Transcribed by Jessica Rios
Jason Bradford (lead in): I am Jason Bradford, host of the Reality Report. I believe that solving a problem begins by facing the truth about its real causes. Our society is pressing against ecological and energetic constraints. We are at an historic inflection point in which decisions made today will have profound impacts for centuries to come. The Reality Report is recorded in the studios of KZYX and Z in Mendocino County, California and is a long format interview program of key thinkers of our time.
JB: This is the Reality Report, I am your host Jason Bradford and today we are going to talk about if the financial crisis is a predictable outcome of a money system requiring exponential growth on a finite planet. Today we have on scientist and financial expert, Chris Martenson, to discuss money in an era of limits.
So Chris, thank you for being here today.
Chris Martenson: Why Jason, thank you, my pleasure.
JB: Well why don’t we quickly let you give us an overview of what’s happening right now.
CM: Well, we are at an exciting moment in the market, we had the bailout bill passed just last week and that was Friday afternoon and, surprising everybody the stock market started to sell off. I guess Wall Street felt it wasn’t quite enough and that’s continuing today with the DOW currently down 475 points. And, Europe's in kind of a disarray mess of their own. So what we’re looking at here is we’re really in the throes of a pretty significant crisis right now. And unfortunately it was a predictable one.
JB: Yeah, so that’s what I want to get into because a lot of what we heard and have been hearing is, "gosh, nobody saw this coming." But that’s not really true, a lot of folks saw this happening. And so we are going to spend today going through why this is absolutely predictable, and inevitable in some extent. Not the specifics, but the general process. So, why don’t we start by letting folks know a little bit more about yourself.
CM: Sure, my background is, I am a scientist by training. I got my PHD from Duke University in pathology, and cell biology was my sub-specialty. And so, I spent a number of years of my life all the way up through post doc, assembling data and developing hypotheses, and just generally having a grand old time being a scientist. And I took a hard turn in my life after that and went and got a business degree, an MBA, and went off into the world of business for a while, where I was in pharmaceutical industries, management consulting -- always at the intersection between numbers and science. That was my job, was to sort of translate and interpret between the scientists who were doing the work and the business people who were trying to translate that into money. So that was where I lived for a while.
And at that time, I guess at the pinnacle of that, that would be around 2001, 2002: I’m a business man, I’m an executive, I’m a vice president in a fortune 300 company, I have a 5 bathroom house on the coast of Connecticut. And I learned a few things along the way about the true state of our economy, energy, and the depletion of environmental resources. And so, let’s fast forward, here it is 2008 and I am renting a small house in rural Massachusetts, and I have a garden and I raise animals and my kids are home schooled. So, this information we are going to talk about today had a very transformative impact on my own life, and I think it has for other people as well.
JB: Most definitely, I’ve gone through kind of a similar path as yours. Not so much going into business, but from academia to having a garden and really changing what I was doing.
So why don’t we get into sort of the meat of the show. You know, given the failure of major banks and investment firms, a lot of people are wondering how this could happen. And you created this online course called Crash Course, which does a great job at explaining that the events unfold things today are a predetermined outcome of the way money is created. And during today’s show I would like to cover four questions that naturally arise in peoples mind when they hear that this crisis is not just about a mortgage bubble, but structural and endemic to modern finance.
So first question is, how is modern money created and why does it lead to financial collapse? The second is, why would societies allow such a system to develop and persist if ruin is the outcome? The third is, what is going to happen next? Good luck with that one. And four, what should people do about this? So we are going to spend most of our time with the first one, so let’s begin with that, alright?
CM: Sure, so I thinks it’s important to understand that everything we are seeing today; the mortgage crisis and the evaporated trillions from Wall Street, all of that, those are all actually symptoms. And what I’ve tried to do in the Crash Course, which is a free online course for people, this is sort of my community service, I feel everybody needs to understand exactly how we got here today, and my theory on this is that in order to have any chance of developing any ideas about where we’re going to go or what we are going to do, we have to know where we are. And in order to know where we are, we have to know how we got here.
So I spent some time going through the history. And when I was developing this idea and putting these things together, really just relying on the brilliant work so many other people have done, again I was translating what I saw to be a pretty immense body of material into a language that I hoped more people could find accessible, I discovered that the cause of all the symptoms we’re seeing today can be explained in the money system itself. Now this is not something that you have to spend a lot of time examining at all moments of your cultural development. The 80s, 90s, go ahead and ignored the money system but today I don’t think we can any longer.
And so here’s the key insight, the thing that really kind of surprised me when I discovered this and really thought about the implications: in our society, in our monetary system and this is true of all western society, all money is loaned into existence. And this is a strange concept, because for me, I kind of fought and scrabbled and earned and saved and did all that stuff. Money was very tangible to me. And so it was a little bit odd to discover that what was so tangible and meaningful to me, was really a creation of-- it was an act of policy, it was just a matter of turning switches and dials and more accurately hitting computer keystrokes. That money is created in the act of loaning in our culture. Every single dollar and every single bank account, if you chased it back through all of its transactions, you would find it originated with a bank loan somewhere.
And so here’s a simple example, if I walk down to a bank and I get myself a mortgage, the bank will say, "ok, here’s your mortgage for $100,000." They will hand me that check for $100,000, I go the closing and I hand it over. And where did that 100,000 come from? Well, the bank actually created that at the moment that they loaned it to me. And when they did that, two things happened actually, the money was created, but an exactly offsetting amount of debt was created at the same time. So I have 100,000 in cash, money, it’s real money, it feels like money, it plays like money, it really is to the person I’m buying the house from, it's real as far as our society’s concerned. But there’s also this 100,000 debt sitting over there that’s attached to it. And this leads to a very interested sort of a situation which is that the minute I walked out of the doors of the bank with my $100,000 loan, two things are true: I have $100,000 in cash and I have my debt that’s $100,000, but the minute I walk out of those doors the debt is now larger than the cash I received because interest starts to accumulate on that debt the minute I take that debt on.
So at any moment in time in our society, in our culture, in our monetary system, debts are always larger than the amount of money that’s outstanding. Well this creates a really interesting problem because how do you pay debts back? Well you pay them back with money. Well if it’s true that debts are always much larger than the amount of money, then you can’t pay the loans back with the amount of money outstanding. So where would you get money to pay the loans back? Well, if all money is loaned into existence, being we’re stuck in this circular loop that in order to continue to pay off all the past borrowing of our culture, we are locked into creating new borrowing that’s larger than the past borrowing.
And this dynamic is exactly what we’ve been in the midst of, if you look at a chart of credit or debt in the United States for the past 25 years it looks like a 45 degree rocket lift off. Straight on compounding accumulation of ever larger and larger amounts of debt. And that’s also known as a credit bubble and of course that will ultimately run out of fuel at some point, it will run out of enough people who can take on new debts, it will run out of resources, it’s guaranteed to run out of something. And that’s where we are today.
JB: So what’s interesting, is that you have, then, the need constantly for banks to be putting more money out there in the form of debt in order for those that they’ve loaned out previously to be able to pay it back. So in a sense there's this debt that we see compounding, and we say "oh my gosh, how can we keep piling up debt?" Well, the debts are actually required, in other words, for the loans to be paid back. But it’s the situation that can’t go on forever.
CM: Yeah and it just, it happens to be our system; all systems have pros and cons, there’s no such thing as an ideal money system. A lot of people had complaints about us under a gold standard, people would have complaints if we were under a LETS or a mutual exchange credit system. They all have pros and cons, the thing that I started lecturing about and really trying to warn people about 4 or 5 years ago when I really went into this full time, is that our system has a fatal mathematical flaw built into it. It was only a question of when, not if, but when this thing was going to become a train wreck.
And it’s not entirely clear to me that we’re actually at the ultimate end stage train wreck, we are having a little bit of a problem right now in our credit market but they could be solved. But certainly within the lifetime-- of my adult lifetime I’m sure, but absolutely within my kids lifetime we are going to absolutely experience that collision between a money system that must grow in order to be stable and happy and a spherical planet that has hard limits. That collision is coming. And we may be seeing the opening salvos of this now as we look into our markets today. But certainly it’s coming soon.
JB: OK, so let me make sure I can review this for everybody. Debt creates money, this money is used as a claim on real things in the world, like labor and resources, buying a house for example, and then because this debt incurs interest, the money supply has to expand to permit borrowers to pay both the principal and the interest, and then the money system is therefore making claims on a future that is larger than the present.
JB: So, what then needs to happen to the size of the economy as a result of this interest bearing debt, or this expanding money supply?
CM: Well this is a great point, we skipped right ahead to what I think is one of the key concepts of the crash course, one of the key of the key concepts, and you put your finger right on it and it starts here. If we think about "what is money," we probably don’t think a lot about it, we have these things that say federal reserve note on them, they’re in our pockets, we can exchange them for things, but if we get down to it, get philosophical for a moment, what is money? Money is something I can use to exchange for things that I want. So if I twist that a little bit, if I say anything that I really want to buy, I can’t think of anything I that I could buy with my money that wouldn’t in some way require human effort to bring that to me. The energy of human effort to bring it, and so I can think about money in a lot of ways. There’s a lot of classical economic ways, but the simplest way for me is to think of money as a claim on human labor.
So if I have $1000 I can take that and translate it into whatever I want. A dozen massages, or whatever it is that I feel like I want that’s going to require somebody to bring that to me. So if money is then a claim on human labor, now we have to think about, well than what’s debt? All this debt that we’re piling up. Well the debt is a claim on money, specifically it’s a claim on future money. When you take out a mortgage for 30 years, you have a claim on whatever money you’ve got coming into your life for the next 30 years. So that debt represents a claim on money in the future. So now we can put those two pieces together, if money is a claim on human labor and debt is a claim on future money, we can just kind of combine that and say that debt represents a claim on future human labor.
Well, when your debts are growing exponentially, there’s a really powerful implicit and even explicit assumption built into that. When debt is expanding exponentially, it’s explicitly assuming that the future is going to be exponentially larger than the present. Which means that the amount of debt that we’re piling up... far from the famous claim that deficits don’t matter, they do, because that money is going to either have to be paid back in the future, or it's going to have to be defaulted upon. And those are two very different future outcomes, but both of them result in a pretty vast diminishment in the standard of life and even quality of life for a lot of people in this country. So it’s quite serious.
JB: Yeah, I mean not only does it have to get bigger in other words the economy has to get bigger in order to service these debts, but you discuss in crash course, how it has to grow, you use the term exponentially, which I found you did a very good job of showing how that quickly led to sort of absurdities that would catch us by surprise. Do you want to give an example or elaborate on that?
CM: Well, I think that the most absurd thing is really this notion that we can continue to just pile up debt after debt after debt, and that there won’t be any impact or cost to that. And I think a tangible way for me to sort of express that was what I watched happening in congress over the past week and half. So, here we are at the tail end of a 25 year experiment, with a credit bubble that has so insinuated itself into our culture, into the way we think, into the way our leaders are positioned that we kind of lost touch with things that I believe were absolute truisms to past cultures or past ages.
So what I’m referring to here is that in this past week and a half, what did we see happen? Well, we saw that congress passed a record breaking six hundred and twelve billion dollar defense budget. So no effort to pare that back, just "Yes, we’ll have that whole thing plus we’ll make it a record." And then a record breaking general appropriation budget for other items, that was a 6% growth, that was good. And then we had a Fannie and Freddie bailout of $800 billion, yes we’ll take that too. Oh and then AIG, we'll have one of those for 85 billion. And now this most recent bailout which was supposed to be $700 billion but in order to grease enough political palms so it could get though some opposition, they tacked on another $150 billion. And so I’m looking at probably 1.5 to 2 trillion dollars of incremental new government borrowing that’s going to happen over this next year.
And to me, that is the ultimate absurdity of the tail end of this exponential money system, where we’ve gotten so used to the fact that money can always just seemingly expand infinitely without any problem that we’ve lost the ability to put any sort of priority setting, boundaries, budget cutting, there’s no trade offs involved in any of the things that I’ve seen. It was just a real amazing entitlement sort of approach at saying "yes were going to have everything, and it will all be fine."
JB: Yeah, I mean this is a really good point, I think you’ve nailed it there in that it’s become so large that its almost an abstraction it seems, let’s just create more. And I guess one of the reasons maybe that everyone looks at numbers like GPD and they're expressed in dollars. But that’s a great way of disconnecting your money system from the real world. So I was just sort of curious what does economic growth then mean, in a physical sort of tangible way, that would enable maybe these debts to keep going?
CM: Well, you put your finger on what I think is one of the larger problems, which I actually have a chapter on called Fuzzy Numbers. It’s the stories we tell ourselves, economically, and through numbers, and statistics, and through other things that have slowly wandered away. And they’ve wandered so far off the reservation that it’s kind of hard to tell what they’re really doing for us anymore.
But let’s just look at GDP. So we love GPD, if it’s going up everybody’s happy. We have these myths that we love to tell ourselves, that a rising tide lifts all boats. But we have to understand that GPD, or gross domestic product, that is supposed to be the total measure of our economic output. But in reality it measures things in ways that are both distorted and bizarre, to the point that it is really questionable as to how good of scorecard it really is at all. So for instance, more people put in prison is measured as a plus by GDP because that’s economic growth. A big hurricane is a positive, because GDP measures all the new rebuilding that’s going to happen but it has no mechanism for capturing any of the destruction that came along with it. So that we could take that to its absurd conclusion: if our country completely burned to the ground tonight, GDP would go through the roof and would consider that one of the greatest things that ever happened. And so GDP itself is not a great measure, it used to be called GNP, I think that was a slightly better measure. But we really have to ask ourselves, what really is economic growth?
A lot of the GDP that we’ve been measuring for the past 10 years is not real growth. And so here’s an example: If I’m a mortgage broker and I help somebody flip through a whole bunch of houses, that gets recorded as a very very big addition to gross domestic product, because all of that is economic activity, and it’s big ticket stuff. So let’s say this guy flips through 5 or 6 $500,000 houses and he owns all of them at the end and he can’t pay for them. GDP is going to capture all of the growth in that but it’s not going to capture anything that happens afterwards in any meaningful way. So a lot of the growth that we tell ourselves that we have been having has not really been real. And we know this to be true, certainly if you talk to anybody who’s not at the upper classes of society, you’ll find that the past 10 or 12 years have mostly been marked by stagnant wage growth, things becoming more difficult to manage on a single income or even two incomes, prices seemingly outstripping income gains. All of that is the reality, that is hidden and masked by the story that we tell ourselves in our higher level statistics like GDP. And that’s not even getting into the fact that there’s just some portions of the GDP that are about as true as the WMDs of Iraq were true. There’s some stories in there that are out and out of highly questionable nature in that statistic.
JB: So, you’ve got then this number which essentially is measuring the exchange of dollars. But these dollars may not actually be doing anything useful. So that they’re not really productive in the long term sense. Is that sort of the bottom line?
CM: That is the bottom line. There’s two ways to look at it as well. That’s the first way. We’ve had some fairly high dollar, I’m just going to call it like dollar flipping, which has been creating what appears to be economic activity but it’s about as filling as instant potatoes, from a nutritional standpoint.
The second thing that’s really missing, and this is enormous, is that the GDP doesn’t measure the extent to which your economic growth was built upon borrowing. So let’s make a very simple GDP. We’ve got you and we’ve got your neighbor and your both earning $50,000 a year. And so we measure the both of you one year and we say hey equivalent GDP’s. But the next year your neighbor goes out a borrows a million dollars and gets the ski boat and does all this high economic activity, and GDP would peer back in and say; oh Jason’s got zero GDP growth, that’s not so good. But this guy, look at this, he just had a twenty-fold increase in his GDP, and we reward that and applaud that.
What’s missing from our economic numbers in the United States is the ticular. And that’s the part from other nations, is the degree to which we’ve been borrowing all of the money from foreign countries in order to enable the appearance, and maintain, I’m going to say the illusion of, strong economic growth. When if we back out the borrowing and so no, no you can’t count add borrowing in as true growth, that doesn’t count. I don’t care what kind of great stuff you did with it. We borrowed that money, we have to pay it back, we’ll find that our GDP has actually been quite stagnant to declining for a period of time.
JB: Yeah, so when I hear statistics about income levels, for example, in many parts of the world you hear things like, the average family lives on 2 dollars a day. And I think a lot a people scratch their heads and think, "gosh, how is that possible?" I think maybe after looking at your coursework, I understand how this is so, in that many people in so-called undeveloped countries, live in economies where goods and services have not been fully monetized. And so I can think about the process happening in America, you know, the 1950’s era mom who stayed home and cleaned and cooked and everyone watched each other’s kids on the block -- and now we’ve got the fast food joints, the cleaning services, there’s professional child care. So what you have is all the adults are joining in the labor pool to pay money for what they once did themselves. And so I’m just wondering is this money system requiring in a sense, because its requiring growth, just structurally, is it also than requiring that it assimilate the work that the people do in order for it to grow.
CM: That’s a great point, there’s two components to that. You got one of them, which is the degree to which we’ve sort of put a price on everything here and so we capture all of that, and we pay for all of that.
I had a pretty shocking experience for me in 2001, I was helping a large company with a global outsourcing initiative, they wanted to place some IT help in India and so in examining that, there were these brilliantly educated, brilliant people in India who were willing to work for a quarter as much as the US workers. And that sounds exploitive when you think of it that way, but the truth is that, the shocking part for me, was that one of the guys we were going to hire made the point, yeah I’m fine with $30,000 a year because with $5,000 I’m going to be able to buy a house, and a cook and a maid. And that I kid you not would cost you a 100 times as much in America.
So their baseline living expenses were just set differently, so we can’t compare: two dollars isn’t two dollars across the landscape. And now as a small business owner, I can tell you that the amount of hoops that I have to jump through. There’s all this structural cost, even before I get my first dollar of revenue in, I have very high structural costs to operate. And these are all things that are very real and for the most part they represent the cost of living in a complicated society with a lot of regulation in it. And that’s just the reality of it, but it means that we can’t just go out and say things like, "Well, the American workers just need to be retrained so that they’re more competitive."
Well, actually the competitive landscape is not just solely a function of how well trained the workers are. There’s another component to that, and that is that if you’re going to have the open borders for trade be completely free, but there are these vast asymmetries in structural costs of operating in one country to the next, there’s no amount of training that’s going to fix that. That’s a problem with saying our level of services, and government, and complexity that we have here is just different than it is over there. And there’s nothing that you’re going to do about that by taking a new course at the local community college. There’s nothing that can be done.
So for me that was a real eye opener seeing that, and just thinking about that, and it really points to I think one of the great flaws in the globalization argument: in order for the playing field to relevel we have to account for those structural differences in some way.
JB:This is the Reality Report and I’m your host Jason Bradford, today’s guest is scientist Chris Martenson, here to explain how the financial crisis is a predictable outcome of a money system requiring exponential growth on a finite planet. You can learn more at chrismartenson.com
JB: So I’m wondering what your take on the current financial crisis is. It’s usually just portrayed as a an overexpansion of the money supply, related to you know, the housing bubbles, subprime mortgages, and the leveraging that was done with that, with those debts. Do you think that there’s any physical limits to economic expansion playing a role right now?
CM: Well I do think that there’s some physical limits coming in. I think the first limit that we hit though is sort of the natural-- we went as far as we could with this credit bubble, I think that basically what happened is like what we’ve seen in past credit bubbles.
The first known example of a credit bubble that I’ve found in the books is the so called Tulip craze of the 1600s; where people in Holland, who can account for it, they went mad for tulip bulbs to the point of-- by the end at the peak of it all, a single example of the finest tulip bulb called the Semper Augustus could be exchanged for the finest house 0n the finest canal. And we would look back on that and we say that’s madness.
But we went through our own madness here, and what’s shocking to me is we went through it with the so called dotcom craze in late '99 - 2000 where people were making up stories to tell themselves about why we had to measure things in a new way, because it was new. And it was no different than someone in Holland in 1637 developing a rationalization for why a Semper Augustus tulip bulb was worth so much.
So we went through all these things, it was eyeballs on the screen, and it was this and that, and then that came crashing down. This bubble that happened following which was really, a housing bubble was one of the prime symptoms, but it was a larger credit bubble as well, but just housing as well. I’m shocked, because I can’t find any historical examples where there are two bubbles that are not separated by at least a generation, because it takes that long to forget the pain. But we came right out of a stock bubble, right into a housing bubble, which is kind of an interesting dynamic.
And the housing bubble is, let’s be clear, it’s not equivalent to the stock bubble, because of the magnitude. The stock bubble involves a relatively small fraction of people compared to the number of people who were swept along in the housing bubble. And to be involved in the housing bubble you didn’t have to do anything. You could have owned you house since 1945 free and clear. But there you were sitting, its value was shooting up, maybe that encouraged you to borrow money against that because you had all this equity, cash in your house that you wanted to tap or use, all the ads exhorting us to do that. But as well, your property taxes were probably rising pretty steeply based on your new value. So whether you chose to be involved in it or not, we were all involved. And 70% of the people owned houses or lived in houses that were owned by them in this country.
So that pretty much involves everybody, and that means that this housing bubble and its aftermath is going to be deeper, broader, and very substantially different from what we experienced after the rundown in the stock market between 2000 and 2003. So here what I’m looking for at this juncture is for basically all of the debts that are going to have to wiped out are going to have to be held, or owned, or eaten by somebody at this point. And that’s what these whole past couple of weeks have really been about. Its been about deciding whose going to hold that bag, and congress pretty much sided with institutions and said "well, we think that should be the taxpayers." And I know a lot of people very vigorously disagreed with this at this point, I was one of them. And that’s kind of where we’re at right now.
JB: Yeah, do you think there's any role played in sort of pricking of the bubble because of the rapid rise in commodities prices?
CM: I don’t think that the commodities prices weighed in on it too much. I just believe that the signs were pretty clear that we were running out steam in the housing bubble around 2006. And the commodity bubble really started to take off around then. From between 2006 to 2008, oil went up from, I’m going to guess about $50 to $140. So that was really taking off, already as the bubble was pretty clearly pricked at that point in time, for that. And again, that housing bubble exhausted itself. And that’s kind of unusual. Your right in suggesting that there should have been a pin out there at the edge of the bubble somewhere because normally they do get pricked. This time I can’t find anything to point to, there wasn’t rising job losses, the interest rates weren’t rising all that steeply, there just wasn’t anything else to account for it -- besides everybody who could have bought a house, did. There was just nobody else to get in on that game.
JB: I was just thinking that, as energy and food prices go up rapidly, than the mortgage holders who are then also facing maybe a reset of their ARMs, are faced with maybe double or triple whammies in a sense.
CM: Oh absolutely, that certainly I think was additive to it. Could it have been the pin? Maybe.
JB: It’s always multi-factoral, I’m sure.
CM: Yeah, there’s a lot of things going on here for sure.
JB: So what about efficiency gains. Can resource constraints be overcome and growth continue if we are to simply become more efficient?
CM: Well, it depends on what we’re talking about here. So, here’s how I think about efficiency: if you want to get to Oregon and you're driving south on I5, does slowing down help? What I mean by that is that if efficiency is mainly about slowing down our rate of consumption of non-renewable resources, than I think it’s a good thing to be more efficient, and certainly we should do it with every ounce of effort we can muster. But at the same time we need to recognize the extent to which our current way of life, our economy, our system is built upon the continued expanded use of nonrenewable resources. Regardless of how efficiently we do it. I’m all for efficiency, trust me on that. Europe lives apparently on about half as much energy as the US, and I think they do it quite well. So there’s a lot of maneuvering room for us to get into the efficiency game and do wonderful things for our country. But at the same time, from a longer term perspective, it’s also important to understand whether efficiency is something that can tide you over while you’re figuring out a bigger solution, or whether it’s the answer itself. And I’m arguing it can’t be the answer because we’re still having an economic model that’s requiring the continued expanded use of things that are patently, obviously running out at this point.
JB: In a sense, I’ve seen comments from various public agencies, like the local government here is putting in water conservation policies. But then they are realizing that when people consume less water, they actually sell less water which means that they have less income with which to pay salaries and maintain the infrastructure. And then, we had a similar thing happen here with the federal highway fund complaining that people were buying less gasoline. So I like to distinguish between conservation and efficiency. In that, with conservation you just consume less and with efficiency you consume less in order to do the same amount of work.
CM: Yes, absolutely. I mean if we look at every town and city that’s sitting on the Oglala reservoir aquifer, it’s great for them to be more efficient with it. I think it would be wonderful if they conserved and didn’t maybe put quite so much on golf courses and what not. But the fact is, that ancient aquifer is still being drawn down by some percentage each year. And it would be great to draw it down more slowly. But what I find most often in public discussion is that when a little bit gets conserved, its immediately snapped up by somebody who says, "oh look we have more to use, that means I can put in my development over here now."
So efficiency is only good if you’re really capturing that territory and really preserving it and setting it aside. If you just using it as a means of allowing even more growth on the back of that efficiency, I don’t think it does as much for us ultimately.
JB: Yeah, I think that’s a really good point. But our money system then, because we require an expansion, is going to prefer that any conservation get translated into more efficiency, actually. In other words, "well we use less here, so we can grow over here," as opposed to actually saying "we are going to really reduce consumption over the long run."
CM: Right and so here we get to the core principle that I really try and get across in the crash course, and it’s around the fact that we have issues that I can point to in the economy, and in energy, and in the environment – the three E’s. And the way I put them all together and think about them -- and once I did this I haven’t been unable to think about it any other way since -- is that we have an economic system that is designed around growth, and that’s what it does.
And as I said, it has pros and cons, and all kinds of wonderful things. We’ve had terrific advances, but the question really centers on –- is this the model that’s going to carry us for another million years, or a thousand years, or even ten more years? But if it has a fatal flaw, we need to know about it as soon as possible. And it’s pretty clear at this point in time, to me, that we have these warning signs all across our dashboard that we can look at. They say that we’ve high graded all of our resources. In this country, there are no more ten percent or grade bodies kicking around. We’re down to relatively fractional percentages that take an enormous amount, and an increasing amount of energy to continually extract. And so we can see that we have a system that requires growth at all times, running into limits now that are saying that kind of growth is no longer possible.
And what I’m all about, so I’m not just trying to point out a bunch of problems that are coming and saying run for the hills. Really my ultimate goal in this is that I don’t believe in sustainable growth. I think it’s the biggest oxymoron that exists and I believe that it’s so prevalent throughout all of our thinking that socially responsible investing, funds talk about sustainable growth, economists don’t even have a word for a recession besides a period of negative growth. Everything’s around growth and I submit that an economic system that has to grow in order to be stable and fair is not compatible with a world where it can’t grow. And that we can either run this ship into the wall at high speed and pick up the pieces afterwards, or we can start to recognize that we’re on an unsustainable path and start maneuvering away slowly over time. And so what I want to promote is I want to promote a concept of sustainable prosperity.
I don’t believe that we need any new technology, I don’t think that we need any new devices, we don’t need zero point energy discovered in some lab in Palo Alto tomorrow, we don’t need any of that. We know how to build zero footprint houses, we know how to live close to where we eat, work and play. We know all of these things, we can actually find a way to shepherd and manage our remaining resources in a way that will ensure prosperity for the people who come after us. And that’s the world that I would like to go towards. Because if we just default into growth we know what that looks like. We can go look at a picture of Bangladesh and we can see exactly what unrestrained growth ends up looking like. That’s not a world I’m all that interested in heading towards. But prosperity, this is different. Prosperity to me is not; I’ve got more toys and I’ve got more gadgets, prosperity is around having and using our resources in a wise way so that we have real opportunity and we’re being really clever about how we’re using them. And we’ve gone the extra distance to get to that next layer of complexity about really understanding: what is truly sustainable? You know, where all the ins and the outs really balance, and we understand that at a fine level. We can do it, we absolutely can do it, but not until we understand what the problems really are and we’re honest with ourselves about the challenges we face.
JB: Yeah, this is what is so mind blowing to me, is listening to kind of news and commentary about this and I have not seen any major decision maker or media outlet really get at these root causes of the financial crisis. And I’m just wondering, how did we let this happen and do you think that even though some folks aren’t talking about it openly, that there is some realization at some of the higher levels that we are bumping into earthly limits and that the money system itself is at the root of the problem?
CM: You know, I wouldn’t presume to know how far down that path we’ve gone but I can absolutely guarantee you that based on the people I’m talking to and the signs I’m reading, the things I’m looking at, what were being told for public consumption about the depth of this crisis is nowhere close to where we really are.
We’ve had a major systemic problem that is now, I believe, well beyond the capacity of anybody to be able to manage this at this point. So just looking back at the cast of characters here, you’ve got Hank Paulson who cut his teeth on rising all the way to the top of Wall Street. Trust me, you don’t get there by being the most altruistic guy on the block. He’s gotten there because he is quite good at what he does, but he’s been infused with a profit motive, with a set of self interested principles, with a sort of a clubby atmosphere that exists on Wall Street for him and his friends. He’s carrying some of that with him. But he was all the way through this saying this isn’t a big problem, it’s contained. Those were his public statements, I don’t know what he was saying in the background, but certainly I can say that publicly he’s demonstrated that he had no awareness of just exactly what was coming or the dimension of it.
And so here’s my view on this right now; is that nobody knows what’s going on at the higher levels right now. We have these things called derivatives, which are just debts that have been placed upon debts that are placed upon real economic activity. And these debts now are many times larger than the economy itself. And so, we have a situation where the derivatives are sitting there like a time bomb and nobody quite knows how they work. And they’re so complicated that even a single derivative contract could take a PhD, several hours to figure out exactly what it was worth, and a lawyer too to figure out what it was going to play like. We have so many of those, we have 600 trillion of those parked in the worlds banking system. And nobody quite know how they interact because they’re all kind of interrelated like a hairball. And it makes it very confusing.
And the time I started to get scared about this was in 2005, Fannie Mae got caught by the regulator. They had fudged some results and the regulator said, go back and tell us exactly how much you made or lost in 2004. And so they had to go restate their books, normally this takes a couple weeks, maybe a month. And it turned out that Fannie Mae had so many derivatives parked in its books that they ended up hiring 1500 forensic accountants who were specialized in this particular field of unraveling derivatives. This is one company. And it took them 800 million dollars in a year and a half during stable market conditions and finally in December of 2006 they announced what they had made or lost in 2004. So now we multiply that by all the companies in the world playing in that and there just aren’t enough forensic accountants and lawyers and legal system to handle any sort of a hiccup in that system. And that’s what’s happening now, we’ve got a hiccupping system.
JB: So it’s like Humpty Dumpty here, and no one’s going to be able to put it together really. And so, well the next set of questions are what comes next? and what should people do about it? Would you care to try those out in the next about seven minutes we’ve got?
CM: Well, so this is tricky. So here I’m going to go into speculation mode, I want everybody listening to be aware that you are listening to somebody guess and I am going to guess just about like everybody else. First thing I’m going to do is, I’m just going to say that right now there’s a lot of fear out there in this system. And we all know that somewhere in ourselves -- probably on a deep level, maybe in our minds, maybe in our bodies -- but that we live in an immensely complicated society that is simultaneously robust, efficient, it’s true, but it’s also brittle in some important ways. And we are seeing that now in our banking system.
So, here is my little prediction, I think that we are dangerously close to a banking holiday. Meaning that this will be a shutdown period to give our authorities some time to sort things out. I’m not 100% sure of this and I’m not saying I know when this might happen. But I am saying that as a prudent adult, who wants to manage his own personal risk, I think there’s probably a 50% change that we are going to see a banking holiday before this year is out. And the reason that this would happen is that everything is chaotic right now. And the banks actually, they may not even know if they are solvent themselves. But they certainly don’t know if their banking partners across the street are solvent. And so what that does is it causes the banks to not want to trade with each other. We’re seeing this already, the interbank lending rates are very high and there’s a lot of fear and banks aren’t even talking which each other in a good way around this right now. And so, if the banks really just stopped and the credit stopped, this is actually a pretty big blow to our style of economy, because we have a credit based economy.
And so what I mean by that is that even if your local store decides to order more food from a distributor, they're going to do that on a credit basis of some kind. They’re going to place the order, no cash is going to go from one account to another. They might have 30, 60 days to make good on that. The distributor is doing the same sort of stuff with whoever they're getting their product from. And all the time they are using the banks as a cash flow mechanism, as they operate on credit. Well, if the credit goes away, and we don’t have a credit based economy any more, then we go back to a cash based economy. And it doesn’t operate that way anymore. We could figure it out again, but trust me, it’s going to be a little bit weird for a while.
JB: Yeah, do the groceries still arrive to the store, does the power stay on, does payroll still get made?
CM: All of that, most of that is happening through credit mechanisms. And so it’s absolutely vital, this is the part they weren’t being very clear about in Washington, is that if that credit mechanism breaks down, literally our system freezes up. And that’s sort of an issue. They way that we get around that is I think that if I was in power I would say is, we need to have a banking holiday. We’ll do just what they did down in Argentina. You’ll wake up one morning and two weeks later the banks will reopen. And this is a time when I look at that and I think of that as a possibility, this tells me that since I don’t have personally any faith that I can be sure which banks are good and which are bad, the personal approach I’ve taken is A. Take some cash out of the bank, 1 to 3 months living expenses. Think about like in Katrina: Katrina hit and all of a sudden ATMs didn’t work and people weren’t taking checks and credit cards, the whole thing kind of didn’t work for a while. And so for people who had cash, you could still go out and conduct business. So part 1 is to get some money out of the banking system. Make sure you’ve got a really safe place to keep it if you choose that option.
I’m advising that people do not take on any more debt at this particular point. Unless you’ve got a really good reason for it, it’s going to pay itself back. A school loan might be a perfect example of that. But if you’re going into debt to simply consume, this is something I’m going to say don’t, think about that really carefully, because in a credit crunch, debt is a real killer. That is what we saw in the thirties. It can really make life hard. And in order to prepare for this possible banking holiday I think it’s also important to make sure that whatever bank you're with is really the safest bank you can, that you can be with.
And I don’t use one bank, I use three. I’ve got three local banks, none of them are big nationals that are exposed to the derivative crisis. All of them are banks that are very highly rated by independent rating services. I’ve talked with the management there, I’ve taken a very active approach in knowing that my bank is safe and sound. And absolutely of course, nobody should have a bank account with more than the FDIC limit on it at this point in time. That would absolutely be unadvisable.
And so this is all about risk mitigation, and this is just navigating what I can horizon one risks, there’s some pretty severe strain in our system today. It’s unclear how they’re going to be resolved. They’re global in nature. Europe is having just as tough a time as we are at this point with their banking system. And unfortunately, the banking system is really the way that we operate all of the physical machinery of our society. And so this is where the fear comes in for a lot of people because if that machinery breaks down we live in a just-in-time society. Where pretty much everything, from your medication, to your food, to your gasoline all arrive on a continuous rolling basis when it’s needed.
JB: Well, what about that, instead of just having stashes of money, you create some buffer in your food and your medical system at home?
CM: I think that’s just plain out prudent. It doesn’t cost that much and if you took somebody from 100 years ago and teleported them to today and showed them our system, they’d be aghast, because it would be unthinkable that you would ever go into October without knowing exactly where all your food was at that point in time. This past hundred years has really-- in some ways, I’m starting to view it more and more as a really delightful artifact of oil. And we are really very close to peak oil at this point in time. I’m almost positive we're past peak conventional oil. But what it means is that we’re going to have fewer energy units on a going forward basis in petroleum. And that has really powerful implications. And of course there’s too much to go into here, but it speaks to needing to start to bring the vital support systems just a little bit closer to home.
JB: Alright, well we’re going to have to finish on that. Thank you for spending the time with us.
We’ve been talking to Chris Martenson about the financial crisis related to the systemic, endemic problems of a money system requiring exponential growth on a finite planet. You can learn more at chrismartenson.com and today and previous shows can be heard online at globalpublicmedia.com. Thanks to everybody, our studio engineer, Tim Gregory, and everybody at KZYX and Z, have a great week everybody, thanks a lot Chris.
CM: Thank you, Jason.
JB: All right, this is a debrief of my interview with Chris Martenson. I was struck by his chilling story about how hard it is for one company, I think it was Fannie Mae, to unravel its derivatives. And this just sort of points out the complexity of the system we’re a part of right now. And I think part of the confusion that people have is related to this complexity. The fact that not even people who are supposed to experts or in charge, can really manage this anymore. And what comes from confusion, is a sense of sort of lack of control. And any animal who feels like a lack of control, feels vulnerable. And that’s a form of fear.
Now, I noticed that fear -- there's sort of a bifurcation in people, when they have fear. Some people, especially if that fear is not validated, they feel disempowered and asocial, they sort of retreat. And this is the predicament that a lot of people saw when I started talking about these issues. A lot of people didn’t like it because they said that I was creating fear, and that fear would lead to people basically withdrawing, and not doing what was needed. Now I think that is definitely a valid point, but it is especially true when the fears are not validated by society. On the other hand, if the fears are seen as normal and as realistic, in other words, if people acknowledge that this complexity is real and it does lead to confusion, it does lead to lack of control, it does lead to vulnerabilities, and the society or at least your peer groups validate those fears, then what that can do is, that can lead to sort of prudent action on your part and it can lead to a sense of practicality, of understanding what’s important and what’s not important at this day and age. And then it can even lead to even stronger social bonds rather than asocial. If you do these things together, and if you’re receiving sort of validation about what you’re doing.
So I think that’s really good to point out, that right now what we’re seeing is that a lot of validation of the kind of warnings that have been made for a long time. And this is a time for people who have felt maybe disempowered and withdrawn to sort of step back in because everybody is needed who sort of understands this.
What other thing that was interesting to me was the fact that the money creation system is actually so incredibly simple, but it’s not taught, and because something that simple is not taught, people sort of have this disbelief about the whole thing. And so you have to kind of go over it again and again with people and find highly credentialed experts to back up these claims. And one of the greatest is actually the Federal Reserve itself. The Federal Reserve explains very well how money is created, and so anyone can go look at that.
The other thing that’s coming to mind is that typically if something works, people don’t ask questions about it. So, we’ve had this money system, which has gone through ups and downs. I mean, there’s definitely been problems, there’s been crises, nothing to this extent though. And they’ve always been crises that have been solvable in the context of just changing the rules slightly, taking some hits, but obviously that’s now changing. People are starting to really wonder, has this run out of control and is it a problem that can’t be solved?
So I just want to point people to sort of similar shows that I’ve done in the past that have gone over these issues. One about money and its need for growth and the collapse of Argentina and how they responded to a crisis like this. I did a show with Richard Douthwaite, and he’s a great person to look up. You can either listen to my show on that on Global Public Media, or just look up Richard Douthwaite and look for his work on money. He wrote a book about The Ecology of Money, a book called Short Circuit, a book called The Growth Illusion, and all these are great sources of information on a lot of the core of the topics we covered today in the show. That was about two years ago that I did that show.
Almost exactly one year ago, I had Nate Hagens on this show and we were talking then about this credit bubble, and about the rapid inflation of housing and in particular, the derivatives market. So, one of the most chilling statistics on today’s show was about the value of the derivatives market and Nate did a really good job of laying that out. And these are so complex, that it’s very hard actually to explain them, and one way I’ve heard people talk about them is that it’s essentially like gambling on investments. So instead of being investments, they are sort of bets on which way investments will go. So in essence, there’s almost no limits on how many bets you place on something. So it’s pretty stunning that these things have gotten so huge and out of control, and completely unregulated, and potentially very frightening.
And I thought the show ended really well with some practical perspective on what we should do in terms of becoming more cash rich, and having less debt. As well as then, put that into tangibles that you really need to rely on day in and day out. And I think over the long term, the message of creating more resilient local economies, where the very basics are met as close to where you are as possible and where people have jobs basically providing for each others' needs and protecting the ecosystems that are really the source of all our wealth and security. I think that’s a good strong message that is more resonant now than it maybe has been in a long time.
So this is a debrief of my show with Chris Martenson. And it's www.chrismartenson.com and I really recommend taking his crash course. Take care everybody, thanks.