politics for the 99%

Published on Neues Geld.net, Interview Professor Dr. Dr. Wolfgang Berger, economist and philosopher, by Lars Schall, Translation into English by Lucy Streng, Feb 14, 2014 (Verbunden mit Ursachen der Finanzkrise).

Professor Dr. Dr. Wolfgang Berger is among the critics of an absolute basic prerequisite of today’s financial system: interest. In the following interview he reveals present conditions, risks and alternatives. “Interest is part of the system and it has side effects which therefore also belong to the system – terrible side effects.” 

Professor Berger, we are in the midst of a so called global “financial crisis”. Is this frequently used term really suitable for the problem or would it be more appropriate to speak of a systemic debt crisis?

• We can continue calling it “financial crisis“, because the debts which outgrew a number of real estate buyers in the USA at first, followed by many system-relevant banks and now most public authorities all over the world, are necessary for our financial regulation. Imagine they would all be able to and would pay back their debts at once, becoming completely debtfree. Then we would find ourselves within a systemic crisis overshadowing everything we experienced up to today. When Bill Clinton balanced the federal budget of the US, he was criticized by the former head of the central bank, Alan Greenspan, who reminded him to bear in mind that pension funds would no longer know where to invest, if the state no longer got into debt.

You have identified the interest phenomenon as the basic problem behind this development. What is so bad about interest, which is generally considered necessary for making money available as credit?

• In our system interest is necessary by all means. If it is low as it is at the moment, it does not even manage to lure financial assets back into the circulation by itself to enable the banks to grant them as credits. We also need inflation which devalues the money and is deliberately created by practically all global central banks. Without interest and inflation, financial assets could hardly be re-invested, since every investment is connected to a risk, and as we have seen, banks can also go bankrupt. It is doubtful whether the countries will still be able to save the banks in the next crisis. Interest is part of the system and it has side effects which therefore also belong to the system – terrible side effects.

What kind of “side effects” do you mean? Please explain to our readers.

• Due to the fact that financial assets bear interest, they tend to grow exponentially. All of us learned about exponential functions at school and still most of us don’t see what this means in reality: a doubling within a certain amount of time which depends on the amount of interest. To give you an example: fold a sheet of your morning paper and you will receive two layers. With each folding, the number of paper layers doubles: after folding twice you get four, after six you get 64, after ten you get 1,024, after 42 you get 350,000 – and this already amounts to the distance between the earth and the moon. Instead of folding your newspaper, you could also stack 500 Euro notes, double the amount, and soon you will also reach the moon. That is one side of the coin.
• Now let’s go on to the other side: these exponentially increasing financial assets bear interest. However, this is only possible, if there are debtors to pay the interest. And this is the reverse stack of 500 Euro notes that has to be stowed in a whole in the earth until it is piercing our planet. This exponentially increasing indebtedness is therefore necessary due to the system. And if private persons or companies are not prepared to assume the costs, or if they are simply not able to, public authorities must intervene. If they refuse, the system falls apart. Among economy, politics and public experts – maybe with the exception of Mr. Greenspan – there is hardly anyone who is aware of this simple interrelation.

You furthermore claim that only those, whose interest income is higher than what they earned, are winners of the system. Generally speaking, who are these winners? And what about the others?

• A product you have bought – e.g. the computer you are using to read this interview – and each of its individual parts underwent a long row of stages in the added-value chain before you were able to use it. This is the same with any product and any service, no matter whether it is a drink, vehicle, journey, doctor’s treatment, medication, TV programme or the police’s speed check. Investment in intermediate steps is necessary for each of these levels which have to be financed. This investment and its interest are 3 represented in the calculation and therefore also in the price. If the interest wasn’t added to the final price, the company producing the relevant stages of the added-value chain would not be able to survive. We need to add together the interest portions in the calculation of all stages of the added-value chain in order to achieve the interest portion in the final product. In an average of all end prices, we thereby achieve around 40 percent. For drinks it is less (approx. 30 percent), for rents and real estate it is more (75 to 80 percent).
• It is well-known that, as an example, in Germany debt service is the second highest item in the federal budget and that we pay our taxes (meaning valueadded tax which taxes each of our purchases) for interest in second place. Roughly calculated, we can therefore assume that of every Euro we spend, we pay half on interest and the other half for the product or the service. This means, if you earn a monthly net income of 3,000 Euro and spend it completely, you pay around 1,500 Euro on interest. So if you earn 1,500 Euro a month for former savings, you still haven’t won a thing. A marginal note: in order to gain 1,500 Euro of interest a month (18,000 Euro a year), you would have had to invest 600,000 Euro at the current rate of federal bonds (approx. three percent) – considerably more than half a million. I am quite sure that the few people, who have this much money to spare, are not aware of the fact that they still aren’t among the winners of the system. Far more than 90 percent of the population is among the losers, and among these (meaning “below”) there is a constant shifting “upwards” – to the few winners whose interest income is clearly higher than their interest spendings.

Could you explain why the system in its current state requires “unlimited growth” in order not to fall apart?

• For 60 years German economy has been growing by almost the same absolute amount a year, whereas the gross national product, which is achieved by all of us together, is constantly increasing. Of course this percentage decreases: if we assume we have one hundred and add 15, this makes 15 percent. If this is continued year by year and the hundred turns into a thousand, the 15 that we added are no more than 1.5 percent. This is a normal economic maturing process which started 60 years for Germany and only a short while ago for China. As long as the growth factor is higher than the interest rate, there is something to be distributed. Employers and employees can argue about who is to get how much, and something will even be left over for the state, for developing infrastructure, financing education and research or improving social security.
• However, for many years the growth rate has been less than the interest rate. Although the economy is constantly earning more, it is not sufficient to satisfy the exponentially growing demands of the finance sector. This is why we have to pay for the difference. It is achieved by lowering net salaries by reducing governmental services, by selling the “silverware” constructed from tax money (post, railway, electricity supply, water plants, public transport etc.), by extending working life, cancelling compulsory military service and many more. The fact that individual politicians are still claiming that savings were necessary in all sectors, because we were living beyond our means, testifies a frightening stupidity: the exponentially growing 4 percentage of national income which needs to be shifted from “bottom” to “top” – meaning a gigantic non-performing income. It must be achieved together by all of us, which means by companies and employees. The ridiculous charity offered to the unemployed victims of the system can however be neglected.
• Of course politicians would prefer not having to withdraw anything from us and not cutting down on state benefits, but adding a little here and there. However this would require a growth rate higher than the interest rate – something nobody needs in a fully developed economy, that our planet could not cope with and that, as we have seen, would not work. This is why the gigantic and exponentially accelerating shifting from the vast majority to a smaller financial aristocracy continues.

What about war and destruction? Aren’t they good news from an interest-economic point of view?

• It is easy to calculate the time to come when everything in the world belongs to a small number of very rich people and all of us have to more or less serve them like slaves. This is a situation triggering revolution, but history teaches us that it seldomly brought about anything good. Existing structures and systems always come along with strong inertia, doing everything to outlast us. Therefore the only remaining solution to keep up our financial system is a war or a crisis with war-like consequences. When everything has been destroyed, we do not have to reform the system. Just like after World War II, we can start anew – with double-digit growth rates above the interest rate. With these new and low standards there will even be something to distribute, starting a new cycle – until the next war or crash.

But isn’t the system inclined to collapse over and over again, a kind of “eternal recurrence of the same thing”, so to say? And if yes, why?

• We have been experiencing the cycle of destruction and reconstruction for several centuries: the millennium experiment of financial regulation with billions of unnecessary human sacrifices. Time after time uncreative leaders have developed lifeless institutions to maintain the system. But today it is different. The world we live in is in a process of complete renewal. Nothing remains the way it was. Everything will change. This includes great chances for anyone developing in personal response to global changes, riding along with them, just like dolphins carried by the waves and birds carried by the wind.
• Our terrestrial magnetic field is dramatically changing, in the South Atlantic it has already decreased by half. Astrophysicists are expecting gigantic solar flares. They will bomb the earth with enormous electron and proton clouds and render the whole of our microelectronics inoperable. Precursors could be witnessed in Canada in 1989 and in Sweden in 2003. As soon as this happens, our financial system will break down anyway. If we were wise, we would reform it beforehand, designing it in a way we will need it after the breakdown, when it is meant to serve life. 5

Why do you think that, in this country, people who brazenly criticize the problem of interest and compound interest are quick to be branded as “structural anti-Semites”? Was Aristotle a “structural anti-Semite” when he wrote down in Ancient Greece:

“εὐλογώτατα μισεῖται ἡ ὀβολοστατικὴ διὰ τὸ ἀπ’ αὐτοῦ τοῦ νομίσματος εἶναι τὴν κτῆσιν καὶ οὐκ ἐφ’ ὅπερ ἐπορίσθη. Μεταβολῆς γὰρ ἐγένετο χάριν, ὁ δὲ τόκος αὐτὸ ποιεῖ πλέον· […] ὥστε καὶ μάλιστα παρὰ φύσιν οὗτος τῶν χρηματισμῶν ἐστιν.”.

Translated into modern English this means:

“Profiteering is hateful, because it is earning from the money itself and not from what this money is there for. Money was invented for barter, now it multiplies by itself due to the interest. […] There is nothing more contrary to nature than this kind of earning.”(Politics, 1st book, chapter 3)

• I cannot recall Aristotle being referred to as anti-Semite. However, Roman- Catholic Church and Martin Luther were, and they probably deserved it. But today’s argument is something completely different: it is a “knock-out argument” of those wanting to prevent a reform of our destructive financial system, setting the proponents of such a reform on the same level with Holocaust deniers. For fear of this branding many well-behaved people therefore do not even start to deal with reform proposals and their beneficial effects, because they don’t want to be regarded as anti-Semites.
• This denigration hides the interests of those profiting of the system, who are in the process of acquiring raw materials, water sources and the world’s riches, controlling the press and preventing anybody from dealing with our financial system and its alternatives in a competent way. Of course there will be Jewish billionaires among them, but naturally also Christians, Muslims, Buddhists and Atheists. All of them – and who could blame them – are protecting their own interests. However we, the non-billionaires – and who could blame us – should also defend our interests. This financial system destroys social and political peace and, ultimately, life on this planet. Therefore, despite their catastrophic consequences, the forthcoming dramatic solar flares will save it.

How does the philosopher in you regard and evaluate the way interest and compound interest shake up our world?

• The question of why the majority of economists does not see the problem of our interest-based financial system is exciting. The theory of science is an important part of philosophy which deals with the laws of “producing” knowledge. Applying instruments of formal logics, Thomas Kuhn proved that every science is based on paradigms – on dogmas which practically are the foundation of the discipline, which cannot be proved and which the representatives of this profession are forced to believe. In my first semester of economics this dogma of economy was practically implanted in my brain: in a market economy there is no alternative for our monetary and financial system: T.I.N.A. (There is no alternative). 6 If I hadn’t believed this at that time, I would neither have been able to pass the first exam nor completing my degree in this subject. If I had continued scientific work in this field after my dissertation, pursuing a career, I might not have been able to question this dogma today and to form completely new and different ideas. The paradigm of this profession would have become my identity and I would have to have given myself up, if I had doubted it. Therefore I can very well understand the colleagues who believe my view of things to be idiotic, since I almost became one of them. This is why the great physicist Max Planck pointed out that a new scientific truth cannot prevail by convincing the advocates of former ideas, until they have all died out. If we waited this long, the planet would rid itself of all humans, assisted by the sun, as we now know.
• All religions, really all of them, have banned interest rates. The economist in me says that this is correct due to the devastating effects of compound interest, it however does not work: if we prohibit something that people want to do, many will do it in secret. If we forbid interest, there will be a black market with reduced legal security where money is yet loaned on interest. We are in need of a mechanism that solves the problem in line with the market.

As an alternative, you are thinking about replacing our current monetary system by “flowing money” with “demurrage”. What does this mean?

• If we do not want interest or inflation, we need a different mechanism luring financial assets back into the circulation so that they are available as credit and can be applied in a profitable way, used for investment. This mechanism is referred to as “demurrage”. In French and English it is a fee charged for ships anchoring in a harbor. It enables quick loading and unloading, making sure that ships are able to leave the harbor as soon as possible. In our example it is a kind of parking fee for your money:
• The central bank only needs to adjust a small screw and request the commercial banks to pay a fee on sight deposits – practically a monetary tax. This fee gradually decreases when money is fixed and is no longer applicable, if money is invested over a long period. With respect to cash, e.g. a chip or a magnetic strip informs us about the amount of time left until the note is worth the nominal amount, and about when a fee is required, so that it is accepted without debt discount. The scanners required for this process – safety tests at the banks – can then be found at every retailer and could also be integrated into mobile phones. The central bank determines the fee so that the interest on the market levels off to zero. The market will decide how the banks break even – with fees on deposits and/or credits.

Why does “hoarded money” lose value while “flowing money” is protected by depreciation?

• Liquid money (in accounts or cash) does not lose value. On the contrary: the central bank can now afford an inflation of zero to make the assets absolutely stable in value. However, those who have money will not want to pay the fee. This includes three possibilities:
  1. spending (on consumer goods or investments),
  2. investing (banks and insurances will develop offers for this purpose),
  3. giving it away.
• In any of these cases it continues to flow, therefore it is called “flowing money”. The monetary circulation is stabilized and the central bank finally succeeds in managing the supply.

Which changes have to be made in the banking system in order to introduce “flowing money”?

• Only the framework conditions of traditional banking business (collecting savings and granting credits) will change for the banks, that’s all. They must adapt their offers to these new conditions predefined by the central bank.

What could a country expect, if it decided to say “good bye” to the current system and use “flowing money” from now on?

• After a transition period companies will be able to finance their investments free of interest and – if it still wishes to do so – the state can also take out interest-free loans with its citizens. Consequently, this means that the shifting from bottom to top via interest portions is ended and citizens have twice the buying power at today’s level of prices. A large part of adapting to the framework conditions will however also be achieved by increased remuneration (wages and salaries). There will no longer be any nonperforming income. Wealth can only be created by work, money is no longer multiplied “by itself” – meaning: through other people’s work.
• Many people are satisfied with their standard of living, if it is secured by long-term stable conditions. They will not need or want double buying power and would rather work half the time. If the number of these people is as high as the number of unemployed, the problem of involuntary unemployment will be statistically solved. The supply of efficiency will probably decrease, forcing companies to pay more to their employees in order to keep them.

Are there any successful historical models of “flowing money”? … //

… (full long interview text).

• (Prof. Dr. Dr. Wolfgang Berger, born 1941 in Kassel, Germany, is a philosopher and economist. He studied economics and philosophy in Grenoble/France and Durham/USA, graduating as Dr. phil. in philosophy and Dr. rer. pol. in economics at Freie Universität Berlin and Technische Universität Berlin within the framework of a research assignment by the Max Planck Society. Subsequently, he worked as senior manager in Europe and overseas for 20 years.
• From 1988 until 1997 he was employed as professor for business administration at Pforzheim University, including one year at California State University in Hayward/USA. Since 1997 he has been leading the Business Reframing Institute in Karlsruhe which he founded himself. In his book “Business Reframing – Erfolg durch Resonanz” [Business Reframing - Success from Response], published by Gabler (3rd edition, ISBN 978-3-409-38895-5), he presented his concept of interior corporate re-orientation.
• The publication of this translated interview is a Joint Venture between “New Economic Perspectives” in the USA and chaostheorien.de in Germany).

Links:

Prof. Dr. Dr. Wolfgang Berger ist auch zu finden: auf Wissensmanufaktur.de/WolfgangBerger; auf de.wikipedia; auf YouTube;

The historical roots of Swiss direct democracy, on Economy and Society, Feb 13, 2014.