Category Archives: Producer Class Economics

Creating money out of thin air

This week, I intend to cover the subject of money creation.  It is not like I haven't covered this subject pretty thoroughly before.  In fact, I made it the subject of Chapter Six of Elegant Technology.  The reason is pretty obvious—if guys like Tony and me are going to run around telling folks that their only hope for survival lies in spending $100trillion for infrastructure upgrades, we owe it to them to explain where all that money will come from.

Actually, the source of that money is blindingly obvious—we will get those funds the same way modern society always gets those funds.  We will create them out of thin air.  But, scream the monetary Puritans, if you just create money willy-nilly out of thin air, what will stop us from becoming Zimbabwe with runaway inflation?  Again the answer is obvious—don't create money will-nilly—only create money to pay for things that make the society richer.

What the monetary Puritans forget is that while money can be made valuable by specifying convertibility to rare metals like gold, the really important value of money is the ability to convert it into necessary items of survival—food, shelter, energy, water, etc.  Fiat money derives its value from funding the clever use of resources.  Producers make money valuable!  And so long a money is created to fund Producer projects—and converting the world into a giant solar-powered fire-free zone would most definitely qualify as a Producer project—new money brings actual prosperity and NOT inflation.

Besides, creating money out of thin air is what bankers do!  It is the rest of us who make that money valuable.  They create a new mortgage with a few keystrokes and folks like us work like slaves for 30 years to pay it off.  It is our hard work that makes that money valuable.  Starving the society of funds necessary for the creation and maintenance of our infrastructure is easily sin #1 of the bankster classes.  Because of this madness, we are not only destroying the only inhabitable biosphere for light-years in any direction, we are going broke doing it.

Can banks individually create money out of nothing? — The theories and the empirical evidence

Richard A. Werner

Open Access

This paper presents the first empirical evidence in the history of banking on the question of whether banks can create money out of nothing. The banking crisis has revived interest in this issue, but it had remained unsettled. Three hypotheses are recognised in the literature. According to the financial intermediation theory of banking, banks are merely intermediaries like other non-bank financial institutions, collecting deposits that are then lent out. According to the fractional reserve theory of banking, individual banks are mere financial intermediaries that cannot create money, but collectively they end up creating money through systemic interaction. A third theory maintains that each individual bank has the power to create money ‘out of nothing’ and does so when it extends credit (the credit creation theory of banking). The question which of the theories is correct has far-reaching implications for research and policy. Surprisingly, despite the longstanding controversy, until now no empirical study has tested the theories. This is the contribution of the present paper. An empirical test is conducted, whereby money is borrowed from a cooperating bank, while its internal records are being monitored, to establish whether in the process of making the loan available to the borrower, the bank transfers these funds from other accounts within or outside the bank, or whether they are newly created. This study establishes for the first time empirically that banks individually create money out of nothing. The money supply is created as ‘fairy dust’ produced by the banks individually, "out of thin air".

“The choice of a measure of value, of a monetary system, of currency and credit legislation — all are in the hands of society, and natural conditions … are relatively unimportant. Here, then, the decision-makers in society have the opportunity to directly demonstrate and test their economic wisdom — or folly. History shows that the latter has often prevailed.”1

Wicksell (1922, p. 3)

1. Introduction

Since the American and European banking crisis of 2007–8, the role of banks in the economy has increasingly attracted interest within and outside the disciplines of banking, finance and economics. This interest is well justified: Thanks to the crisis, awareness has risen that the most widely used macroeconomic models and finance theories did not provide an adequate description of crucial features of our economies and financial systems, and, most notably, failed to include banks.2 These bank-less dominant theories are likely to have influenced bank regulators and may thus have contributed to sub-optimal bank regulation: Systemic issues emanating from the banking sector are impossible to detect in economic models that do not include banks, or in finance models that are based on individual, representative financial institutions without embedding these appropriately into macroeconomic models.3

Consequently, many researchers have since been directing their efforts at incorporating banks or banking sectors in economic models.4 This is a positive development, and the European Conferences on Banking and the Economy (ECOBATE) are contributing to this task, showcased in this second special issue, on ECOBATE 2013, held on 6 March 2013 in Winchester Guildhall and organised by the University of Southampton Centre for Banking, Finance and Sustainable Development. As the work in this area remains highly diverse, this article aims to contribute to a better understanding of crucial features of banks, which would facilitate their suitable incorporation in economic models. Researchers need to know which aspects of bank activity are essential — including important characteristics that may distinguish banks from non-bank financial institutions. In other words, researchers need to know whether banks are unique in crucial aspects, and if so, why.

In this paper the question of their potential ability to create money is examined, which is a candidate for a central distinguishing feature. A review of the literature identifies three different, mutually exclusive views on the matter, each holding sway for about a third of the twentieth century. The present conventional view is that banks are mere financial intermediaries that gather resources and re-allocate them, just like other non-bank financial institutions, and without any special powers. Any differences between banks and non-bank financial institutions are seen as being due to regulation and effectively so minimal that they are immaterial for modelling or for policy-makers. Thus it is thought to be permissible to model the economy without featuring banks directly. This view shall be called the financial intermediation theory of banking. It has been the dominant view since about the late 1960s.

Between approximately the 1930s and the late 1960s, the dominant view was that the banking system is ‘unique’, since banks, unlike other financial intermediaries, can collectively create money, based on the fractional reserve or ‘money multiplier’ model of banking. Despite their collective power, however, each individual bank is in this view considered to be a mere financial intermediary, gathering deposits and lending these out, without the ability to create money. This view shall be called the fractional reserve theory of banking.

There is a third theory about the functioning of the banking sector, with an ascendancy in the first two decades of the 20th century. Unlike the financial intermediation theory and in line with the fractional reserve theory it maintains that the banking system creates new money. However, it goes further than the latter and differs from it in a number of respects. It argues that each individual bank is not a financial intermediary that passes on deposits, or reserves from the central bank in its lending, but instead creates the entire loan amount out of nothing. This view shall be called the credit creation theory of banking.

The three theories are based on a different description of how money and banking work and they differ in their policy implications. Intriguingly, the controversy about which theory is correct has never been settled. As a result, confusion reigns: Today we find central banks – sometimes the very same central bank – supporting different theories; in the case of the Bank of England, central bank staff are on record supporting each one of the three mutually exclusive theories at the same time, as will be seen below.

It matters which of the three theories is right — not only for understanding and modelling the role of banks correctly within the economy, but also for the design of appropriate bank regulation that aims at sustainable economic growth without crises. The modern approach to bank regulation, as implemented at least since Basel I (1988), is predicated on the understanding that the financial intermediation theory is correct. 5 Capital adequacy-based bank regulation, even of the counter-cyclical type, is less likely to deliver financial stability, if one of the other two banking hypotheses is correct. 6 The capital-adequacy based approach to bank regulation adopted by the BCBS, as seen in Basel I and II, has so far not been successful in preventing major banking crises. If the financial intermediation theory is not an accurate description of reality, it would throw doubt on the suitability of Basel III and similar national approaches to bank regulation, such as in the UK. 7

It is thus of importance for research and policy to determine which of the three theories is an accurate description of reality. Empirical evidence can be used to test the relative merits of the theories. Surprisingly, no such test has so far been performed. This is the contribution of the present paper.

The remainder of the paper is structured as follows. Section 2 provides an overview of relevant literature, differentiating authors by their adherence to one of the three banking theories. It will be seen that leading economists have gone on the record in support of each one of the theories. In Section 3, I then present an empirical test that is able to settle the question of whether banks are unique and whether they can individually create money ‘out of nothing’. It involves the actual processing of a ‘live’ bank loan, taken out by the researcher from a representative bank that cooperates in the monitoring of its internal records and operations, allowing access to its documentation and accounting systems. The results and some implications are discussed in Section 4
2. The literature on whether banks can create money

Much has been written on the role of banks in the economy in the past century and beyond. Often authors have not been concerned with the question of whether banks can create money, as they often simply assume their preferred theory to be true, without discussing it directly, let alone in a comparative fashion. This literature review is restricted to authors that have contributed directly and explicitly to the question of whether banks can create credit and money. During time periods when in the authors' countries banks issued promissory notes (bank notes) that circulated as paper money, writers would often, as a matter of course, mention, even if only in passing, that banks create or issue money. In England and Wales, the Bank Charter Act of 1844 forbade banks to “make any engagement for the payment of money payable to bearer on demand.” This ended bank note issuance for most banks in England and Wales, leaving the (until 1946 officially privately owned) Bank of England with a monopoly on bank note issuance. Meanwhile, the practice continued in the United States until the 20th century (and was in fact expanded with the similarly timed New York Free Banking Act of 1838), so that US authors would refer to bank note issuance as evidence of the money creation function of banks until much later.8 For sake of clarity, our main interest in this paper is the question whether banks that do not issue bank notes are able to create money and credit out of nothing. As a result, earlier authors, writing mainly about paper money issuance, are only mentioned in passing here, even if it could be said that their arguments might also apply to banks that do not issue bank notes. These includeJohn Law (1705), James Steuart (1767), Adam Smith (1776), Henry Thornton (1802), Thomas Tooke (1838), and Adam Müller (1816), among others, who either directly or indirectly state that banks can individually create credit (in line with the credit creation theory). 9

2.1. The credit creation theory of banking

Influential early writers that argue that non-issuing banks have the power to individually create money and credit out of nothing wrote mainly in English or German, namely Wicksell, 1898 and Wicksell, 1907, Withers (1909), Schumpeter (1912), Moeller (1925) and Hahn (1920).10 The review of proponents of the credit creation theory must start with Henry Dunning Macleod, of Trinity College, Cambridge, and Barrister at Law at the Inner Temple. 11 Macleod produced an influential opus on banking, entitled The Theory and Practice of Banking, in two volumes. It was published in numerous editions well into the 20th century ( Macleod, 1855–6; the quotes here are from the 6th edition of 1905). Concerning credit creation by individual banks, Macleod unequivocally argued that individual banks create credit and money out of nothing, whenever they do what is called ‘lending’:

“In modern times private bankers discontinued issuing notes, and merely created Credits in their customers' favour to be drawn against by Cheques. These Credits are in banking language termed Deposits. Now many persons seeing a material Bank Note, which is only a Right recorded on paper, are willing to admit that a Bank Note is cash. But, from the want of a little reflection, they feel a difficulty with regard to what they see as Deposits. They admit that a Bank Note is an “Issue”, and “Currency,” but they fail to see that a Bank Credit is exactly in the same sense equally an “Issue,” “Currency,” and “Circulation”.”

Macleod (1905, vol. 2, p. 310)

“… Sir Robert Peel was quite mistaken in supposing that bankers only make advances out of bona fide capital. This is so fully set forth in the chapter on the Theory of Banking, that we need only to remind our readers that all banking advances are made, in the first instance, by creating credit” (p. 370, emphasis in original).

In his Theory of Credit Macleod (1891) put it this way:

“A bank is therefore not an office for “borrowing” and “lending” money, but it is a Manufactory of Credit.” 
Macleod (1891: II/2, 594)

According to the credit creation theory then, banks create credit in the form of what bankers call ‘deposits’, and this credit is money. But how much credit can they create? Wicksell (1907) described a credit-based economy in the Economic Journal, arguing that

“The banks in their lending business are not only not limited by their own capital; they are not, at least not immediately, limited by any capital whatever; by concentrating in their hands almost all payments, they themselves create the money required….”

“In a pure system of credit, where all payments were made by transference in the bank-books, the banks would be able to grant at any moment any amount of loans at any, however diminutive, rate of interest.” 12

Wicksell (1907, 214)

Withers (1909), from 1916 to 1921 the editor of the Economist, also saw few restraints on the amount of money banks could create out of nothing:

“… it is a common popular mistake, when one is told that the banks of the United Kingdom hold over 900 millions of deposits, to open one's eyes in astonishment at the thought of this huge amount of cash that has been saved by the community as a whole, and stored by them in the hands of their bankers, and to regard it as a tremendous evidence of wealth. But this is not quite the true view of the case. Most of the money that is stored by the community in the banks consists of book-keeping credits lent to it by its bankers.”

Withers (1909, pp. 57 ff.)

“… The greater part of the banks' deposits is thus seen to consist, not of cash paid in, but of credits borrowed. For every loan makes a deposit ….”

Withers (1909, p. 63)

“When notes were the currency of commerce a bank which made an advance or discounted a bill gave its customer its own notes as the proceeds of the operation, and created a liability for itself. Now, a bank makes an advance or discounts a bill, and makes a liability for itself in the corresponding credit in its books.”

Withers (1909, p. 66)

“… It comes to this that, whenever a bank makes an advance or buys a security, it gives some one the right to draw a cheque upon it, which cheque will be paid in either to it or to some other banks, and so the volume of banking deposits as a whole will be increased and the cash resources of the banks as a whole will be unaltered.”

Withers (1916, p. 45)

“When once this fact is recognised, that the banks are still, among other things, manufacturers of currency, just as much as they were in the days when they issued notes, we see how important a function the banks exercise in the economic world, because it is now generally admitted that the volume of currency created has a direct and important effect upon prices. This arises from what is called the “quantity theory” of money ….”

Withers (1916, p. 47)

“If, then, the quantity theory is, as I believe, broadly true, we see how great is the responsibility of the bankers as manufacturers of currency, seeing that by their action they affect, not only the convenience of their customers and the profits of their shareholders, but the general level of prices. If banks create currency faster than the rate at which goods are being produced, their action will cause a rise in prices which will have a perhaps disastrous effect ….”13

Withers (1916, pp. 54 ff.)

“And so it becomes evident, as before stated, that the deposits of the banks which give the commercial community the right to draw cheques are chiefly created by the action of the banks themselves in lending, discounting, and investing” (pp. 71 ff.).

“… then, it thus appears that credit is the machinery by which a very important part of modern currency is created …” (p. 72).

Withers argues that the sovereign prerogative to manufacture the currency of the nation has effectively beenprivatised and granted to the commercial banks:

“By this interesting development the manufacture of currency, which for centuries has been in the hands of Government, has now passed, in regard to a very important part of it, into the hands of companies, working for the convenience of their customers and the profits of their shareholders.”

Withers (1916, p. 40)

While Withers was a financial journalist, his writings had a high circulation and likely contributed to the dissemination of the credit creation theory in the form proposed by Macleod (1855–6). This view also caught on in Germany with the publication of Schumpeter's (1912, English 1934) influential book The Theory of Economic Development, in which he was unequivocal in his view that each individual bank has the power to create money out of nothing.

“Something like a certificate of future output or the award of purchasing power on the basis of promises of the entrepreneur actually exists. That is the service that the banker performs for the entrepreneur and to obtain which the entrepreneur approaches the banker. … (The banker) would not be an intermediary, but manufacturer of credit, i.e. he would create himself the purchasing power that he lends to the entrepreneur …. One could say, without committing a major sin, that the banker creates money.” 14

Schumpeter (1912, p. 197, emphasis in original)

“[C]redit is essentially the creation of purchasing power for the purpose of transferring it to the entrepreneur, but not simply the transfer of existing purchasing power. … By credit, entrepreneurs are given access to the social stream of goods before they have acquired the normal claim to it. And this function constitutes the keystone of the modern credit structure.”

Schumpeter (1954, p. 107)

“The fictitious certification of products, which, as it were, the credit means of payment originally represented, has become truth.”15
Schumpeter (1912, p. 223)

This view was also well represented across the Atlantic, as the writings of Davenport (1913) or Robert H. Howe (1915) indicate. Hawtrey (1919), another leading British economist who like Keynes, had a Treasury background and moved into academia, took a clear stance in favour of the credit creation theory:

“… for the manufacturers and others who have to pay money out, credits are still created by the exchange of obligations, the banker's immediate obligation being given to his customer in exchange for the customer's obligation to repay at a future date. We shall still describe this dual operation as the creation of credit. By its means the banker creates the means of payment out of nothing, whereas when he receives a bag of money from his customer, one means of payment, a bank credit, is merely substituted for another, an equal amount of cash” (p. 20).

Apart from Schumpeter, a number of other German-language authors also argued that banks create money and credit individually through the process of lending.16 Highly influential in both academic discourse and public debate was Dr. Albert L. Hahn (1920), scion of a Frankfurt banking dynasty (similarly to Thornton who had been a banker) and since 1919 director of the major family-owned Effecten- und Wechsel-Bank, Frankfurt. Like Macleod a trained lawyer, he became an honorary professor at Goethe-University Frankfurt in 1928. Clearly not only aware of the works of Macleod, whom he cites, but also likely aware of actual banking practice from his family business, Hahn argued that banks do indeed ‘create money out of nothing’:

“Every credit that is extended in the economy creates a deposit and thus the means to fund it. … The conclusion from the process described can be expressed in reverse by saying … that every deposit that exists somewhere and somehow in the economy has come about by a prior extension of credit.”17

Hahn (1920, p. 28)

“We thus maintain – contrary to the entire literature on banking and credit – that the primary business of banks is not the liability business, especially the deposit business, but that in general and in each and every case an asset transaction of a bank must have previously taken place, in order to allow the possibility of a liability business and to cause it: The liability business of banks is nothing but a reflex of prior credit extension. The opposite view is based on a kind of optical illusion ….”18

Hahn (1920, p. 29)

Overall, Hahn probably did more than anyone to popularise the credit creation theory in Germany, his book becoming a bestseller, and spawning much controversy and new research among economists in Germany. It also greatly heightened awareness among journalists and the general public of the topic in the following decades. The broad impact of his book was likely one of the reasons why this theory remained entrenched in Germany, when it had long been discarded in the UK or the US, namely well into the post-war period. Hahn's book was however not just a popular explanation without academic credibility. Schumpeter cited it positively in the second (German) edition of his Theory of Economic Development ( Schumpeter, 1926), praising it as a further development in line with, but beyond, his own book. The English translation of Schumpeter's influential book Schumpeter (1912 [1934]) also favourably cites Hahn.

It can be said that support for the credit creation theory appears to have been fairly widespread in the late 19th and early 20th century in English and German language academic publications. By 1920, the credit creation theory had become so widespread that it was dubbed the ‘current view’, the ‘traditional theory’ or the ‘time-worn theory of bank credit’ by later critics. 19

The early Keynes seemed to also have been a supporter of this dominant view. In his Tract on Monetary Reform ( Keynes, 1924), he asserts, apparently without feeling the need to establish this further, that banks create credit and money, at least in aggregate:

“The internal price level is mainly determined by the amount of credit created by the banks, chiefly the Big Five …” (p. 178).

“The amount of credit, so created, is in its turn roughly measured by the volume of the banks' deposits — since variations in this total must correspond to the variations in the total of their investments, bill-holdings, and advances” (p. 178).

We know from Keynes' contribution to the Macmillan Committee (1931) that Keynes meant with this that each individual bank was able to create credit:

“It is not unnatural to think of the deposits of a bank as being created by the public through the deposit of cash representing either savings or amounts which are not for the time being required to meet expenditure. But the bulk of the deposits arise out of the action of the banks themselves, for by granting loans, allowing money to be drawn on an overdraft or purchasing securities a bank creates a credit in its books, which is the equivalent of a deposit” (p. 34).

Concerning the banking system as a whole, this bank credit and deposit creation was thought to influence aggregate demand and the formation of prices, as Schumpeter (1912) had argued:

“The volume of bankers' loans is elastic, and so therefore is the mass of purchasing power …. The banking system thus forms the vital link between the two aspects of the complex structure with which we have to deal. For it relates the problems of the price level with the problems of finance, since the price level is undoubtedly influenced by the mass of purchasing power which the banking system creates and controls, and by the structure of credit which it builds …. Thus, questions relating to the volume of purchasing power and questions relating to the distribution of purchasing power find a common focus in the banking system” (Macmillan Committee, 1931, pp. 12 ff.).

“… if, finally, the banks pursue an easier credit policy and lend more freely to the business community, forces are set in motion increasing profits and wages, and therefore the possibility of additional spending arises” (p. 13).

Concerning the question whether credit demand or credit supply is more important, the report argued that the root cause is the movement of the supply of credit:

“The expansion or contraction of the amount of credit made available by the banking system in other directions will, through a variety of channels, affect the ease of embarking on new investment propositions. This, in turn, will affect the volume and profitableness of business, and hence react in due course on the amount of accommodation required by industry from the banking system. … Thus what started as an alteration in the supply of credit ends up in the guise of an alteration in the demand for credit” (p. 99). 20

While money is thus seen as endogenous to credit, when what is called a ‘bank loan’ is extended, the Committee argued that bank credit was exogenous as far as loan applicants are concerned:

“There can be no doubt as to the power of the banking system … to increase or decrease the volume of bank money” (p. 102).

“In normal conditions we see no reason to doubt the capacity of the banking system to influence the volume of active investment by increasing the volume and reducing the cost of bank credit. … Thus we consider that in any ordinary times the power of the banking system … to increase or diminish the active employment of money in enterprise and investment is indisputable” (p. 102).

The Macmillan Committee also argued that bank credit could be manipulated by the Bank of England, and thus was also considered exogenous in this sense. 
The credit creation theory remained influential until the early post-war years. The links of credit creation to macroeconomic and financial variables were later formalised in the Quantity Theory of Credit (Werner, 1992,Werner, 1997, Werner, 2005 and Werner, 2012), which argues that credit for (a) productive use in the form of investments for the production of goods and services is sustainable and non-inflationary, as well as less likely to become a non-performing loan, (b) unproductive use in the form of consumption results in consumer price inflation and (c) unproductive use in the form of asset transactions results in asset inflation and, if large enough, banking crises. However, since the 1920s serious doubts had spread about the veracity of the credit creation theory of banking. These doubts were initially uttered by economists who in principle supported the theory, but downplayed its significance. It is this group of writers that served as a stepping stone to the formulation of the modern fractional reserve theory, which in its most widespread (and later) version however argues that individual banks cannot create credit, but only the banking system in aggregate. It is this theory about banks that we now turn to. more

Germany losing its nerve over energy?

Even as far away from Germany as the center of North America, you can feel their enthusiasm for a solar-powered future just leaking away.  I have no inside information for why this is happening or why now, but Institutional Analysis provides us with informed guesses.
  • In spite of some serious costs and great effort, Germany's transition to a solar society has basically grabbed the low-hanging fruit.  Even solar's biggest boosters have to acknowledge that they have only climbed the foothills and the big mountains still lie ahead.  Not surprisingly, many are losing their nerve.
  • Transmission lines.  Even those who love the sight of big graceful wind turbines turning slowly on the horizon are appalled by the prospects of transmission lines all over the country.  Yet because there are long distances between good wind sites and the large consumers, transmission is inevitable.
  • Europe's ongoing economic crises is beginning to frighten the sane.  Yes neoliberalism has been pretty good for Germany but the ultimate reward for their diligence and aggressive business practices may be that they are left holding the bag when all this crazy debt defaults.
  • Asia has already gotten their hands on the green technologies the Germans struggled to perfect.  So even after paying the price of being first, Germany is discovering there isn't even a likely payoff.
  • No one is following Germany's lead.  Poland builds more ways to burn brown coal while France believes HER nukes are just fine because they are run by people with elite France skills and training.  But mostly, no one can follow the Germans because it is quite obvious that even they cannot pay to finish their big plans.
Of course, right after destroying the baleful influence of the neoliberals scattered throughout the German economy, she must figure out a way to get back in the good graces of Russia.  If the Germans, of all people, don't understand the madness of provoking hostilities with Russia, they are obviously not teaching their history very well.  To piss away years of solid work over a political "crises" that has you lining up on the side of the bad guys who foment violent coups is literally beyond crazy.  I most certainly hope that 2015 is the year we see the return of the sane German.

Opinion: Germany needs more courage for its energy transition

Richard Fuchs / bk  04.01.2015

Where has all the courage gone? Germany's transition to renewable energy used to be a prestige project. But a new flawed reform is endangering its core principles, says Richard Fuchs.

Anyone who has driven along a snow-covered winter road knows that you have to be careful with the brakes. Push the pedal too hard and the car can spin off the road in seconds. Just as braking hard on ice doesn't guarantee success, last year's renewable energy reform is the wrong way to keep Germany's energy transition on track.

Last summer, the government coalition of the conservative CDU and the center-left SPD drove a new energy reform through parliament. Its aim was to ensure that Germany's renewable energy subsidy, set by the Renewable Energy Act of 2000, should incur no increased costs. The reform may achieve this, but an unwanted side effect could well be that Germany's successful development of renewable energy could stall.

Instead of pursuing its goal of 80 percent renewable energy by 2050, the government has shackled the transition. The extent of new wind farms and solar plants will be capped - the new rules mean that any such enterprise will only be subsidized if, at the time it goes online, the government's target has not yet been reached. And this target is shamefully low - indeed, for an ambitious energy transition, something of a farce.

We need more courage

All this faintheartedness creates security for bureaucrats - and chaos for investors. Long-term investment in wind parks will become a financial kamikaze act, and could slow down a sector that has been very dynamic, and has created more than 380,000 new jobs in Germany.

There is much at stake - in the past 15 years, wind and solar power have become Germany's most important source of energy. Even now, 27.3 percent of the country's energy consumption is green. But the new rules won't allow that to continue. On the contrary - this U-turn is likely to seriously dent the international reputation of Germany's energy transition.

It also seems fainthearted that, on top of the un-ambitious caps on wind farms and solar power plants, we could be seeing the suspension of one of the principles of current energy policy. Up until now, renewable energy always had priority access to the grid - in future, it will have an equal status to lignite coal and nuclear power. Once again, at the latest press conference on energy reform, the government failed to explain how abolishing that privilege squares with the declared aim of building up renewable energy by another 50 percent.

Beyond a certain point, renewable energy providers will have to market their power themselves. They will no longer be able to feed their power into the grid ahead of others, but will have to sell it at the energy exchange in Leipzig like everyone else. For one thing, that contravenes the core aim of the energy transition - to replace electricity from CO2-heavy coal-fired power plants with green energy. For another thing, it seems less than reasonable because it radically alters the playing field.

No more privilege

Smaller renewable energy providers will increasingly be driven from the market, while large energy companies - especially Germany's four biggest energy corporations - will be offered a helpful branch to grab onto at the expense of the taxpayer. Only the big players with a lot of expertise in marketing electricity will be able to succeed in the renewable energy market of the future. The obligation to sell and market your wares will require expertise that only major companies have. As a result, the transition to renewable energy will not only be slowed down, but it will become a playground for major companies, and pass out of public hands - where Germany's energy has been for the past 100 years.

Germany's subsidy for renewable energy was a success mainly because it was so popular, and a decisive factor in this popularity was the fact that more than 50 percent of all new renewable energy plants were operated by private citizens or small energy cooperatives. If the energy transition used to be decentralized, it could soon be big business.

So last summer's renewable energy reform is a threat to decentralization - and to its popularity. So it is high time for those who took to the streets to support the end of nuclear power to get their protest banners out again. Now, more than ever, we need people to demand a courageous transition to renewables because at the end of the day, only a courageous transition will be a successful transition. more

A course adjustment for real-economics

It's a new year.  Tony and I have been kicking around some ideas we want to try.  It's not that we are unhappy with our little blog, it's just that we believe we must rise above a continuous critique of the current approaches to economics, politics, and especially environmental and resource management.  I'll let Tony explain his thinking but for me, I believe those of us who have been given insights into the methods of community and nation-building should devote our energies into promoting a much more constructive agenda.

Both of us have some interesting opportunities in the near future to promote a builder's agenda.  Tony will pitch his vision to a gathering of progressive activists in North Carolina while I will address one of the volunteer "think-tanks" of Minnesota liberalism.  While Tony will stress political organizing and grass-roots activism, I intend to appeal to theoretical roots of economic thought—a battle that must also be won.

Tony has already produced a rough draft of his Powerpoint presentation.  As you can imagine, it is replete with examples of how USA became an industrial powerhouse with a middle class that was the envy of most of the world—before the deindustrialization disasters since the mid 1970s.  Anyone who believes that USA became powerful using the notions of Free Trade will be in for a long evening.  This is good stuff!

My approach will start with an examination for why 45 years after Earth Day One, the planet is in dramatically worse shape.  Mostly it will explain why a Leisure Class approach will NEVER solve problems based in physics and the consumption of energy.  Those who have read Elegant Technology will know what I am going to say.

What we both will have in common is the price tag—$100 trillion.  We intend to introduce some serious sticker shock.  Both of us agree that the problems we are facing are so enormous, it is blatantly dishonest to suggest that there are any more ways to fix them on the cheap.  After all, the first step to the solution for any problem is a clear and honest assessment of its nature and size.

So I can devote more energy to this and other projects like it, I will be cutting back my posts to four per week—Mon-Thu.  This blog will also serve as a home base for our new "positive" agenda.  I hope we don't come off as too "commercial" but we have an agenda to promote.  This is a ridiculously ambitious task (suggesting that there is a way to save human existence on planet earth and further suggesting that we have discovered what that is) and I wouldn't come near to trying except for one extremely important fact—neither Tony nor I have to invent one damn thing.  Everything we are suggesting is based on historical experiments that turned out great.  Humans HAVE made progress since we lived in caves.  We probably still have a lot of progress left in us.

Water quality—controlling the runoff

It would be easy to assume that Minnesota would not be a place for water problems—either quantity or quality.  I grew up in a state where drinking water directly out of a creek or lake was considered a normal thing to do.  And most municipal water systems regularly top expensive bottled water in most measures of quality—including taste.  But these days, I am hanging out with folks making videos about Minnesota's water problems and the takeaway is: those problems are severe.

The biggest single problem is that agricultural runoff is sending so much fertilizers and irreplaceable topsoil down the rivers that our farms are significant contributors to the dead zone in the Gulf of Mexico.  And while its the urbanites who seem most upset about these problems—and are certainly most organized—the farmers aren't any happier about losing their topsoil patrimony and expensive fertilizers to runoff.  So it would appear that everyone is on the same page. NOT!

From the farmer's perspective, this is a practical problem they would have solved long ago if they knew how and could afford new practices.  But the fact is, it is practically impossible to plant row crops and reduce run-off to zero.  So for the farmer, the whole approach is is to manage the farm using the best conservation practices they can afford.  Some of these farms have been in families for six generation so we are not talking about a slumlord mentality here.  And since the farmers must make all the investment and do all the work, what they believe is extremely important.

The environmentalists believe those (filthy, disgusting) farmers aren't trying hard enough.  They need stricter regulation with monitoring done by drones.  Water quality will magically improve if only harsher laws are written and passed.  How runoff will be actually reduced is not their worry.  They have a set of desired changes that cannot be implemented without bankrupting Midwest agriculture but if anyone fails to try their sometimes expensive fixes, it will only confirm their belief that the farmers aren't trying hard enough.

The last I heard, some farmers are researching the best methods for shooting down drones.  I assume matters will be solved before folks resort to gunfire, but there is a lot of anger out there.  And why not?—it is a perfect example of a Producer-Leisure Class dispute and that battle has been raging since the invention of agriculture.

Start Worrying About Your Tap Water 

By James Greiff, Bloomberg View, DEC 8, 2014

Americans take for granted that every time they turn the faucet, clean water will pour out.

Yet, cracks are appearing in the system that ensures the supply of safe, drinkable tap water, and the efforts to repair the damage are increasingly contentious. Exhibit A is a set of rules proposed in April by the Environmental Protection Agency called Waters of the U.S., which would extend protections to the sources of drinking water for more than 100 million Americans.

These common-sense measures to guarantee basic health and safety have been met with a ferocious campaign from opponents who often resort to willful deception and half-truths. When they aren't misleading, the complaints read like boilerplate from the business lobby: the costs are excessive, the rules too complex and government is intruding where it has no business.

The signs of deteriorating water quality are particularly acute in agricultural areas. For example, the Des Moines, Iowa, water works is having trouble controlling the amount of nitrates in local drinking water. This pollutant exceeded permissible levels of 10 milligrams per liter in one of the utility's main water sources, according to a September letter from water works manager William G. Stowe to the Des Moines Register. Nitrates are especially toxic to infants and at that level can cause blue baby syndrome -- a form of oxygen starvation.

Des Moines's water system spent an additional $1 million in 2013 to filter out nitrates, Stowe wrote, and costs will inevitably rise. The reasons for the contamination are clear: Farms in Iowa and elsewhere can skirt regulations to control the runoff of noxious chemicals derived from fertilizers into rivers. As Stowe wrote:
The intensive corn-soybean cropping system that occupies much of our watersheds `requires' massive amounts of fertilizer applications and agricultural tile drainage to maximize yields. Application of unlimited manure from growing animal feeding operations and commercial fertilizer and the ease in transporting these pollutants to our rivers through drainage systems has significantly, and increasingly, degraded water quality.

Until industrial agriculture is no longer exempt from regulations needed to protect water quality, we will continue to see water quality degrade and our consumers will continue to pay.
The new rules seek to address the loophole. They would ensure existing regulations apply to protected bodies of water, limiting how much pollution is allowed and establishing a permitting process so that industry would have clear guidelines to establish waste outflows.

Opponents seem to have forgotten that the EPA's proposed rules were initially sought by agricultural interests, real-estate developers and state and local governments as a way to clarify regulatory ambiguity, caused, in part, by a pair of Supreme Court rulings. Waters of the U.S. would use technical and scientific analysis to say where the Clean Water Act applies and where it doesn't, including rivers and streams where farms now discharge polluted runoff.

The CWA itself was adopted in 1972 to limit using bodies of water such as New York Harbor or the Cuyahoga River in Cleveland, famed for repeatedly catching fire, as industrial dumping grounds. And the law did much of what it was supposed to do. Today, the Cuyahogasupports aquatic life again and New York Harbor is cleaner than it's been in more than a century.

Trouble is the act has proved fairly easy to circumvent: It has been interpreted as applying to "navigable" waters. That reading would mean that polluters only face clear limits on dumping waste into waterways that allow ships, but as soon as a river gets too shallow, those constraints are ill-defined.

Waters of the U.S. would specify that the CWA extends to streams and wetlands that drain into larger bodies of water. It's a logical effort to control so-called externalities -- in this case, when the expense and harm caused by a polluter are borne by the public.

Some of the opposition to the rules is based on claims that the costs would be too burdensome for industries such as ranching, farming, energy and infrastructure construction. This is worth debating, though an EPA cost-benefit analysis suggests that, on balance, the rules would be an economic plus. The costs would involve compliance and pollution mitigation, while the benefits would include greater recreational uses of waterways, reduced contamination and sedimentation, less flooding and erosion and lower costs for enforcing existing rules.

It's a shame that rather than seeking an honest discussion, some opponents are relying on a misinformation campaign that contains gross distortions and outright falsehoods. To cite a few:
  • Every ditch would be subject to EPA oversight, as would puddles on homeowners' driveways and schoolyard playgrounds.
  • The rules give the federal government control of all farming and real-estate development.
  • The enforcement of the rules would amount to the biggest land grab in U.S. history.
If you want to see a corrective to this hyperbole, the EPA has developed a page of rebuttals called "Ditch the Myth."

Regrettably, and perhaps predictably, the House of Representatives heard the plaints of industry. In September it passed the Waters of the U.S. Regulatory Overreach Protection Act -- the title is self-explanatory -- which would block the rules from formal adoption. The bill passed with almost all Republicans in favor and most Democrats opposed.

Maybe the rules are cumbersome and would impose unsustainable costs that the EPA hasn't considered, as the opponents claim. But if a campaign of falsehoods is allowed to prevail, the tradeoff could be far worse: a loss of trust in the water that comes out of Americans' faucets. more