To our Podcasts

Why money is not debt

A piece to explain why extraeconomics is a neccessary thing to escape carbon pollution and climate catastrophy. See Extraeconomics.com

Money today is not what it used to be at the start of the fossil fuel era. In the time manual labour was still the dominant factor in production of wealth the amount of money had to keep pace with the amount of skilled workers, and if something big had to be initiated it required that something als was not being achieved. Production of one thing meant not producing another thing.

This all changed with when industrialization happened based on coal driven steam engines. The machines broke the limitation set by the number of hands or horses able to help, and the value of labour became harder to determine. Unlike after the plague in England, when the noblemen and royals had to give in to the demands of the workers, because so little where left, now it was possible to wage wars slaughtering hundreds of thousends of men without ultimate negative impact on wealth for those left behind. In fact, fossil fuel driven wars became something ‘economics’ was very positive about.

When the amount of money was fixed, also because it was gold, and when our existence was predicated on many people cooperating, then money could be owed, or a debt. In fact most people intuitively feel debt when someone does something for them. That person is not free to enjoy his life while he performs the service, and so this means to recipient of the service should feel a debt to make sure he will do something back someday. Money helped shift the debt around so it could be repayed sooner and with more effect. This is the primary function of money.

It is easy to see that storing money even in this age would not be storing value, because a plague or other event could wipe out all people and who would then (even want to) provide services in return for money? Also many initiatives would invlove no money at all, or involve the creation of some kind of money independent of prevalent currencies.

Money as we know it after a century of fossil fuel industrialization no longer means manual labour. It means fossil fuels. Banks no regulate the amount of money to keep pace with the amount of fossil fuels available for production of goods and services. If they would not do that prices would fluctuate constantly, because demand (based on consumers with money) would not be in tune with supply (limited by the amount of fossil fuels available). This intimate link between money and fossil fuels is completely overlooked in modern economics, yet it is the absolute basis of its validity. Without fuel the economy would grind to a standstill in days.

This means one important thing : Profit is an illusion. Why? Because all gain in goods and services comes at the cost of a loss of fossil fuels (as the enabling resource). You are always left with less even if you make a Ferrari or you feed 100.000 children. Profit from fossil fuel investments mean money is taken out of circulation, at least as much as is spend on the project. This still doesn’t mean anything is gained, only that the loss is contained, the loss could have happened because of other processes (like people spending money to drive cars), but the money ended up in the pocket of the project.

What does it mean that a person that borrowed money from a bank to invest in a project has to pay that money back? The money is being spend on fossil fuels and other resources, it ends up mainly in the hands of these producers (fossil fuel, food, raw materials). The fuel is burned and the product is sold and all money gained except the profit has to be payed back to the bank. The question is : Why? What does it mean. The bank provided the money, but a debt in the true sense is not owed to the bank, it is owed to the suppliers of the fuel and materials needed to create the product or service. Somehow they accepted the money, especially the fossil fuel supplier. Why could the project not be done to the profit of the fossil fuel supplier and the other raw materials suppliers? That would make much more sense. Instead the bank pretends to have a right to both the money back and a piece of the action (interest).

The only reason one can think of why money should be returned to the bank (and this can be a way to aknowledge a debt) is that the bank wants money to remain scarce and more importantly (the real reason) because the bank wants to control what happens with the fossil fuels, how much of them are used how. If the bank allows money continue to circulate endlessly more and more would circulate and this would mean both inflation, but it would also mean less control over the projects that are initiated. The type of projects could be undesirable, and we all know what projects those are : Ones affecting the dominance of fossil fuels!

In economic theory money is created as debt because it has to return to the bank, because control over the amount is crucial for management of the fossil fuel consumption rate as well as the power of the banks. It is not debt in the classic sense because nobody in any bank loses sweat and no oil worker loses income over you not repaying it. It is a mere instrument of control.

If money really had to be repayed, the oil also would have to be unburned

On a small scale, locally money does play the classic role, but only because people really don’t think about whether there is still gas in the pump tomorrow, or whether bread will come to the bakery. So from the individual perspective it seems a mortgage is a debt to be repayed. It is not. Saying you need money to start something is like saying people can’t move except for money. They can and have and will.

The most imortant thing to keep the majority convinced money is the means to everything is to keep the fossil fuel based production machine going. If it is using renewables it has to be from a position of debt, not for free! This is why we need extraeconomical zones and thinking, because economics is bound to fossil fuels, and depends on our illusion of debt.