and money will be at the heart of the troubles that lie ahead for small remote communities as collapse progresses. I am interested in that sort of community because that is where I am recommending that you take refuge in order to ride out collapse (and where I have already taken refuge). I've covered electrical power in parts 10 to 14 of this series and diesel fuel in part 15, so that leaves money for this post and the next one.

We'll be looking at shortages of money from two angles here. First, in this post, shortages that occur when you have money on deposit at the bank, or credit prearranged with the bank, but can't access it due to problems with the banking system. Second, in the next post, shortages that occur when you have trouble earning enough money to live on because of problems with the economy.

The song says, "money makes the world go round". You could certainly be forgiven for believing that, especially given the increased commodification of everything that has been going on, and the growth of the financial sector of the economy in the last few decades. I don't agree, though. Drawing from the writings of Dr. Tim Morgan on "surplus energy economics", I would say that it is energy that makes the world, or at least the economy, go round.

We'll get back to the role of energy in the economy in my next post, but first let's look at money itself. Money is really just a system of tokens we use as a medium of exchange, a unit of account, and a store of value.

Conventional economists tell stories about how before money was invented, people had to barter for what they needed but couldn't produce for themselves, and this was very inconvenient. In fact, as an anthropologist would tell you, barter was used only on those rare occasions when they were trading with strangers, and often with the intent of gaining a (possibly unfair) advantage. They were strangers, after all.

Most people usually dealt only with people they knew and didn't want to cheat. In small groups (less that Dunbar's number) there was no need of money since people just did what was needed, didn't attempt to keep precise accounts it, and accumulated little of value to store. This was primitive communism which worked on the principle of "from each according to their ability and to each according to their needs."

As people began to live in larger groups, it proved useful to have some way of keeping track of transactions with people outside one's immediate group. I'm not going to go into the historical details here (read Graeber's book if you are interested), but eventually we arrived at the system we use now.

Today money is created when a bank loans it out as debt. The main thing about money created as debt is that it can increase flexibly as the economy grows, where money based on precious metals is limited by the scarcity of those metals. In order to make a profit, which is after all the reason for their existence, banks insist that those loans have to be paid back with interest. This means that the economy must continually grow in order to cover that interest. As long as the economy is growing, this system works quite well. Indeed that is why we adopted it, to accommodate the growth stimulated by fossil fuel energy.

Only a tiny fraction of money ever exists as coinage or bank notes—mostly it just consists of entries in the banks' accounting software. Coinage confuses the issue of what money really is, since coins at least appear to be made of precious metals. Many people believe that money based on precious metals (gold, silver) has some real value, because of their rarity and the difficult of mining them. They call our modern debt based money “fiat currency” because its value is based solely on your confidence in it. I disagree. Take gold as an example—it has some limited industrial use because of its low electrical resistance and high corrosion resistance, but its current high market value is based almost entirely on what people think it is worth. In fact all money is an abstraction and its value is based only on what value people agree to give it.

Indeed the financial sector of the economy is largely based on trading in money itself as well as stocks, bonds, and derivatives. Much of the so called wealth in the world is based on these things, and their value is almost entirely based on public confidence in them. If the confidence evaporates, so does the wealth.

I would define wealth as an enforceable claim of ownership on things with real value, or an enforceable claim on future productivity, yours or someone else's. The value of money in the bank or investments, is based on a claim on future productivity, and if that productivity decreases, so does the value of your claim on it. And, of course, if your claims become un-enforceable, as they might if the financial sector or society itself experience disruption, your "wealth" is worth nothing.

In the last few decades the switch over from primitive communism to modern neoliberal capitalism has been just about completed. The idea of an "immediate group" has largely disappeared, much to our loss, and money mediates almost all relationships, even to some extent within nuclear families. This means that we are very much dependent on the systems which provide us with money, and via that money, the necessities of life.

Today most of us access the cash we have on deposit at a bank via an automatic teller machine (ATM) or less commonly via a human teller at the local bricks and mortar office of our bank. And more and more we use debit cards to eliminate actual cash altogether, accessing our bank deposits directly at point of sale terminals. Many of us also have credit cards allowing us to access credit up to a prearranged limit at ATMs or point of sale terminals. Some of us, who are undertaking rennovation projects or operate small businesses for instance, have arranged lines of credit at the bank, at much lower interest rates than credit cards. This form of credit is usually accessed via cheques or online transfers.

But having cash on deposit or prearranged credit is no good if you can't access it. Ready access to money relies on infrastructure that can fail quite easily. A local grid failure or damage to communications cables can knock out ATMs, point of sale terminals and the banks themselves—you may have noticed that, when you are dealing directly with a human teller, they are making entries in a computer while dispensing or receiving cash. Cash itself has to be delivered regularly to both ATMs and banks and shortages of diesel fuel or storms closing the highways can stop those deliveries.

Financial crashes, recessions or depressions can cause banks to fail and take your money down a financial black hole with them. And during such crises the banks who don't fail get very cautious in their dealings with each other and the public. This is like throwing sand in the gears of the economy, and makes the situation worse. In such an event, you can except that your access to credit will dry up and that even your access to cash on deposit will be limited, since the banks will be concerned about nervous people deciding to withdraw all their money, in what is known as a "run on the bank". The banks, of course, don't have enough cash on hand to cover all the deposits that people have made, and would likely limit you to taking out only a few hundred dollar a week, at most.

The simplest preparation for these sort of problems is having a chunk of cash on hand, enough to see you through a few days or weeks at the worst. And having a stock of food and other essentials on hand so you don't need so much money to spend in times when the banking system isn't working.

A lot of people seem to think that a long term failure of the financial sector would be the end of the world, or at least of the economy, and believe that it is the form that collapse will take. But remember an economy is just a system in which the things people need are made and exchanged. Among small numbers of people who know each other (or can quickly come to know each other), and certainly in emergencies, it is quite possible for such activity to continue without anyone keeping track of it. The thing, of course, is to have close to hand the resources from which to make what is needed. In large population centres, once shipments stop, this quickly becomes difficult. In small agricultural communities, it need not be so much of a problem.

In communities of more than a couple of hundred people, it would be useful to print and issue a local currency and set up accounting systems separate from the no longer functioning banks. The idea that we can't get by without banks irks me—they currently have a monopoly on the services they provide and on which we depend—and they make a generous profit in that business. If they can no longer do their job, then we should feel free to replace them as needed.

As my regular readers know, I believe that collapse is actually something that happens quite slowly, has been going on for the last 50 years or so, and will be continuing for years or probably decades to come. But, when it comes to money, I can see why many people seem to have their hearts set on a fast collapse. Such a collapse would be much harder, of course, but at least your creditors, landlords, etc. would be collapsing with you and wouldn't be able to come after you for what you owe them. Leaving you free to concentrate on the business of survival.

In a slow collapse there will be a period of time (already started, actually) when the banks and landlords still want their pound of flesh, but many people no longer have jobs, or good enough jobs, to pay them.

That will be the subject of my next post.

As I have been writing this post, the corona virus, COVID-19, has been spreading over the world. I've done a fair bit of reading on it recently, and I am getting disgusted with the amount of fear, uncertainty and doubt (FUD) that is being spread around by people who stand to gain by attracting more visitors to their websites. This is uncertainly not conducive to an intelligent response.

This a new disease and there is much we do not yet know about it, much that we will only know after the dust has settled. I think this sort of uncertainty is going to be characteristic of many of the challenges we will face as collapse deepens. My hope is that this blog will be conducive to a calm and constructive response to such challenges. Here are a few links that I hope will help when it comes to responding to COVID-19:

That last link is behind a paywall, so I'm including a link with advice to help you get past paywalls in general.. Just part of my anarcho-communist approach to life.

Links to the rest of this series of posts, Preparing for (Responding to) Collapse:


Bev said...

A good one, Irv. Explains the system well and in a way most (well, I hope most), people can understand. It amazes me how many people depend solely on plastic cards to get the necessities of daily life. I do have a debit card and I use it to buy stuff I can't get locally, but being a debit card and not a credit card, I'm conscious of the fact that it's MY money I'm spending and not the bank's (meaning once the transaction is over I don't have to worry about how I'm going to pay the bank back).

The other thing is cash on hand. I suppose being aware that an oil supply crisis can come at any time has made me more risk averse, but I always have a store of cash at home. I've come to realise it's not a thing with other people. They rely on their plastic card. We have become so complacent. While everyone seems to be stocking up on supplies to weather the Corona virus, when it's all over (if that does happen) most will go back to normal operations and very few will learn anything from it. The mind boggles.

Joe Clarkson said...

The thing, of course, is to have close to hand the resources from which to make what is needed. In large population centres, once shipments stop, this quickly becomes difficult.

Yes, but since 80%, or more, of people in North America live in "large population centres", what becomes difficult is survival. The time to get out of cities is now.

Anonymous said...

Love the blog, but I think Tim Morgan does not have it correctly. As a matter of fact, David Graeber almost has it right :). Money is simply a promise of more in the future. In it's essence, it is that simple promise based on the assumption that there will be more in the future. There are examples of bubbles that did not involve excess energy, but, of course, excess energy creates a narrative that everything will be better into the indefinite future.

Money IS the narrative of having more in the future (positive EROI, a biological imperative), when in fact the energy is consumed in the present. When the narrative clearly becomes that the future will provide less, money disappears with it, because it was never there, except in our minds. In a sense looking through the lenses of Cultural Materialism, money is at the Superstructure level.

Kirk said...

What think ye of nuclear power, as a CO2-free, 24/7 energy source for producing electricity? See Mark Lynas’ book, “Nuclear 2.0: Why a green future needs nuclear power”.

Don Hayward said...

Good, Irv,
As you know, my thoughts on this are well set out in Collapse, Book One of After the Last Day.
Cash on hand will be useful for a few days, weeks or perhaps months until the long-distance supply of food and energy is done.
No need to get fancy with money theory. It will simply be a local medium of exchange once fiat support is gone and as we agree, of limited duration.
The local currency I described was not a fiat but based on real resource (food) supply.
As I outlined, distortions will persist for years as residual power structures try to restore domination.
In my story, I depict, years later in Book Three, The End of Shadows, an attempt to reestablish a bank and fiat currency (under the guise of the railway corporation) and that will be a persistent goal of the potential bourgeoisie. The anarchic system based on barter, trade, gifting and local currencies, as my future characters lived in will always have to be vigilant.
It will be a slow and complicated journey, no matter what the details.

Irv Mills said...

@ Bev

Thanks! I am dreaming that when the dust settles from the coronavirus crisis, a few people will have been woken up. In Australia, if the fires and the virus won't do it, then one wonders what it would take.

But I have long suspected that when the long, slow collapse is over there will still be some lucky people who have not be hit too hard and refuse to acknowledge that anything much has changed.

Irv Mills said...

@ Joe Clarkson

You are right of course--try as a might I can't see a way forward that doesn't involve the death of 80 to 90 percent of our population, most of them in the big population centers. Indeed if 20% of us manage to get through what lies ahead, it will be a great success. What I write here is in the hope of helping that happen.

Irv Mills said...

@ Anonymous
I'd be interested to hear exactly where you think Morgan has it wrong. Not that I am particularly attached to his ideas.

Irv Mills said...

@ Kirk
Not sure if you are aware, but I spent most of my working career next door to the largest nuclear generating station in the world, maintaining the equipment in the switchyards. And I currently live about 10 miles away from that station.

I am not irrationally afraid of radiation and nuclear power, the way so many people are, but I am certain that expanding nuclear power would not allow Business As Usual to continue with exponential growth forever. And it seems that for most people, continued growth is the only thing that doesn't count as collapse.

It would take a LOT of nuclear stations to replace fossil fuels and allows us to continue even without growth, so I have doubts about the availability of fuel on an ongoing basis. Especially since I am pretty sure commercial scale fusion will continue to be 50 years in the future, forever.

In our contracting economy it would be difficult to raise capital to build a large number of nuclear plants, even if we really wanted to.

And lastly I am concerned about the public reaction to plans for storing even low level waste, much less spent fuel. It seems like a political hot potato that will never get straightened out. But I would say storage plans must be in place before any new reactors are built.

Irv Mills said...

@ Don Hayward
Nice to hear from you.
I think my point is that fiat money actually works better than money that is based on something, even something of real value. More important, though, is the fact that nobody seems to have any idea how to make money work in a contracting economy, which is the situation we face.

And by work, I mean keep a minimal economy going so as to cause the least amount of misery for the surviving population. In very small communities, we can simply not other to do accounting, since if someone is clacking off or taking advantage, it will be obvious to all. But I think there will be communities of up to a few thousand people who will need a somewhat more elaborate organization. Our history with such organizations is not good.

When next we meet, I'll be interest to hear your response to that "Degrowth" book, which addresses exact this question.