How households can create a new model of sustainable capitalism

Source: Unknown

Humans are exploiting the Earth in an unsustainable manner. The current model of capitalism is cited as the main culprit with a burgeoning chorus of scientists challenging the economic mantra of “grow or die”. They argue that perpetual growth on a finite planet will lead to environmental calamity.

In the ongoing debate on sustainability, conservationists feel hampered and business people feel vilified. Meanwhile, ecologists and economists disagree about the limits of economic growth and the ecological capacities of the Earth. There is a mounting view that preserving the planet and expanding the economy are mutually exclusive. But is this really the case?

The reality is that environmental and economic issues are interconnected. The planet is part of the economic system and the economic system, in turn, is part of the planet. In order to grow, the economy feeds on natural resources and emits waste which pollutes the air and threatens the delicate climate on which life relies.

We must reduce the use of fossil fuels by switching to clean energy such as natural gas, nuclear and renewables (solar and wind). The energy sector matters greatly in our efforts to slow climate change. Electricity generation has long been the world’s biggest source of greenhouse gas emissions. The rest comes mainly from transportation, manufacturing and agriculture.

Around the world, businesses are making changes to their production systems in order to help stop the degradation of the planet. But what role do consumers play? Businesses argue that they merely supply the products and services that consumers demand. In an age of rampant consumerism, many of us crave the latest “must haves” thereby fuelling an endless cycle of spending.

To understand our insatiable appetite for products and gadgets that are newer and better, you need only look at the hordes of people around the world who queue for days outside an Apple store for the latest iPhone. Consumerism has caused us to confuse a good life with a goods life. The more we have the more we want, creating a cycle of compulsive buying.

But many of us buy things we don’t really need and this particularly applies to clothing. Open your wardrobe and take stock of all the clothes that you have either never worn or not worn in the past 12 months. It is claimed that most people wear 20 per cent of their clothes 80 per cent of the time. Put another way, we barely wear 80 per cent of what’s in our closet.

When it comes to poor practices that contribute to climate change, the fashion industry is cited as one of the worst offenders. Never have consumers been so quick to buy pieces of clothing, but this apparel runs out of style within weeks. The fashion industry has a vested interest in selling more clothes, so it sets new trends several times a year to keep consumers buying. It’s claimed that throwaway garments contribute more to climate change than air and sea travel.

For consumers, sustainability means getting the most out of the products they buy and not throwing them away on a whim. More than 1.7 billion people worldwide now belong to the “consumer class”. These people live on diets of highly processed food, own bigger houses and cars, carry higher levels of debt and have lifestyles devoted to the accumulation of non-essential goods.

Not surprisingly, many of the environmental issues we see today can be linked to consumption. Disposable cameras, plastic garbage bags, and other cheaply made goods with built-in product obsolescence inflict a devastating toll on the Earth’s water supplies, natural resources and ecosystems. Demand for cheaply manufactured goods fuels our throw-away mentality.

A magazine article titled Climate Change Is the Symptom. Consumer Culture Is the Disease. notes that “… industries are spouting carbon because customers demand their products: travel, electronics, entertainment, food, all sorts of stuff. So, what if, instead of solely measuring emissions by economic sector, we looked at consumer demand within those sectors?”

Researchers have done just that, and the results tilt the blame away from businesses toward a different villain – ourselves. The article goes on to say:

C40 Cities, a network of 94 of the world’s biggest cities, released a report … estimating how much consumption habits drive the climate crisis. The results were staggering: In those nearly 100 cities, where a combined 700 million live, the consumption of goods and services “including food, clothing, aviation, electronics, construction and vehicles” is responsible for 10 percent of global greenhouse gases. That’s nearly double the emissions from every building in the entire world.

Billions of citizens around the world are looking to governments and businesses to do something about climate change. But the real power for change is in our hands. Our collective actions can provide the leadership necessary to combat climate change. We support governments with votes and businesses with dollars, which means that we can choose who governs and where we spend our money.

If we don’t like what a company is doing, we can stop buying their products and services and force them to change. Consumers drive markets and sustainable consumer choices can change corporate behaviour. But we all need to take a stand and, for many of us, this will require a lifestyle overhaul, particularly with regard to saying “no” to unnecessary and/or environmentally unfriendly household items.

Research reveals that having more and more possessions does not make us happier, which is why some have adopted a minimalist approach to life. There is a growing minimalist movement which advocates that we should get by with less. The basic premise of the movement is to live without excessive possessions in order to have more meaningful and thoughtful experiences.

I remain an avid fan of capitalism and believe that it is the greatest vehicle the world has ever known for creating wealth and prosperity. Even so, it is an economic system in need of repair. All of us as individual consumers working together can drive that repair by making better choices in our day-to-day lives regarding the products and services we consume.

Let’s prove that sustainable capitalism is not an oxymoron.

Before you go…

My next blog post will be the final one published for 2020 and will take the form of a Christmas parody. It will be set to the rhyme scheme of Clement Moore’s classic poem, The Night Before Christmas. It will imitate the style and form of Moore’s original lyric while addressing a different subject matter – a look back at the biggest news stories of 2020. I hope that you enjoy this twist on the famed poem.


Paul J. Thomas
Chief Executive Officer
Ductus Consulting

Where is the pandemic stimulus money coming from?

The Economist / Otto Dettmer

Governments around the world are spending up a storm. They have loosened their purse strings and are shovelling truckloads of cash into their respective economies. Collectively, it represents the biggest relief package in history – in excess of US$10 trillion globally. For most nations, every penny of their mind-boggling spendathon is borrowed.

In doing “whatever it takes” to combat the COVID-19 pandemic, governments have shown that they can sustain levels of debt far greater than previously thought. Consequently, the coronavirus has challenged orthodox economics in just a few weeks. The belief in balanced budgets has been thrown out the window. Public debt is no longer seen as a drag on economies but a critical lifeline.

Proponents of an unconventional economic framework – Modern Monetary Theory (MMT) – welcome the ramp-up in government spending. MMT posits that countries which issue their own currencies can’t go bankrupt as they can never run out of money in the way businesses and households can. That’s because governments with their own sovereign currency are able to “print” (or more precisely “create” with a few keystrokes) as much money as they need to pay creditors.

Not surprisingly, traditional economic thinking warns that such spending is fiscally irresponsible as the debt balloons and inflation skyrockets. Critics of MMT cite Hungary in the 1940’s, Brazil in the 80’s and Mexico in the 90’s as examples where easy money policies (governments creating piles of cash) led not just to inflation but hyperinflation.

But this has not deterred MMT advocates who argue that increased government spending will not generate inflation as long as there is unused economic capacity or unemployed labour. It is only when an economy hits physical or natural constraints on its productivity that inflation happens, because that is when supply fails to meet demand, jacking up prices.

This is what occurred in Zimbabwe in the late 1990s and mid-2000s. The economy collapsed, but not because Robert Mugabe printed ever-more Zimbabwean dollars. Rather, the economy nosedived when farming production plummeted by 60 per cent as Mugabe forced experienced white farmers off their land and gave it to inexperienced soldiers to farm.

The resultant decline in output caused a shortage of goods. At the same time, demand rose as Zimbabweans had more paper money. The combination of more money chasing fewer goods – the classic definition of inflation – caused a supersonic rise in prices. Wallets were replaced with wheelbarrows as hyperinflation peaked in the African nation in November 2008 at an estimated 89.7 sextillion per cent – an eye-watering number with 21 zeros after it.

Of course, Robert Mugabe’s gross economic mismanagement of Zimbabwe cannot be compared to Shinzo Abe’s savvy stewardship of the Japanese economy. A basket full of groceries in Japan in 2020 does not cost a bucket full of money as it did in Zimbabwe in 2008. That’s because Japan’s expansionary monetary policy has not been inflationary – spending has not exceeded the economy’s capacity to produce.

Despite having the highest public debt in the developed world, Japan has not experienced runaway inflation (in fact, it has been battling deflation for two decades!) and remains an economic powerhouse. Supporters of MMT cite Japan’s success as proof that their unorthodox ideas work. But critics – including world renowned economist and Nobel laureate, Paul Krugman – strongly disagree.

Both sides of this debate were outlined in a 2019 article published in The New York TimesModern Monetary Theory’s Reluctant Poster Child: Japan. Notwithstanding Japan’s hesitance to be labelled an MMT practitioner, proponents of the theory insist that Japan has been a testing ground. As explained in the article:

The country (Japan) is their (MMT’s) equivalent of Charles Darwin’s Galápagos Islands: a natural experiment that reveals a fundamental truth about the way the world really works. Since the country’s boom ended in the early 1990s, Japan has borrowed deeply. Currently, its debt level is approaching 250 percent of its annual economic output. Critics say it is an economic basket case. Despite all that, Japanese inflation and lending rates remain low. In fact, some bond rates are negative, meaning Japan can profit when it borrows money. Its standard of living remains competitive with those of the United States and other developed countries.

Bill Mitchell is a professor of economics at the University of Newcastle in Australia and one of the founders of Modern Monetary Theory. He has been closely studying Japan since the 1990s. “It is my laboratory,” he explains, calling the country “a really good demonstration of why mainstream macroeconomics is wrong”. He argues that Japan has established “the principles of MMT and the consequences of different fiscal and monetary policy initiatives”.

Japan has blurred the lines that traditionally divide fiscal and monetary policy. Other nations, including Australia, are currently doing likewise with their pandemic stimulus packages. Historically, governments have raised money to fund spending by issuing bonds which are bought by a range of investors. But some nations are now self-funding their stimulus packages by issuing and then buying their own bonds, thereby creating money out of thin air.

This funding mechanism bypasses the need to pay interest to investors on newly issued money and is at the heart of MMT – the fusion of fiscal and monetary policy. MMT links fiscal policy to monetary policy by using the central bank to buy the debt (bonds) issued by its government. If all of that sounds double Dutch, then let me share with you another explanation.

In a recent article in the Sydney Morning Herald, Don’t add government debt to your list of things to worry about, economics writer, Jessica Irvine, quite rightly points out that the Reserve Bank of Australia (our central bank which is responsible for monetary policy) has exhausted its traditional method of stimulating our economy (lowering interest rates). So, the RBA is helping the federal government (which has responsibility for fiscal policy) stimulate the economy by buying Australian government bonds.

In answering the question: Where does the stimulus money come from?, Irvine writes:

A large part of (it) … will come from the Reserve Bank. Weird, you might be thinking. Does that mean that one arm of government – albeit a statutory independent agency – is now lending to another arm of government, the executive branch? To whom, in such a situation, do taxpayers ultimately owe the money? Themselves? The answer is: well, yes. … And if we only owe the money to ourselves, what’s to stop us spending as much as we like? Another very good question, and one to keep in mind in the strange debates to come.

Irvine underscores that MMTers would prefer that the government simply print the money, rather than borrow it from the private sector in a money-go-round they decry as “corporate welfare”. According to MMT, government issued bonds aren’t strictly necessary. Instead of issuing $1 in bonds for every $1 in deficit spending, the Australian government could just create the money directly without issuing bonds.

The belief that governments do not need to issue public debt is supported by Dr Steve Hail, a lecturer in economics at the University of Adelaide and an MMT proponent. He sees no need to match public deficits with debt issuance for a currency issuing government. Such governments should gain the necessary political approval for additional spending and then be able to do it. “Spending is self-financing,” he asserts and “does not have to be funded”.

In a recent article Dr Hail wrote for the news and opinion website, Independent Australia, he stated:

… central governments like those of Australia, New Zealand, the USA, the UK and Japan face no purely financial constraints at all. Never mind a “money tree”, they have a money computer. They can create limitless amounts of their currencies when they need to do so. They are not dependent on the goodwill of the bond market, or of credit ratings agencies. They are monetary sovereign currency issuers.

It’s clear that MMT is a controversial idea that has detractors and admirers worldwide. The coronavirus pandemic has moved MMT from the fringes of economic debate to centre stage. It is receiving unprecedented attention now that policymakers are (knowingly or unknowingly) implementing some of its basic tenets. This is MMT’s moment in the sun and only time will tell if it works as advertised.

For the record, I do not believe that government deficits are inherently bad. Nor do I believe that government budgets, like household budgets, should always be in the black. So, my belief is that MMT should not be dismissed out-of-hand nor should it be approached with a pre-existing economic ideological bias.

Remember, the economics profession (it is jokingly said) is the only field where two people can win a Nobel prize for saying the exact opposite thing!

PS. Professor Stephanie Kelton is the public face of MMT and its foremost evangelist. Her recently released book, The Deficit Myth: Modern Monetary Theory and How to Build a Better Economy, provides a comprehensive and lucid explanation of MMT.


Paul J. Thomas
Chief Executive Officer
Ductus Consulting

How will the world pay for COVID-19 stimulus packages? Cartoonist Gary Varvel

The economic damage caused by the coronavirus is mounting across the globe. In a frantic scramble to cushion economies, governments launched massive stimulus programs. These unprecedented fiscal and monetary interventions come with a staggering price tag. Sovereign debt is set to soar with governments around the world embarking on one of the greatest peacetime borrowing binges in history.

Most governments run annual deficits as they spend more than they collect. Few have spare surplus funds sitting around that can be redirected to support struggling households and businesses. So, countries are piling on more debt to fund emergency spending to help citizens cope with the economic ravages of the pandemic. Many people understandably worry whether the world can afford this avalanche of new borrowing.

The good news is that debt is incredibly cheap at the moment. Prior to the pandemic, the world was awash with savings which pushed interest rates very low. As global interest rates are now even lower, it has never been cheaper for governments to borrow. Governments are collectively borrowing trillions of dollars to enable them to spend trillions of dollars in a synchronised shock-and-awe response to the pandemic.

A classic way for nations to “print” emergency money is to borrow it by selling government bonds. This increases national public debt and is how governments have historically dealt with economic shocks such as recessions, financial dislocations and wars. During such crises, investors prefer the safety of government bonds in lieu of putting their money into the stock market, corporate bonds or real estate.

In Australia, the federal government is expected to fork out in excess of $200 billion to keep the economy afloat during the pandemic-induced downturn. The first federal response cost $17 billion, the second round cost an additional $66 billion and the third cash splash rang the bell at $130* billion. All up, Australia’s coronavirus stimulus packages are equivalent to nearly 10 per cent of the size of our economy.

As explained by ABC business reporter, Gareth Hutchens:

Essentially, the Government will pay for the stimulus package by creating the money and racking it up as debt. Officially, it will raise the money via the Australian Office of Financial Management (AOFM), which borrows money on behalf of the Government by selling Australian Government bonds.

Institutional investors (e.g. local and overseas banks, superfunds and foreign countries) will be buyers of the bonds. However, as noted by Gareth Hutchens:

The ultimate buyer of the Government bonds could be the Reserve Bank, because at the moment, the RBA is stepping into the market regularly to purchase as many Australian Government bonds as necessary to keep the interest rate, the “yield”, on three-year Government bonds around 0.25 per cent.

The yield on Australian government bonds is the interest rate we pay on our nation’s debt. Given that the current rate of inflation in Australia is around 1.8 per cent and is expected to decline further, we are effectively borrowing for free. This is good news for Australia, yet many Aussies are fearful of our level of sovereign debt.

A recently released paper by think tank, The Australia Institute, “The Budget Surplus Objective: An example of how economics is broken” highlights the folly of this fear of government debt. Citing the report, economics writer, Greg Jericho, states:

… given Australia’s nominal GDP is expected to grow at around 4.5%, if government borrowing pays lower than that (as is currently the case) debt levels will fall over time. This is because the economy is growing much faster than is the interest on the debt. … It means to quote Larry Summers, the former chief economist of the World Bank, that “public investment is essentially costless – the classic free lunch”.

One of Australia’s foremost economic commentators, Chris Richardson, from Deloitte Access Economics, has gone public to ameliorate fears that the government has saddled our children with massive debt. According to Richardson, the budgetary impact of the fight against the coronavirus will have a much smaller impact on Australia than many expect.

Notwithstanding the “jaw-dropping” size of Australia’s stimulus package, Richardson stressed that we have not sentenced younger Australians to a lifetime of higher taxes and sub-standard services.

Although the dollars are unprecedented, what’s even more unprecedented are the interest rates we’ll be paying on this new debt. Never in the two thousand years of recorded history of interest rates has it been cheaper for governments to borrow. Never. And markets aren’t fazed in the slightest: they reacted to the latest package by dropping the rate on 10-year Commonwealth borrowing substantially further.

Richardson went on to say:

Australia’s economy will grow again on the other side of this (COVID-19) war. So, here’s a simple suggestion: Let’s just let our debts from this new war simply become a smaller share of our growing economy over time. That’s what we did with the war-time debts of the past. And it’s probably the smart play this time too. Self-imposed flagellation rarely makes sense. The same policies that were sensible ahead of this crisis will remain just as sensible after it too.

As counter-intuitive as it sounds, government deficits can be very helpful to an economy. Nobel prize-winning economist, Joseph Stiglitz, has long argued that deficit spending can be a major stimulus to economic growth and can actually lower long-term government debt. When economic growth is restored and unemployment falls, tax revenues increase which eventually lessens the need for a government to borrow.

Another world-renowned economist and Nobel Laureate, Paul Krugman, has often observed that government finances are not like personal finances. While consumers on a spending spree ultimately have to pay the piper, a government’s borrowing strategy directly affects economic growth and this delivers social benefits.

All of this means that increased national debt from COVID-19 is not our enemy – it will not leave a deep scar on our economy nor will it result in a day of reckoning. This will be hard for many Aussies to accept as they have been conditioned to believe that debt is bad and that any political leader who does not pledge to lower Australia’s national debt is not worthy of their vote.

Even though Australia has long had one of the world’s lowest debt-to-GDP ratios, we Aussies display an irrational and emotive attitude to government debt. Hopefully, the pandemic will challenge some long-standing economic theories, including the idea that responsible government means having no national debt.

The notion that governments can sustain levels of debt far greater than previously thought is the centrepiece of an economic model called Modern Monetary Theory (MMT). It proposes that governments can spend freely as they can always create more money to pay off debts in their own currency. Orthodox economists see MMT as a fringe economic movement with some labelling it as “voodoo economics”. But it is worth exploring which I do in my next blog post.

For now, please do not be spooked by the debt bogeyman.

*It has since transpired that the government’s $130 billion JobKeeper program will cost only $70 billion.


Paul J. Thomas
Chief Executive Officer
Ductus Consulting