24 October, 2017

Global Economic Revolution Is Overdue

By Hema Senanayake – 

Hema Senanayake

Hema Senanayake

The venue was a Buddhist temple. On Saturdays, a few parents whose kids take lessons on religion sit around a table until kids finish their classes. Usually on such circumstances they exchange ideas mostly on religion, culture, science and philosophy. But on a recent Saturday their topic was on economics; particularly the topic was about extreme consumerism. It was a suitable topic to be discussed in a temple because Buddhism is not supportive for extreme consumerism. Buddhism upholds frugal living for laymen. Many agreed that almost all major religions recommend living economically and not living extravagant.

What does it mean by extreme consumerism? Perhaps, a former CEO of Lehman Brothers would not have considered having 6 private jets for him was as extreme consumerism. Therefore the term extreme consumerism is a subjective term and could vary from person to person. In other words, it is very difficult to determine that how much consumption falls into the category of extreme consumerism. Therefore, let us define it more objectively so that everybody will have a unified understanding as to what it means by “extreme consumerism.”

At least for this essay, let us define “extreme consumerism” as “living beyond one’s own monetary means.” The same will apply for any economic system which lives beyond its due monetary means. This same definition constitutes that “living within monetary means” is frugal-living or live economically. However this definition is not fully compatible with the religious understanding of extreme consumerism which recommends us to avoid living on more and more resources. Yet, our new definition clearly determines as to how much consumption is considered as extreme consumerism.

According to our definition prior to 2007 the United State economy as a system and many U.S. households lived indulging in extreme consumerism. Many people lived beyond their own monetary means and the system as a whole lived beyond its monetary means, on massive debts. As a result the economic system and livelihoods of many people crumbled in big time in 2008. Even after five years from the crash things are not all good. Extreme consumerism in the U.S., EU and other developed countries are bad and had bad repercussions globally.

Perhaps, you may now want to know whether the U.S. and its citizens, learning a lesson from the Great-Crash of 2008, are now living within their own monetary means. Unfortunately, they do not. Why? Are they so stupid? The answer is that the economic system we put by ourselves does not permit it. The contemporary economic system is our (I mean human’s) design. We have designed a system that does not permit to live within our own monetary means. Can we design another system that permits us to live within our own monetary means and grow in accordance with physical capacity of production without economic crashes? Yes, but first we must know the systemic trap in the present system.

After the Great Economic Crash of 2008, many economists and mainstream politicians echoed the need of living within our own means. President Obama mainly blamed for bankers and lenders and said that they, “duped borrowers” into borrow in amounts that cannot be paid back.  From the Republican side, they put more blame on the poor borrowers who took loans knowing that they can’t pay back and the laws that facilitate poor householders to borrow more easily than otherwise. When we ignore whose responsibility it was, these world leaders have clearly identified the cause of the economic crash was related to extreme consumerism or “living beyond their own monetary means.” Also these leaders know that “living beyond our means” might in future cause severe economic crises of greater magnitude than the crisis of 2008. But sadly they operate thinking that if people and the government borrow what they could pay back, the system is fine. Wrong! Dead wrong!!

Living within our own monetary means is good. But there is a hindrance. A few people or a small group of people can make a choice to live within their own means but all of us can’t do it even if we want to. Why? It is because the macroeconomic system, which we put by ourselves to ensure our best possible wellbeing, wants us to “live beyond our monetary means” and crash periodically. This is a systemic set up but not a conspiracy. Who put the system in place? We put it by ourselves? Let us investigate this issue as simple as possible.

When the economic system plunged into an economic recession or depression we know that output reduces and a significant number of employees lose their jobs. Economic recessions or depressions happen due to one-and-only reason. That unique reason is that the demand-and-supply equilibrium in the economic system takes place in decreasing output levels. If the demand-and-supply equilibrium takes place in increasing output levels or at the same output levels then we will not have a recession. This is an economic truth but also easy to understand.

Let us assume that you are a producer. You produce something assuming that there will be a demand for your product and somebody will buy it. If somebody buys what you supplied then the demand-and-supply equilibrium takes place. If the buyer demands a lessor quantity then you reduce the volume of your output but in this situation still the demand-and-supply equilibrium takes place but at decreasing output level. Since you now need to produce a lessor quantity you slash jobs. This is exactly what happens in a recession. Can a recession take place outside this mechanism? No. The opposite of this mechanism, that is, when the demand-and-supply equilibrium takes place at increasing output levels the economy will grow. Can the economy grow outside this mechanism? The answer is “No.”

The above two conclusions make our investigation easy and simple because in the final analysis we have to deal with only one economic equilibrium, which is demand-and-supply equilibrium.  Through which medium do we achieve this equilibrium? It is through money. This is the very reason that money or the monetary system is so important in any exchange economy. Is the monetary system a natural system? No. We, the human beings have designed the monetary system we use today. It is not an ultimate system. We can design another system if we want to.

Now, the most important question in regard to our topic of extreme consumerism is: can we achieve the demand-and-supply equilibrium, which is an essential necessity, if the whole society decided to live “within its due monetary means?” If the answer is “Yes” then advocating and practicing to live within our own monetary means by all members of society is possible. If the answer is no to above question then the economic system must (I use the word “must” to insist that it is a must and there is no choice), live “beyond its due monetary means” – And as a result the system must crash due to bad debt time to time.

In fact the real answer to the above raised question is “No.” This means “extreme consumerism” is a systemic need under the monetary system we have put in place by ourselves. I wish if any economist or any other intellectual could come forward and say that I am wrong on this point.

Not only that, the modern capitalistic monetary set up is such that even during recessions we (I mean all of us or the system) cannot live within our own monetary means. The same is true, when the demand-and-supply equilibrium takes place at the same output level year after year, which situation is known as “stagnation.” Therefore, these understanding led us to make another serious conclusion. That is that there is no truth for the widely propagated idea that the economy makes corrections by itself during crashes. This is a theory or grave illusion held and promoted by business cycle theorists or “boom should bust” theorists.

Under the present monetary system, there is a visible cyclic behavior in the economic system. Nobody can deny it. As I briefly mentioned above an economic growth takes place when the demand-and-supply equilibrium is met at increasing output levels year after year. During this period the society lives beyond its monetary means and hence accumulates bad-debt. This trend should come to an end when the system can’t create any more bad debts due to heavy debt burden. This includes the debt accumulated by the stock market speculators and the over-blown financial assets of banks, which are liabilities on the part of the banks. Then the system crashes. The only correction needed is to enable the wipe-off, of bad debts. In order to do what? This is necessary in order to facilitate the system to live beyond its monetary means for another period of growth. This is the real cycle that exists in macroeconomic system that we live in today. This concludes that even after the so called correction the economy cannot grow without creating debt exponentially. But the growth of debt and the component of bad-debt are not quite visible until the system is collapsed, due to an accounting trick because somebody’s debt is computed as somebody’s asset in the books of the system.

However, in the present monetary system, most of the debts are created when something known as “credit money” is created by banks. Therefore exponential growth of banking assets must have a correlation to the new debts created in the system. For example before the crash of Iceland banking system in 2008, only top five largest banks in Iceland held assets amounting to 1200% of the country’s GDP in that year. This clearly shows that bank’s assets are not real assets but debts or liabilities too. Due to this very reason when banking assets vanishes the liabilities do stay.

Therefore, if we want to live within our own means then we must be able to say “Yes” to the above mentioned question. Therefore if can’t say “yes” to the said question then, only enlightened option is to design a new system. In other words we must redesign a new monetary system that facilitate us to live within our means and most importantly, only such a system could avoid economic crashes because there is no systemic bad-debt accumulation in such a system. Only within this type of economy, we can truly advocate and practice “frugal living” as we wish. There is no systemic hindrance or barrier.

Did any mainstream economist see this before? Yes, but not in the same way I see it. One of the economists who saw this contradiction was Hyman Minsky. He was an American Economist. He clearly pointed out that the nature of capitalist system is to accumulate bad-debt during growth periods. And, as a result that there will be an unavoidable corporate bankruptcies, mostly in financial sector, which create a chain effect bring down other sectors. His solution was to allow the bad-debts to be wiped-off. What is important is that Minsky saw that something is wrong with the present monetary system. Can the expertise monetary management of U.S. Federal Reserve or European Central Bank or Bank of Japan or even Bank of China can resolve such debt crises? Minsky answered this perceived question. He said that “expert monetary management” cannot resolve this crisis. Though I disagree with his explanation as to the root cause of contradiction, at least you may now see that there are other mainstream economists who pointed out about a systemic problem. But he believed that this is the ultimate system and we must live with debt bubbles and crashes. This is where we must reject his notion.

The other mainstream economists who saw this crisis was Milton Friedman, the founder of monetarist school of economic thought. Towards the end of his life, he had suggested to establish a monetary rule. This idea was picked up a group of U.S. Economists and prepared a draft “Monetary Reform Act.” They claim that Milton Friedman was sympathized with their proposal. Especially the proposal to set up a monetary rule by abolishing the current Fractional Reserve System which allows designated commercial banks to create what is known as “credit money” and to allow the government to create debt-free money amounting to 3% of GDP (in the U.S.) in each year. This means if this Act is implemented the U.S. government does not need to borrow because it creates its own money amounting to 3% of GDP. Since private commercial banks cannot create money they will act as real intermediaries. This means that there can’t be exponential debt accumulation in the system or as we may easily perceive that there will be no exponential growth of banks’ assets. In this proposed system, since somebody’s saving is absorbed by another as loans the system will live within its own monetary means and since the government creates its own money needed to fill the deficit it also live within its monetary means. This is not a correct system which I support, but you may now agree that this proposed system which was approved by Friedman is a completely different system than we use today. Under this system, we may be able to answer “Yes” to our most important question mentioned above i.e. can we achieve the demand-and-supply equilibrium, which is an essential necessity, if the whole society decided to live “within its due monetary means?” In the present system as I explained above the answer to this question is “No.”

The above arguments clearly prove that we are trapped in a monetary system that requires the society to live “beyond its due monetary means” or to indulge in extreme consumerism according our definition of the term. Also you may now understand that designing a new monetary system is quite possible. The only hindrance is that world leaders think or they are made to think that the present system is the ultimate monetary system. I think media can change this paradigm to herald a new global economy truly supportive to the wellbeing of human civilization that facilitates us to live within our due monetary means without economic crashes. This is my message for the New Year.

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Latest comments

  • 1

    Recently, One OLD man in Canada had won a $ FORTY MILLION from a Lottery. He had refused the win and he had not informed it even his children.

    LAter he was found to be a former CEO of a company and now he is retired and live a silent life.

  • 1

    I would not blame the system for every thing.

    Human should learn, when they can not they perish.

    JAPAN was a rich country. JAPANESE govt survived the demise of their own capitalism because they learned to save.

    Here people cannot live even if they earn $ 100,000 a year because their expenses are that high.

    • 3

      Jim Softly, You are referring to the Rajapaksas and their cronies are you not?

  • 1

    Living beyond your means and consumerism is because of the greed gene in our DNA.As long as it is there it will continue unstoppable.Those who realise that they have it and want to control it without letting it control them,can do it with supreme self discipline.These type of people will be just 1 to 5 % of the population only.So the merry go round of up and down in the economic cycle will continue unabated because it is part of what we are as human beings.

  • 1

    I read with expectation of finding a nugget of hope within this article by Hema Senanayake, our own ‘economist’ who predicted the downfall of Citibank (and that Wall Street will not be able to save it) and who now takes issue with the long-dead Hyman Minsky. I do not know what the devout parents round the pansal table made of the Senanayake contribution to their discussion but I tired of the points that were made (partly due to his laboured writing style). On reflection, I suggest it is best not bring religious takes into an article on a subject so nebulous as Global Economic Revolution.Please note that in 2013, Citibank was awarded Global Bank of the Year in The Banker’s annual awards

    • 0

      Your comment needs a small clarification. My prediction about Citibank’s failure was in Dec. 2007 not in 2013; and the bank needed to be bailed out by the U.S. Government in mid-2008. Thanks.

  • 3


    “..Here people cannot live even if they earn $ 100,000 a year because their expenses are that high..”

    How much does your MARA wastes poor tax payers’ extortioned money per day? And for a whole year how much is it?

  • 0

    There is enough of everything in this world to satisfy our need,but not our greed.As long as the greedy gene is there in our DNA life goes on as usual.No amount of checks and balances will eradicate the ups and downs.

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