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Curing global crises: Let’s treat the disease not the symptoms - Page 3

The Third World debt crisis

We’ve already noted that under the C&C/ebcu arrangement, the central banks of each country participating would be supplied with a quantity of ebcus based on the size of its population. Most poor countries would find that the amount they received was more than enough to enable them to repay all their foreign debts. Under the treaty putting C&C into effect they would be required to do so immediately and to exchange their ebcus for the necessary foreign currency. This is important for the success of the ebcu system because when the dollars and the other currencies were repatriated and the loans that created them paid off, the money involved would cease to exist. This would limit the extra purchasing power created by the issue of the new currency and also create the space for it to operate internationally by getting the reserve currencies out of the way. Indeed, national currencies would lose reserve status. Under the C&C treaty, not only would ebcus be the only currency permitted as central bank reserves but countries would undertake not to use third-party currencies for international transactions. In other words, trade between India and France could be carried out in the euro, the rupee or the ebcu, but never the pound sterling or the dollar.

Some people might say that HIPCs should not use their issue of ebcus to pay off illegitimate debts that should be cancelled anyway. While we have a lot of sympathy with this view, we see the introduction of the C&C/ebcu system as a single, all-embracing act of re-balancing and reconstructing the world’s money and trading system. In the bargaining process over the date of convergence on equal per capita entitlements and the base year for populations, the moral responsibility for the currently unpayable debts would be taken into consideration, along with the ecological debt that the over-consuming countries have run up. The compensation for these would be part of the overall package.

Moreover, moral issues aside, the underconsuming countries will be well able to pay off the debts because they will immediately get their ebcus back in payment for their surplus SERs. Indeed, if the under-consumers declined to clear their debts, the over-consumers would not have the money to purchase the SERs and the whole system would lock up. In our view, then, the poor countries should just regard the ebcu issue as a windfall, a get-out-of-debt-free card. They should have no reservations about using the money for clearing their debts since they will be earning more ebcus from the sale of their new export crop, SERs, year after year, and those earnings will be available to be used for development purposes.

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Oil and gas depletion

There is no doubt that energy-use limits under C&C would restrict growth in the North and that northern countries would have to supply a lot of goods and services to the South each year in order to earn the ebcus they required to purchase emissions permits from the southern allocation. An evening-up between the rich and poor parts of the world would begin. The gap between rich and poor within countries would begin to narrow too as, besides getting an income from emissions permit sales, the poor would find that, with fossil energy more expensive, their labour would be in greater demand.

Fortunately, there would be no danger that the industrialised economies would find the size of the income flow they were providing to the South to be so high as to be unacceptable. This is because oil and gas are running out and if the C&C/ebcu arrangement is not introduced, the price the oil and gas producing countries will charge for fuel will rise considerably as scarcity bites yielding the producers massive windfall gains. Under the new system, however, the scarce item will be SERs rather than fuel and the gains will go to the poorer countries instead. Here’s why.

The world’s oil production from conventional sources is widely expected to peak within the next five or six years. Output will then fall away so that by 2050, it will be just over half its 2010 level as Figure 3 shows. Even if the serious environmental problems with unconventional oil sources like the Athabaska tar sands can be overcome, it would only ease supplies for a few more years. With gas, world output is expected to peak around 2040 and then go into a steep decline, as Figure 4 illustrates.

Oil and Natural Gas Liquids

Natural Gas

Source: Association for the Study of Peak Oil

If we put the two graphs together to show the total amount of energy that oil and gas can be expected to deliver over the next century we get Figure 5. This shows that the rising amount of energy available from gas will be unable to compensate for the declining amount from oil after 2015 or thereabouts. After that, in roughly twelve years’ time, the overall decline will begin and prices will rise sharply.

Source: Association for the Study of Peak Oil

In the absence of C&C the five big OPEC producers – Saudi Arabia, Kuwait, Iraq, Iran, and the United Arab Emirates – would take advantage of their growing share of the world’s oil production and put up prices sharply. This could give them such a huge increase in their earnings that, as in 1973 and 1979, they would be unable to spend it all on additional imports. If so, they would have no option but to lend their surplus back to the countries from which it came by depositing it in western banks. The problem with this is that the money might stay in those banks rather than being lent out again because, unless countries and corporations can see some prospect of being able to repay additional loans, they will not take them on. Interest rates might be cut to encourage them to do so but, as in Japan, even zero rates might not be low enough to make extra borrowing attractive. Without the extra borrowing, however, the global money supply would contract, plunging the world to a depression while simultaneously cutting oil demand and bringing its price down to very low levels. After a few years, the depression might pass and oil demand increase again. Prices would rise, OPEC earnings would soar, and the cycle would begin again.

In other words, under a business-as-usual scenario, there is a real chance that the level of global economic activity will contract in step with the decline in oil and gas supplies. Constant contraction and depression could be the norm. Even the oil producers would not do well out of this because their output would be sold in depression conditions for a lot of the time,. There might be no way that the free market could break out of this cycle once it started because the peak oil price – the level that tipped the world into depression - might not be high enough or maintained for long enough to encourage investment in renewable energy sources. Then, once the depression had begun, oil would be cheap again and the market would provide no incentive to countries to reduce dependence on the fuel, at least on a significant scale. The world could descend, cycle by cycle, into chaos and misery, unable to help itself.

C&C is the ideal way to avoid this scenario. If C&C reduced the demand for oil and gas faster than output was going to decline anyway because of depletion, it would become, in effect, a buyers’ ring, the type of arrangement dishonest antique dealers set up before an auction. The dealers in a ring decide who is to bid for each item and the maximum he or she is to pay and then, afterwards, they hold a private auction among themselves to determine who actually gets what. The point of this ploy is to ensure that the extra money which would have gone to the vendor if the dealers had bid against each other in the original auction stays within the ring and does not leak away unnecessarily to a member of the public. In our case, C&C would prevent excess money going to fossil fuel producers in times of scarcity and plunging the world into an economic depression. It would go to the poor countries instead, where it would be quickly spent in the industrialised countries by people who urgently need many things that the over-fossil-energy-intensive economies can make.

So, rather than debt growing as it would in the business-as-usual scenario, demand would increase instead constrained only by the availability of energy. Suppose it was decided to cut emissions by 5% a year. This would achieve the 80% cut the IPCC urges in thirty years and is the sort of goal we need to adopt. Cutting fossil energy supplies at this rate would mean that the ability of the world economy to supply goods and services would shrink by 5% a year minus whatever rate it became possible to save energy and to get renewable energy supplies set up. Initially, energy savings in the overconsuming countries would take the sting out of most of the cuts as a lot of the energy they use is wasted at present. Then, as savings became progressively difficult to find, the rate of renewable energy installations should have increased enough to prevent significant falls in global output.

Under C&C, investors in renewable energy projects could be sure of keen demand. The poorer parts of the world would get the resources they need to follow low-energy development paths. And the spread of purchasing power would open new markets for manufacturing companies. Even the oil and gas producing countries would benefit if they were offered a reasonable fixed price, as this could be more lucrative for them than high prices for short periods followed by lengthy slumps. And that’s just the economics. Everyone would win a second time if the climate was saved.

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The US would benefit too

But what about the United States? As the main beneficiary of the present system, wouldn’t it lose rather badly? We don’t think so. In our view, its main loss would be the massive seignorage gains that it has been able to make and many commentators have been saying recently that these gains are about to come to an end anyway.

It might happen like this. As we write, the dollar is falling against the other reserve currencies. If this continues, many institutions and private individuals holding dollar assets, Americans and foreigners alike, will feel at some point that they have lost enough and start to sell their holdings off as rapidly as they can in order to switch the proceeds to the pound or the euro before the dollar slips even lower. Panic could set in and the heavy asset selling is likely to cause US real estate, bond and stock prices to drop sharply and the dollar to fall faster still, frightening those who have so far held themselves aloof to join the headlong rush to get out of the currency, just as happened in Mexico in 1994.

The heavy fall in the value of the dollar would then make US goods highly competitive on world markets and its exports would rise. They would do so, however, against a worldwide decline in business activity caused by two factors. One would be the loss-of-wealth-effect. Roughly half of the world’s savings are invested in the US and as the value of these investments (and the income from them) plummeted, those owning them would feel poorer and cut back their spending. The other would be that the rise in imports from America and the rapid decline in exports to it would cost millions of people outside the US their jobs. Many firms, desperate to stay in business, would slash prices, thus spreading the deflation that is already eroding prices in Japan, Taiwan and Singapore. Wages outside the US would fall too, increasing the real burden of debt consumers have to carry. Nobody in their right mind would wish to take out new loans in these circumstances and the money supply will contract so that, even though goods and services are cheaper, they would become less affordable because there would be less money about.

That’s about as far as we can take the scenario. The world economy could go on contracting for years – in theory. The positive feedback that proved so rewarding on the way up – growth leading to greater profits that went to fund more investment and thus more growth – would prove terrifyingly destructive on the way down.

Once this had happened, it would definitely be in the interests of the ex-superpower to join an international move to sign up to C&C and to issue the ebcu. True, if the US held back, it would benefit from being able to burn oil, coal and gas without having to purchase SERs first. This would keep the price of the declining amount of fossil energy it was still producing from domestic sources lower than that paid by those of its competitors that had signed up. Moreover, the US would benefit from the lower prices being charged by OPEC as a result of the C&C price ring. However, the countries in the SER club would be bound to impose import duties on products coming from non-members, whom they would despise as free riders and parasites. Also, the club would almost certainly give its members rebates calculated on the energy content of their exports to non-members so that their producers and farmers could still compete.

This would remove any advantage the US gained by staying out of the system, particularly as its products would be discriminated against and its pariah status would cost it its remaining authority in world affairs. But what would happen in the US itself? Would a planned, steady rise in fossil energy prices really be so bad, particularly as developing renewable energy sources would generate a massive range of technological and investment opportunities? If one accepts that oil and gas are getting scarce anyway, the transition to renewables has to come. Even if the US energy demand for oil and gas merely stays constant, it will need to consume the world’s entire output of these fuels within 50 years.

Moreover, a switch to renewable energy would restore some of the security that the country is currently trying to buy through its military spending, as the lobby group Environmental Defense has pointed out⁸. "Affordable technology exists for a new American energy economy that can deliver real cuts in oil consumption and greenhouse gas pollution, while at the same time making the nation's power supply more secure from terrorist attacks," its senior lawyer, Jim Marston, said in 2002. "The sunlight, wind and falling water that power renewable energy cannot be eliminated, and renewable energy is not powered by explosive, flammable or radioactive fuels which are vulnerable to attack."

“The administration and Congress should work together on a clean energy package that protects America's national security, environmental security and economic security" his colleague Steve Cochran added. "As the world's largest producer of greenhouse gas pollution, it's well past time for the United States to join the broad based international coalition against global warming.” A lot of Americans would say amen to that.

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Better distributed political power

More generally, oil and gas depletion will change the basis and distribution of political power. At present, financial power rests in the hands of the countries which create the money we use and the banks that authorise its creation. Since newly-created money can be used to buy energy and without energy, nothing can happen, the creation of money delivers to those who receive it a great deal of physical and political power.

While oil and gas production can still be raised, increasing the money supply can bring about an increase in the supply of energy. Once production has peaked, however, that will no longer be true and, rather than the availability of money being the limiting factor, as it is now, the availability of energy, and who gets it, will determine what gets done, by whom, and where. In other words, rather than money buying energy, energy will buy money. In future, the possessors of energy will have the physical and political power.

This will lead to a massive power shift to the Middle East unless something is done to prevent it. One option is for the nations whose power is based on money to use force to take over the nations whose power will be based on energy while they still have the ability to do so. Events in Iraq have demonstrated, however, that this is not a workable solution. A far better course would be for countries to develop their own sources of power. And this power would have to be from renewable resources as coal and nuclear energy are non-runners for reasons explained in the panel. The key feature about renewable energy sources is that they vary widely. Many are so small and scattered that they are much more efficiently developed by local organisations than by giant multinationals. This means that, rather than money power being generated by big banks and countries far away, communities will be able to produce energy power – the new money - for themselves. A mosiac of much more diverse, self-reliant local economies and cultures should spring up. And that, in itself, would be a major step towards global sustainability.

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Summary

1. C&C seems the only proposal for curtailing greenhouse gas emissions capable of gaining the necessary level of international support to be put into effect.
   
2. Any arrangement to control greenhouse gas emissions is likely to break down unless it is coupled with the introduction of a non-debt-based global currency that links the overall size of the world economy with the ability of the planet to cope with that economy’s waste. Without such a link, a conflict would develop between the world economy’s need to use energy to grow and the need to control fossil energy use.
3. The new global currency would be given into use. This feature, together with the earnings from emissions-permit sales, would make the combined C&C/ebcu arrangement very attractive in the poorer parts of the world, particularly as the issue of the currency would solve the Third World debt crisis. The new currency would also remove the unfair advantage that wealthy nations get from operating ‘reserve’ currencies.
4. The value of the global currency would be a fixed number of SERs, just as at one time, a dollar’s value was fixed at one-thirtyfifth of an ounce of gold. As every country’s currency would have floating exchange rates with the ebcu, all money would have an energy value. Instead of banks approving the creation of money as now, money would be created wherever energy was extracted or captured. This would decentralise both political and actual power systems as renewable energy can be captured almost anywhere in the world.
5. The industrialised countries need to be able to stop growing without their economies crashing if they are to cut fossil energy use and release resources for the poorer parts of the world. Their national currencies should therefore cease to be debt-based to remove the growth compulsion. Instead, their national currencies should be spent into use by governments and the quantity of money in circulation adjusted by changes in the levels of taxation and state spending.
6. The distribution of emissions permits to individuals is necessary to provide them with a source of income to cushion them against the effects of higher energy prices.
7. The purchase of emissions permits from under-consuming nations by overconsuming ones would not just provide an income stream for the poorer parts of the world. It would also be a means by which the rich countries would pay off their ecological debts.

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The gains and the losses

Here’s a score sheet to prove our point that, in this massively non-zero-sum game, everyone is a winner.

Rich countries
Gains

• An end to forced, damaging uneconomic growth required to satisfy the growth compulsion inherent in the current monetary system
  
• A stable economic and financial system
  
• Excellent overseas markets for advanced products
  
• Reduced reliance on uncertain supplies of imported energy
  
• Fewer potential causes for international conflict and terrorism.
  
• And, above all, a good chance of avoiding a climate catastrophe
  

Losses

• The ability to exploit poorer countries through debt restructuring programmes.
  
• The seignorage gains arising from the use of national currencies as if they were international ones.
  

Poor countries
Gains

• Freedom from debt.
  
• A new source of income for the whole population
  
• A stable global economic and financial system
  
• Good internal markets for a wide range of domestically-produced goods.
  
• Less pressure to export
  
• Reduced reliance on imported energy
  
• Fewer potential causes for international conflict and terrorism.
  
• And, above all, a good chance of avoiding a climate catastrophe
  

Losses

• Cheap dumped food from the US and the EU. Supplies of this will cease because more costly energy will make it uneconomic to produce.
  

Fossil fuel producing countries
Gains

• A fair, stable price for fuel exports
  
• A new source of income for the whole population
  
• A stable global economic and financial system
  
• Good internal markets for a wide range of products
  
• Fewer potential causes for international conflict and terrorism.
  
• And, above all, a good chance of avoiding a climate catastrophe
  

Losses

• Cheap dumped food from the US and the EU