Comment: Are booms and bust cycles built into our monetary structures?

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Are booms and bust cycles built into our monetary structures?

Here are some excerpts from 'Is Our Monetary Structure a Systemic Cause for Financial Instability? Evidence and Remedies from Nature', by Bernard Lietaer. This essay interestingly enough talks about the error of assuming that growth in the size of the economy is a sufficient measure of health AND it points out a remedy which allows for diversification in types of currencies, specifically through complementary currencies.

Why is the financial crisis of 2008 treated as if it were the first? The World Bank has identified more than 96 previous banking crises and 176 monetary crises since President Nixon introduced the floating exchange regime in the early 1970s (Caprio and Klingebiel, 1996). Even before this period, financial booms and bust cycles were, in Kindleberger’s words, a remarkably “hardy perennial” (Kindleberger, 1978); he inventories no less than 48 massive crashes between the 1637 tulip mania in Holland and the 1929 crash on Wall Street. In short, it may be tempting to consider financial and monetary instability as a given, as part of Schumpeter’s “creative destruction” of capitalism. But Schumpeter was referring mainly to the rise and fall of business units, not the monetary system. Could it be that a bug in the monetary system keeps crashing the operating system of capitalism, and that this has generated financial instability during the entire Modern capitalist era? Our view is that such repeated breakdowns, in very different countries and times, under different regulatory environments, and in economies with very different degrees of development, signal some underlying structural problem. If such a deeper mechanism is involved, it could explain why each new set of regulations achieves, at best, only a reduction in the frequency of banking and monetary crises, without getting rid of them and their horrific economic and socio-political consequences.

Fundamental laws govern all complex flow systems, including natural ecosystems, economic and financial systems. Natural ecosystems are practical exemplars of sustainability: enduring, vital, adaptive. The sustainability of any complex flow system can be measured with a single metric as an emergent property of its structural diversity and interconnectivity; it requires a balance in emphasis between efficiency and resilience. The urgent message for economics from nature is that the monoculture of national currencies, justified on the basis of market efficiency, generates structural instability in our global financial system. Economic sustainability therefore requires diversification in types of currencies, specifically through complementary currencies.

Until recently, total throughput and efficiency have been the only means for us to identify the relative success of a system, whether in nature or in economics. For example, in ecosystems, as in economies, size is generally measured as the total volume of system throughput/activity. Gross Domestic Product (GDP) measures size this way in economies and Total System Throughput (TST) does so in ecosystems. Many economists urge endless growth in size (GDP) because they assume that growth in size is a sufficient measure of health. GDP and TST, however, are both poor measures of sustainable viability because they ignore network structure. They cannot, for example, distinguish between a resilient economy and a bubble that is doomed to burst; or between healthy “development,” as Herman Daly (1997) describes it, or explosive growth in monetary exchanges simply due to runaway speculation.

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