Sound Money

TLDR: Central banks positioning themselves as a solution to climate challenges is dangerous. They’ve promoted unsustainable debt fueled consumption for 50 years. Consumption is great but it needs to be based on production otherwise it’s unsustainable and bad for the environment. Micro level policy is futile while unsound money remains. Sound money is the environmentally friendly answer that promotes judicious consumption, savings and efficient use of our scarce environment.

Video summary:

The impact of humanity on our changing environment is viewed by many as THE issue of the 2020s. Pollution, rising sea levels, changing temperatures and wildfires are all used as evidence of this growing challenge. I’m not an expert on the climate or the environment so I’ll leave the articulation and debate of this problem to others. What piques my interest is the suggestion by central banks that they can solve the problem.

Former BoE Governor Mark Carney and current ECB Governor Christine Lagarde are two prominent figures talking about the role of central banking in climate change. Largarde said to the FT recently, “I want to explore every avenue available in order to combat climate change.” This may sound appealing because it appears as though central banks will focus on a hot button social issue, but it’s truly dangerous! Let me explain.

If consumption>production its unsustainable & environmentally damaging

Over the past 50 years central banks have lowered interest rates and used debt at any sign of economic, social or financial stress. They explicitly encourage households, businesses and governments to consume in the present, rather than wait until the future, in the hope of making current conditions appear optically better that otherwise. They’ve been successful at this goal but, like anything in life, it has consequences. Consumption has grown at the expense of many other components of the economy, including the environment.

Consumption as a percentage of the US economy has increased from below 60% in the 1960s to 70% in 2020. Consumption is by its very nature bad for the environment, as we’re depleting precious resources. Every environmentalist knows that sustainability requires us to only consume what we produce. Otherwise we’re harming the environment and creating a less sustainable society. Ideally, we should consume less than we produce so that we’re saving, investing in our future and making ourselves more productive. Productivity leads to efficient use of resources and environmental conservation.

Monetary constraints impose sustainability

Don’t misunderstand me. I’m not saying that we should stop consumption, control birth rates and live in caves. Consumption is natural and necessary. I’ve also got no desire to tell individuals or families how to run their lives. People should consume all that they like, but within the constraints of what they can afford. If they’re going to take on debt, then they must face up to the constraints of properly priced interest rates. These constraints encourage us to consume sustainably and experience the consequences when we don’t. When society introduces untethered debt growth through incredibly loose monetary and fiscal policies, then there is no constraint to consumption. Under these conditions’ consumers can, through the illusion of debt, feasibly afford new cars every year, with zero thought to the environmental impact of their actions.

Central banks may argue that the only consequence to their policies are CPI inflation, but they’re sorely mistaken. Lowering interest rates and reducing the cost of debt encourages unsustainable actions that are bad for the environment through encouraging us to consume more than we produce.

People like to talk about “American consumption culture” or “capitalist consumption” or a “consumerist society” but I think they’re failing to identify the key cause in this social development. I’m sure there are other factors influencing these trends like technology but low interest rates, the availability of credit and unsound monetary policies are central!

Gaze back towards the first chart. The global monetary system has become increasingly unsound since 1971 when the USD broke its linkage to gold. We spoke about this shift in monetary regime extensively in last month’s article, “Where can we place our trust.” This shift towards an unsound monetary regime is a key feature driving overconsumption in the US. And remember, it’s not just a US phenomenon. The US is the centre of the global monetary network and most other countries have followed in its footsteps with unsound monetary and financial policies. We just focus on the US because it’s the clearest characterization of these relationships and the data is available.

Hopefully these relationships make logical sense to you, but here are a couple pieces of data to provide evidence for the conclusions. American plastic waste has ballooned since the 1970s. While recycling has grown in recent years, it’s a concerningly small proportion relative to total plastic waste in landfills (we’ll return to this point).

Global consumption of primary energy sources has also ballooned since the 1970s as the monetary constraints to consumption have been removed.

The idea that we’re going to tackle environmental challenges by legislating what consumers can and cannot purchase is nice, but impractical. Humans respond to incentives! If you increase interest rates, and raise the cost of capital, then people will think twice about a new car every few years. They’ll think twice about that gas guzzling super car. They might even think about catching the bus to work or, God forbid, walk there. Once again, I’ve got nothing against cars, I’m not going to tell you to walk to work and have zero desire to dictate where you consume your hard-earned capital. People must do as they like. But we need to be exposed to monetary constraints in our actions to create a sustainable environment.

Conclusions:

1. Macro>Micro

I support sustainable practices as individuals, businesses and countries, like recycling and reductions in emissions. However, I think it’s very unlikely that environmental challenges will be solved with micro level policy to mandate certain actions, like electric cars, when unsound money remains the prevailing macroeconomic force. I know macroeconomic analysis isn’t everyone’s area of interest, but I hope this article generates enough interest for the environmentalists to shift slightly from the micro to the macro. Unsound money is an environmental disaster.

2. Arsonists can’t fight fires

Central banks talking about solving climate change, is like the arsonist applying for a job at the fire department. Central banks have no place a “tackling climate change” as Lagarde and Carney offer. We need to push back against this drivel with every sinew in our bodies, lest they use it as motivation to further expand their negative influence on society. The best thing that central banks can do for the environment is remove their loose monetary policies and allow natural constraints to support sustainable consumption.

3. Sound money is environmentally friendly

Sound money imposes these constraints immediately on the economy, limiting credit growth and unnecessary consumption, supporting sustainability. Gold and bitcoin are often frowned upon by environmentalist because they require a fair amount of energy to create. I will specifically tackle this topic in a future bitcoin bulletin, but this article provides a glimpse into why gold and bitcoin are environmentally friendly. A bitcoin or gold monetary standard reduces unsustainable consumption, alleviating environmental pressure.

4. Sound money promotes saving, productivity and efficiency

One can already witness these actions in a microcosm amongst bitcoin investors who would rather save and invest their capital into bitcoin than waste capital on unnecessary consumption. Remember, savings and investments lead to productivity gains, which leads to efficient use of resources and environmental conservation. Buy some bitcoin yourself, understand some of these relationships and you may also feel compelled to delay gratification and easy the pressure on the environment in the interests of longer-term gains. Seen through this lens, bitcoin has a lot less to do with speculation than many think.

I’m about to open a whole new can of worms on that topic, so I’ll leave it here and save speculation for a future article.

I might not speak to many of you again before the end of the month, so I’d like to wish you a wonderful December holiday. I hope that the time with family is filled with genuine connection, meaningful conversation, deep relaxation, good perspective, fun and laughter, leaving you refreshed for the new year and all the opportunities that it brings. My wife and I will be thinking of you and sending you warm wishes! Thank you for the impact that you’ve had on our lives over the past year. Each interaction has been meaningful, no matter how small and I’m truly grateful for the part you’ve played. I look forward to growing our connections and adding more value to your life in the New Year. Onwards and upwards my friends.

Recent articles:

• Happy Thanksgiving
• Edition 1: Debt; the macro trend to rule them all
• Edition 2: Die Slang in die Grass
• Edition 3: Debt’s unequal impact on wealth
• Edition 4: Trust and reality