November 01, 2012

Hurricane Sandy And The Environment

And the warning about global warming and more such severe weather to come.

By Melvin J. Howard

We now know that you and I don't just go out and make money when we go to work or sell something. Instead we are just getting a transfer of already existing money from people that have some. Unless these people or companies are a bank then they didn't make money either - they also got a transfer of some money that already existed. Money, you will recall, is just the other-side, the mirror image, of debt. Money is created by the creation of a corresponding amount of debt. Money, in its most basic and spendable (or liquid) form, is created by banks making loans to the non-bank public.

Maybe your money started its life as funding for a dam or mining project, and here you are with it today. Maybe it even started off as the funding for that logging project that caused your favourite forest to be clear-cut and which caused you so much distress. That seems like money some of us might not like very much. Before I even ventured into the outback I really never knew what was all the fuss about? Global warming, carbon pollutants, clear-cutting, recycling. I didn’t care much as long as it didn’t affect me in the City but slowly I found that it did it effects all of us. So lets look at exactly what purposes money is being created for and then we'll have a better idea of the history of the money we are spending today.

If you go to the web site of the Federal Deposit Insurance Corporation bulletin at Total assets of commercial banks at year-end 2000 are $6.2 trillion dollars. Savings Institutions have total year end 2000 assets of $1.2 trillion. Here is an interesting way to look at this data. Adding up the total Commercial Banks and Savings Institution Assets would give a total of $7.4 trillion in bank assets. This is, of course, debt of the non-bank public (that’s us) owed to the banks this is in the form of mortgage, credit card debt and so-forth. The way that money works this should mean that the total money supply in US dollars (that is the money that we non-banks can use in the trade for all goods and services) should be close to this $7.4 trillion in bank assets. At the end of 2000, this is $7.2 trillion, which is only 2% off the total bank assets or debt owed by the public to the banks. 

Let's just focus on Commercial Banks since that’s where most money (almost 85%) is being created. This total balance sheet of the commercial banks gives us the breakdown of how today’s available bank money was created. We see that $3.8 trillion, or 60% of it, is created as "Loans and Leases". The rest was created for other assets owned by the banks such as investment securities and bank real estate. So let’s drill down into these "Loans and Leases" since they make up most of the money that’s been created. You will see a breakdown of how this $3.8 trillion dollars was created. Almost 50% was created for real estate purposes, mostly mortgages for residential and commercial real estate purchases and development. Another 30% is for commercial and industrial project purposes. And most of the rest is loans to individuals, in the form of Credit Card and other personal debt. 

Combining this information we can see that almost half of the money created by banks comes into existence for some kind of real estate transaction, commercial or industrial project. We can extrapolate and say that about half the money we use today came into existence for the purpose of some kind of Land Alteration and its associated natural resources. This means the replacement of natural land with some kind of human development. The US dollar based monetary system including the G-20 nations, as we know it today is heavily dependent for its survival on human alteration of the natural landscape and it's resources.

Let’s go green

Nature has figured out some excellent ways to moderate the flow of water to manage flood and drought risk and also to clean water so that the waste of one process can get all cleaned up and ready for another process. This all happens through water's interaction with the land and with the ultimate Central Banker - the Central Banker of Energy, the Sun. Humans have absolutely no control over the Energy Central Banker. All they can control is the things that store the sun's energy like plants and animals that eat plants, and also they can go find the sources of other stored solar energy in the form of old squashed dead plants and animals, called oil and coal. All these activities plus all of the human monetary-system driven development of land effect the land on earth, not the Energy Central Banker. So the land is what we focus on in considering the link between the water cycle and the money cycle that forms the basis of our economy. The way that nature manages flood and drought risk is really through plants and soils which are, of course, the very best of friends - the soils being largely made up of decaying leaves and trees, and the plants needing the soils for food. The soils store lots of the rain as groundwater and they are kept in place by tree roots. Some of this water the trees might like for later when they get a bit thirsty, and other ground water might fall to an underground aquifer or run off slowly into a stream in the watershed.

Having lots of plants and rich soils in a watershed means that when there is lots of rain the ground will soak up lots of the excess water and this will help mitigate flood risk. When it's been a long time between rains you can rely on the groundwater in the aquifer or the groundwater gradually seeping into a nearby stream to provide a steady flow of water from earlier rains. This helps mitigate drought risk.

As for natures water cleansing functions the trees keeping the soils in place prevent excessive amounts of mud, clay, sand and salt from sliding into the stream. The soils and the little microorganisms living in them are very fond of waste products that most other living things would find rather unappetizing. Them and other little critters living in or near the stream often perform water cleaning and filtering functions that help to make the water useable for others. The trees sweat off some water through evapo-transpiration helping to cool the stream area so that all the critters that live there that have an important role in the water cycle can stay at a nice temperature to do all their work. Having such a water cycle on our planet makes a lot of sense given that gravity would otherwise drain all the water to the salty sea and sea-water is not very drinkable. This whole business of evaporation and rainfall to replenish all living things that need fresh water is quite sensible and, of course, life as we know it would not exist without an efficient water cycle. A prosperous human society cannot exist without an efficient water cycle. There's that efficiency word that people would have us believe that only markets can provide. There number of ways to describe efficiency but lets just talk about efficiency in plain language that makes sense intuitively. At the end of the day markets and the monetary system are all about allocating energy amongst the different participants of a society - whether that energy be in the form of labor applied to a raw good to make it into a product, the raw good itself such as food crops, or stored energy such as coal and oil. And we know that all our energy comes from the sun and that only plants know how to capture and store that energy directly. All these being the processes of Mother Nature they obey what we humans have interpreted to be the natural laws of physics, most especially they obey two important energy laws - the First and Second laws of Thermodynamics - that have never ever found to be violated by any process. Water obeys these natural laws. Money, being a purely human abstraction, does not.

The First Law of Thermodynamics is the Law of Conservation of Energy. This says that the amount of energy in the universe is fixed and you can’t create new energy or destroy existing energy. When it comes to the planet Earth, we get new energy to the earth from another source in the universe, called the Sun. Apart from all the energy that we have stored in and on earth and the daily dose of sunlight we have no other energy available to us. This is perhaps the primary reason humans have seen fit to develop markets - that is, to allocate this scarce resource of energy.

If the laws of Thermodynamics had just stopped there, all would be right with the world! Under the conservation of energy I could just fill my car with gas, stick a little collector in the exhaust pipe and recycle all the energy I just used and fill my car back up, since I know that energy will be conserved. I only ever have to buy one tank of gas in my life. Buy one load of electricity to heat my home for my whole life Id just recycle everything over and over. Energy companies would go bankrupt, there would be no wars in the Middle East, and the stock market would collapse because no-one could make money from selling energy.

OK there’s a catch. And that’s the very important Second Law of Thermodynamics. The ENTROPY Law. The law that sits right at the heart of the conflict between man and nature. ENTROPY is a measure of disorder in terms of the usefulness of energy. Low entropy means very useful energy. High entropy means quite useless energy cant use it for another process, its not organized enough. The Second Law of Thermodynamics says that Entropy always increases as energy is used. Therefore, once you have used all the gas in your tank, even though the driving process left the same amount of energy from the gas in the world, that energy has become pretty useless so that you cant re-use it. This law then really creates the scarcity of energy and the primary motivation for using markets to allocate it.

Some economists tell us that this will be done most efficiently if the conditions of a free market are met. Presumably this means energy will be distributed more efficiently since that ultimately is what the market is distributing. So how does the market deal with the Entropy Law? The answer to that would be Not at all! While it is true that the Entropy Law contributes greatly to the scarcity that gives rise to the need for markets you will not find the Entropy Law mentioned in mainstream economics textbooks. Modern money and capital markets, and contemporary economics have been built up IGNORING the most fundamental laws of nature. It is interesting to consider who runs things most efficiently - the Markets or Mother Nature? Given that the most desirable outcome of the water cycle, even from a human-centered point of view, is a stable, secure flow of clean water one would have to conclude that Mother Nature arranges the most efficient allocation of energy, for, in the natural processes there are no waste products, and solar energy is used to its maximum. Every player in the natural water cycle does some work in the water cycle and various related nutrient cycles and their waste products get used as input into some other process in these cycles. Nothing is wasted and everything fits together to form a whole cycle that has evolved over millions of years and that we are the beneficiaries of today. Nature's water cycle seems to have taken the Entropy law into consideration and then optimized energy use within this boundary condition.

Enter Man

But then we Humans come along with fears of scarcity, markets and a monetary system that ultimately depends on alteration of the land for its survival and for the survival of the markets. But most alterations to the natural landscape then disturb Mother Nature's maximally energy efficient water cycle in several common ways. These are common things that have happened all across the globe:
  • First, deforestation exposes soils and causes soils, sediment and salt to rush into the stream at the next rainfall. You end up with salty water and/or sediment that kills off lots of the plants and critters that had important roles in the water cycle such as water filtration.
  • Second, the loss of soil and vegetation, coupled with impervious surface coverage such as roads, car-parks and buildings means that water can no longer seep into the ground as is very important in mitigating flood and drought risk. The frequency of flood and drought increases.
  • Human activity in watersheds (real estate, mining, logging, intense farming and so forth) and the loss of filtering systems through the loss of vegetation and soils means more and more pollutants are entering the water sources.
  • The practice of building dams either for hydropower or for storing water in a place that doesn't have enough, and the practice of channelling water to places that don't have much, has been responsible for massive loss of aquatic life, flooding and drastic alteration to affected watersheds and local water cycles.
Then we market-oriented humans come along and say, "Now we have a water problem. Let's use some market mechanisms to fix it." In fact a lot of the market-oriented people go so far as to say - "Let's privatize the water - they think that this pure market solution will fix everything can you believe this? " And they say this perhaps forgetting that it was market forces that got us into this problem in the first place.

All this is not to say that us humans should not have markets for other things or should not alter the land. Rather it is a wake up call to build a much better world and make more efficient use of our energy. Ultimately this would mean a paradigm shift in the way land is developed so as to retain enough natural resources for million of years to come. If we do these functions right it would enter into the economy at the point of credit creation, or equivalently money origination think about it. “That’s why I am green.”