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The Titanic may have hit the iceberg... we will soon find out


2 March 2020


 
Der Untergang der Titanic. Willy Stöwer (1912)
Der Untergang der Titanic
Willy Stöwer (1912)
 

If the corona virus is anything like the Spanish flu then 2 billion people might get infected and 100 million people might die. We don't know that now but it will become clear in the coming years. It might not seem the right time to think about the economy but it never is when people are dying. But we should think ahead because the corona virus can easily sink the global economy if it becomes a pandemic. And it doesn't require 100 million fatalities.

Drastic measures like closing public places and businesses to contain the virus can trigger an economic depression. And even that is not needed. The fear for the virus may be enough to do the job. The world economy is brittle despite its apparent strength in recent years. The crisis of 2008 nearly collapsed the world economy, even though the trigger of sub-prime mortgage debt was relatively small.

Once the economy slows down it becomes harder to repay debts and the interest on these debts so that debts and interest payments can sink the global economy. That nearly happened in 2008. As it turned out, a relatively small trigger can be enough. The capitalist economy is inherently unstable. That is because incomes fluctuate while interest payments on debts are fixed.1

There is far more debt than there was in 1930. And there is more debt than in 2008. The world economy may be on the brink of total collapse. If that happens people might get desperate. Populists may rise and real solutions may remain out of sight. The Great Depression allowed Hitler to grab power and start World War II. World War III can easily kill more people than the corona virus. That's why we shouldn't ignore the economic fall out.

And there may be a solution. It may be possible to make the world economy robust and shock proof and able to deal with low or negative growth. In other words, it may be possible to make the capitalist economy inherently stable. The solution is Natural Money and it may work as explained below.

First, there will be no interest payments. Hence, interest payments can't collapse the economy.

Second, interest is a reward for risk. By capping the maximum interest rate to zero questionable borrowers can't get a loan so there will be fewer bad debts.

Third, there will be less debt because equity investments will be more attractive as returns on equity aren't capped. Hence, balance sheets will deleverage.

Fourth, capital is abundant so the equilibrium interest rate is probably negative. That is why negative interest rates can help to make the economy stable.

Fifth, a holding fee on money can prevent a depression or lift the economy out of a depression (see: The miracle of Wörgl).

And sixth, the maximum interest rate of zero may cause credit to contract when the economy is booming so there will be no debt overhang later on.

Natural Money may solve the problem of fluctuating incomes and fixed interest payments by ending interest payments and stabilising the economy so that incomes fluctuate less. And if capital is not destroyed in a depression, it may remain abundant and the equilibrium interest rate may remain negative. Even if the equilibrium interest rate goes positive, the currency can rise in value so that deflation exceeds the negative interest rate and the real return is positive.

If the Titanic really has hit the iceberg then Natural Money may be your lifeboat. And this lifeboat is much bigger than the Titanic itself so don't panic. Feel free to notify your friends, family and everyone else of its existence. There are enough seats for everyone.

1. The End of Usury. Bart klein Ikink (2019). Naturalmoney.org.