Can you fix the economy?: Risk without reward?

Last updated 09:28 25/10/2012

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* This is a response to Lara Iriarte's article in this series, titled "Can you fix the economy?".

The proposal to preclude exponential growth of the money supply by eliminating simple interest and dissuading "non-productive" investment by demurrage is, er, well, interesting but simplistic.

I would agree with the idea's proponent that the inevitable conclusion to an exponentially expanding money supply is certain: it's called an economic collapse.

But where, and be specific, does the notion of risk and reward fit within this proposal? Is it the reward of a successful investor to simply reinvest, reinvest, reinvest but always under the threat of risk? And that the moment he gets off the investment treadmill his reward gets whittled away through a 15 per cent demurrage regime?

What if our risk-averse investor now decides to plough his capital and accrued reward into a safe non-productive ("non-job-creating") holding asset like, say, gold or real estate? Will that investor have to slice off 15 per cent of his holding to dissuade non-productive investment? Oh, and who gets this slice? The government? For "redistribution"? Sounds suspiciously like a command economy in sheep's clothing to me.

The laws of exponential growth apply equally well in reverse as they do forwards. The result is an inevitable singular collapse. Nature has provided an example writ large that neatly describes the end game of an interest-free economy. Its called a black hole. Demurrage is only negative interest, after all.

I hold no hope for a return to a gold standard and I do not believe that we can discipline ourselves to retire debt voluntarily. So I would counter-propose that an inflating interest-fed economy, however cyclical it may be, is the best we can hope for. I suggest that past and future deflationary collapses are the necessary and inevitable solution. In the immortal words of our neighbour Mr Keating: "It’s the recession we needed to have."

Europe and the US are about to discover that the game is up. No matter how fast they spin the cage, the mouse is already dead. In fact it's beginning to reek.

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