The solution to the financial crisis is straightforward.
As Richard Douthwaite and others have pointed out, the problem we face is not a lack of money. Rather it is the fact that our money has been lent into existence. As we are now discovering, this creates an inherently unstable system of debt, in which default in one part can threaten to bring down the entire system.
What we need instead is for our money to be spent into existence. This would not only bring financial stability, it would also address the global economic crisis, which has repeatedly been blamed on lack of demand.
But what kind of project would be big enough to support this level of spending?
War is one answer. But we are running out of countries to invade. And by its very nature, every bullet, shell, and drone we fire in war immediately destroys value rather than creating it. So this is not a long term solution.
Earlier this month the International Energy Agency (a conservative organisation) urgently warned that “investment in low-carbon technologies must be made by 2017” to prevent dangerous climate change. “If, as of 2017, there is not the start of major and clean new investments, the door to 2 [degrees] C will be closed.” This would essentially mean ‘Game Over’ for the entire economy as we know it — and for every business within that economy.
On the other hand, taking the suggested action would provide a mechanism to address not only our environmental but also our financial and economic crises.
And it is noticeable that the eurozone country that is already furthest down this path, Germany, is also the one whose bonds are most trusted by markets and investors in their search for stability.
You cannot solve a problem with the same thinking that created it. The reason we are facing these multiple crises is because they are systemically linked. The common thread that joins them is an error in our understanding.
It is too early to know whether changing our thinking about the way we create money would provide a single ‘silver bullet’. But it is certainly a step in the right direction.