Wednesday, March 4, 2015

Sustainable Banking

Our Fiat Currency System
As the late peak oil writer Michael Ruppert used to say, “until you change the way money works, you change nothing.” Chris Martenson does a great job in his “Crash Course” linking the banking system to peak oil. In short, our entire global fiat monetary system is dependent on exponentially-increasing levels of debt. If debt does not continue to increase exponentially, there isn’t any money to pay off the interest on the existing debt and the system seizes up. Exponentially-increasing debt is dependent on exponentially-increasing economic growth which is largely dependent on exponentially-increasing resource extraction. Of course you can’t have exponentially increasing resource extraction when you live on a finite planet with a finite quantity of resources, so eventually we will reach peak oil and “peak everything” and the whole debt-based monetary system will unravel.
Due to its basic design, our current monetary system encourages unsustainable resource extraction practices. Until we move to a sustainable monetary system, we will continue to find it extremely difficult to transition to a sustainable economy. Ultimately if we are going to live sustainably on our earth we will need to reach a sustainable equilibrium where we no longer need to extract resources from the ground and are able to provide all of our energy, food, water, housing, products, etc. from renewable energy, recycled water and recycled raw materials. Every product would be designed to be “cradle-to-cradle” with the full product lifecycle from manufacturing to recycling (or upcycling) designed for sustainability. Instead of planned obsolescence we would have products designed for multi-generational longevity (like myaluminum cornhole boards!) But in order to get to that sustainable future, we need a currency that isn’t dependent on increasing economic growth.
I see two main sustainable alternatives to the current fiat debt-based monetary system:
  1. Resource-based money
  2. Cryptocurrencies

Resource-Based Money
Before the Bretton Woods Agreement, our global currencies were resource-based. The US Dollar was backed by gold. Before that, the British Pound was backed by an actual pound of silver. Going forward, we could return to this old system by having a gold or silver-backed currency where each paper or digital dollar is backed by gold or silver held in a vault which is redeemable on demand. For years people like Ron Paul have been pushing for a return to the gold standard in the US. There has been speculation that the Persian Gulf countries have been accumulating gold in order to create their own gold-backed currency called the Khaleeji. An interesting new technological twist on the gold standard is a product by Valaurum called the “Aurum.” The Aurum is essentially a sheet of gold laminated between plastic. Instead of holding gold in a vault and printing paper notes which are claims on physical gold, people could actually hold the physical gold inside of the note in their wallets. Obviously for larger sums of money (or for digital transactions) a gold-backed currency would still require gold to be held in a vault, but for day-to-day cash transactions the value of the gold could be held in Aurum and physically transferred. Obviously, this is the way cash transactions used to happen with gold and silver coins, but the Aurum allows for a much smaller amount of gold to be held in a familiar form-factor.
Besides precious metals, governments could also back their currencies with any physical commodity. OPEC countries, for example, could back their currencies with oil. Instead of holding gold in a vault, countries could issue notes that are redeemable for barrels of oil. Someone holding 200,000 Saudi Reals could call up the central bank and arrange for the shipment of 1,000 barrels of crude oil. Obviously the main problem with this system is transparency; since the wealth of the nation would be calculated based on the recoverable reserve barrels, the reserve estimates would need to be independently-variable.

In the last few years cryptocurrencies like bitcoin and darkcoin have emerged as a new asset class which could allow us to transition to a sustainable monetary system without the need for government-backed resources like gold and silver to be held in vaults. I first started investing in and blogging about bitcoin in 2010. Since then I’ve seen the value go from $1 to over $1000 and crash back to less than $300. Obviously that kind of price volatility doesn’t make for a confidence-inducing monetary system, but as adoption widens the currency value should become more stable. The reason bitcoin could provide us with a sustainable currency alternative is that the algorithm built in to bitcoin regulates the currency supply. Over time the rate of money supply for bitcoin will slow and ultimately halt at a finite amount of 21 million bitcoins. This finite supply works exactly the same way as gold or silver. Without the ability to print more money, our governments would be required to balance their budgets and wouldn’t be able to live off the “inflation tax” they currently survive on.
One of the main problems with bitcoin is that it is “pseudoanonymous” and thus is actually far more traceable than cash if users aren’t careful. This fact came to the public’s attention recently at the trial of Ross Ulbricht, the alleged operator of the online drug marketplace Silk Road. By claiming ownership of the bitcoins that were seized by the government, prosecutors were easily able to trace all of the transactions associated with those bitcoins and prove Ulbricht’s connection to the Silk Road’s illegal activity. In June of 2014 I wrote a book called “Anonymous Cryptocurrencies” (which became an Amazon #1 best seller!) about some of the alternative cryptocurrencies that offer true anonymity. Since then darkcoin has emerged as the anonymous cryptocurrency leader, offering instant and anonymous transactions – creating the world’s first true “digital cash.” In the future we may see governments adopt darkcoin (or the technology behind darkcoin) to create a sustainable currency with a finite supply that offers their citizens financial privacy.

Sustainable Banking
Until we transition to a sustainable monetary system like a resource-backed currency or cryptocurrency, we will have to make do with our current debt-based system and attempt to make it “more sustainable” in whatever way we can. One of the simple actions people can take is to switch their checking account from a global “megabank” to a local bank or credit union. When I lived in Ithaca, we had the Alternatives Federal Credit Union which invested in local businesses and even backed the local alternative currency Ithaca HoursToday in our household we bank at San Francisco’s New Resource Bank. New Resource does a great job being sustainable with our current unsustainable monetary system. They have incorporated as a B-Corporation and as a result are able to pursue many sustainability-related efforts without needing to explain to investors why such efforts don’t have a direct financial return. They also invest locally with the goal of becoming 100% invested in local businesses that are sustainability-focused; this means that they currently invest in companies like Cowgirl Creamery and Hog Island Oysters. Local banking, however, isn’t all sunshine and rainbows. Some of the annoyances we’ve endured with our local bank include:
  • Fees – local banks typically have higher fees than megabanks.
  • Locations – New Resource Bank has 1 location. Bank of America has 5,132 locations. Obviously more locations is more convenient.
  • Hours – our bank is only open 9-5 on weekdays while most megabanks are open on weekends.
  • ATM – When we visited the bank a few weeks ago the bank’s only ATM was “permanently disabled.” Thus our only way to despot checks during non bank hours is gone.
  • Fraud Lockouts – much to our consternation, almost every time we travel and attempt to use an ATM we get locked out because the bank’s hair-trigger fraud detection system thinks our card has been stolen. The bank’s website also requires that you change your password every few weeks, which is also extremely annoying. Unlike megabanks, which can spread the risk of fraud across millions of customers, local banks need to be more careful, which means more annoyances for customers.
The most basic reason for all of these inconveniences is that local banks simply aren’t able to be as profitable as global megabanks, which brings me to my final point…

One of the main threats to local banks is the Federal Reserve’s policy of keeping interest rates at nearly 0%. When rates are this low, the traditional small bank model of taking deposits and making loans becomes impossible to sustain. Banks simply can’t find enough low-risk people and businesses to lend to at the current rates to justify the risk-return equation required to maintain business as usual. Ultimately this will mean increasing fees for depositors as banks are unable to make enough money from loans to cover all of the overhead costs associated with providing depositor banking services. Not only has the FED painted itself into a corner with multi-century low interest rates, they are starving the local banks that provide the only semi-sustainable business model that could ultimately save us from our unsustainable monetary system.