The money system & the false hope of UBI

Why a system of worklessness would fail both society and planet

With acknowledgements to rdworldonline.com

Silicon Valley oligarchs are using globalisation and capitalism to build a global system that does not require the productive employment of workers. They favour a system of worklessness, of the robotification of employment - at a time when there is so much work to be undertaken to protect the biosphere that sustains human life. Work that cannot and will not be undertaken by robots. To ensure the workless have income, Silicon Valley supports a system of Universal Basic Income - whereby the state ‘prints’ money to sustain the unemployed.

In this post I will argue that UBI is unaffordable and unsustainable. But first:

The breakdown of trust

As I write this, the world is watching as capitalist market dynamics overpower and destroy much of what humanity values: a thriving biosphere to sustain life; and peace - upheld by an international system of cooperation, solidarity and prosperity.

Instead we face war.

The world’s most powerful state appears hell-bent on destruction, using both military and monetary warfare.

The bombing of Iran is the singular achievement of the United States’s military industrial complex, and of old, white and embittered capitalists - Netanyahu (76) Trump (79) (previously Biden, (82)) and Murdoch (94) all four of whom have deliberately and consistently undermined the system of international security represented by the cooperation and coordination of the United Nations and by international diplomacy.

Capitalism undermines its foundation: trust in the monetary system

Equally destructive of human security and international stability is monetary warfare - undertaken by both the Biden and Trump US administrations. It began with attacks aimed at Russia in February 2022 followed by Trump’s deliberate undermining of trust in the world’s reserve currency. The US dollar has fallen ten percent against most currencies this year. That deliberate weakening led in turn to a ‘record buying spree’ of what Keynes called a “barbarous relic” - gold - whose price rose 30 per cent over the same period. Central bank net purchases of gold have been more than 1,000 tonnes each year for the past three years — record levels. The FT reminds readers that

As gold rose past $3,000 per troy ounce this year, traders were reminded of previous market shocks. Bullion passed $1,000 in the 2008 global financial crisis and went through $2,000 during the Covid-19 pandemic.

Trust and the international monetary system

At the heart of this breakdown of trust in the international monetary system is an age-old, deliberate abuse of one of humanity’s greatest inventions: the money system.

The money system, like the ecosystem, is planetary in its scope, and in order to help the world’s economies trade, thrive and survive, requires discipline and restraint (regulation) but also international cooperation and coordination. Above all, it requires the upholding of that increasingly scarce, but very human quality: trust.

Capitalism - globalisation - fosters fragmentation, individualism and insecurity - and truckloads of distrust.

While the Trump administration must bear much of the blame, the breakdown of the world’s monetary order is fundamentally a consequence of the great divide in society’s (and economists’) understanding of money. That misunderstanding explains why the price of gold, stablecoins and crypto are rocketing, and the world’s reserve currency has been falling (although the US dollar has acquired some of its ’safe haven’ quality in the last week or so.)

As Vishnu R Nair from Ernakulam, Kochi, India wrote in the Financial Times last week:

When central banks abandon productive dollar assets for sterile metal (gold), they signal something darker than portfolio diversification…Instead of investing in productive capacity that creates jobs and prosperity, sovereign wealth is being buried in vaults. The opportunity cost is staggering - trillions that could fund development are now locked away as insurance against monetary warfare….

Gold’s rally isn’t a sign of smart investing. Its a funeral procession for the co-operative international system that made modern prosperity possible. When trust dies, we all become poorer.

Like gold, the crypto and stablecoin bubble is also a ‘funeral procession’ for sovereign systems of money.

In my next post I want to discuss the difference between sterile gold and productive dollar assets… and the impact on the global monetary system. (Gold is sterile because, unlike credit (productive dollars), it does not generate interest (income) for the creditor, and capital (productive income) for the investor. Instead it is ‘sterile’ and valuable only when used as assets held in vaults, where its value rises and falls.)

I also plan to write about stablecoins and how they are simply a form of ‘narrow banking’ practised last in the nineteenth century, and based on out-of-date, flawed ‘classical’ commodity-based monetary theory.

But for now I am going back to basics. The post is motivated by a recent encounter with an influential friend who is a tech expert and lives in San Francisco, California. He explained to me in some detail that Artificial Intelligence (AI) is here to stay, and that the consequence of its impact will be mass unemployment for much of the professional classes. I am skeptical - but he seemed to have a powerful case.

He went on to explain that the architects of the new AI technology in Silicon Valley had an answer to the problem of mass unemployment: Universal Basic Income or UBI.

I strongly disagreed and spent all of two hours trying to explain that those problems could not be addressed by the government ‘printing’ money and paying the unemployed a Universal Basic Income, as was done during the Coronavirus pandemic. But to make my case, I had to explain the money system, and that was hard. I’m not sure I succeeded, and so I’m taking another plunge at the subject here.

The Money System and why UBI is wholly wrong

In one of society’s two big camps, money is gold and crypto. In other words it is understood as a scarce commodity, whose value, like corn or lumber, depends on its scarcity. In that camp (the one loved by crypto fans, and attached to orthodox, neoclassical economists like Hayek, Friedman and other neoliberals) money is understood as a scarce commodity that can be traded and whose price depends on the law of supply and demand.

If money is gold, it is as Vishnu Nair explained, ‘sterile’. Why? Because gold does not generate interest. Its ‘price’ is determined entirely by the laws of supply and demand and by its ’safe haven’ quality. When it is scarce, which by definition it is, its price is determined by ‘demand’ for the asset - demand that inflates its prices. Right now, because confidence in the US dollar and international monetary system is fading, gold, crypto and stablecoins are having a moment.

The gold and crypto camp and its associated orthodox economists do not think gold’s ‘sterile’ quality is of any importance. They ignore the fact that the metal does not produce a yield. Credit, in contrast, does produce a yield. First, for the creditor - in the form of interest payments, and second, for the borrower - in the form of returns on investment.

For most orthodox economists the rate of interest is of little theoretical importance. Little attention is paid to its ‘productive’ quality, or to its sinful, usurious quality.

Keynes understood the power and importance of the rate of interest, both its usurious, exploitative power, and its constructive, productive power. The rate of interest on this social thing we call money was his major theoretical preoccupation. It is why his great masterpiece is titled: The General Theory of Money, Interest and Employment. Most economists ignore both the power of the rate of interest and Keynes’s view of its fundamental role in the sustainability of the economy. But also its power to generate unpayable debts, economic failure, exploitation and instability.

The second camp

In the other camp (the one attached to the great monetary theorist John Law, J.M. Keynes, Hyman Minsky, J.K. Galbraith and others) the understanding of money is as a social construct. In other words money as a series of human obligations, promises and claims on both present and future human and ecological resources. Money’s ‘price’ is the rate of interest, also a social construct, fixed by both individual creditors and bankers (’the market’). The rate of interest for banks and big international institutions with accounts at the central bank is fixed by committees of men and women meeting regularly.

As a social construct the value and usefulness of money is dependent on both its ‘price’ (interest) and trust - trust that the recipient of new money (credit or a loan) will uphold their promise/obligation/contract - to repay in the future.

Money, or the promise to pay - credit - does not exist in isolation. It is part of a system. For money to function effectively as a device that enables humanity to undertake economic transactions - buying and selling goods, services and assets - then money must be part of a trusted domestic and international regulatory system.

Pillars of the system include an incorruptible central bank to manage the nation’s currency (the unit of account) and the basic rate of interest on credit. Second, a series of commercial banks responsible for issuing the bulk of an economy’s credit contracts (money). Third, as a system of contracts (promises) money’s value must be upheld by institutions of the law. Fourth the system requires trusted standards of accounting for assessing assets and liabilities. Finally for promises, obligations, (credit) to be upheld requires inclusion in the system of income-generating employment (to guarantee repayment of the credit).

It is this last step that UBI hopes to bypass.

The monetary system is circular - it flows into the economy as credit and investment and flows back again as income. Like water in a reservoir (to use an inadequate metaphor) it fills up (with credit) to meet a need, and when dispensed and invested, helps to create economic activity. But if the system is allowed to over-flow the boundaries of the economic reservoir, it creates mayhem (unpayable debts). At some point the reservoir’s credit ‘tap’ has to be switched off (regulated). If the water is drained by investment in productive use, the reservoir will be replenished by new rainfall (i.e. earned income.)

To recap: almost all credit (money) is issued by commercial (not central) banks to millions of the economically active - at a price, the rate of interest. The creditor fixes the rate according to his/her (subjective) assessment of a) the risk associated with the borrower and her investment and b) the collateral offered as guarantee of repayment. The riskier the borrower, the higher the rate of interest. The central bank sets a floor on the basic rate of interest.

The newly issued credit (loan) allows the entrepreneur/artist/homeowner to invest - in a new asset - factory, home, kitchen or piano. The newly created asset enables the economically active to ultimately generate income - as a concert pianist, piano tuner, robot manufacturer, widget creator, WFH consultant. It is then that money becomes productive, generates income (and tax revenues) enabling the credit to be repaid, over time.

While the money system can bear an imbalance in the credit created and the repayment of the credit (the ‘deficit’) - for the system to remain stable requires that the money system is productive, and that interest rates are low, not usurious. By that is meant that the rate of interest must be low enough not to render the the investment unprofitable, because income generated by capital invested turns out to be much lower than the high costs of debt repayment.

UBI bypasses the circular system. It assumes that credit (money) can be issued by the state to the unemployed and that engagement in economic activity (work) is unnecessary to generate the income needed to pay for, or finance the initial investment in UBI. Instead, the argument goes, the central bank can just ‘print’ money for people who can use the money and time freed up, for leisure. There is no need, it is assumed, for UBI to generate work, and from it, the income and tax revenues that are a consequence of employment.

That is why I believe UBI generates false hope. [Instead I vote for a system of Universal Basic Services - which ensures everyone’s basic needs are met. (My organisation, PRIME economics, hosts the Social Guarantee campaign.)]

The monetary system cannot sustain an economy in which money is not employed in ‘productive’ job creation and in work that generates earned income for the investor, salaries and wages for workers, and tax revenues for the state.

This is where the link between robots and UBI comes in.

I did not get far in my efforts at an explanation of the circular nature of the monetary system in that long, frustrating discussion over coffee with my friend. But I did achieve one thing. I made him promise never to use the word ‘printing’ when discussing the issuance of credit - by the central bank or any commercial bank.

My hope is that by removing the ‘printing’ frame from his mind, he could begin to understand money as credit/obligations/promises to pay; and credit as part of a circular money system that cannot be bypassed by UBI.