Financial Feudalism
By Dmitry Orlov
March 25, 2015 "ICH"
- Once upon a time—and a fairly long time it
was—most of the thickly settled parts of the
world had something called feudalism. It was
a way of organizing society hierarchically.
Typically, at the very top there was a
sovereign (king, prince, emperor, pharaoh,
along with some high priests). Below the
sovereign were several ranks of noblemen,
with hereditary titles. Below the noblemen
were commoners, who likewise inherited their
stations in life, be it by being bound to a
piece of land upon which they toiled, or by
being granted the right to engage in a
certain type of production or trade, in case
of craftsmen and merchants. Everybody was
locked into position through permanent
relationships of allegiance, tribute and
customary duties: tribute and customary
duties flowed up through the ranks, while
favors, privileges and protection flowed
down.
It was a remarkably resilient,
self-perpetuating system, based largely on
the use of land and other renewable
resources, all ultimately powered by
sunlight. Wealth was primarily derived from
land and the various uses of land. Here is a
simplified org chart showing the pecking
order of a medieval society.
Feudalism was essentially a steady-state
system. Population pressures were relieved
primarily through emigration, war,
pestilence and, failing all of the above,
periodic famine. Wars of conquest sometimes
opened up temporary new venues for economic
growth, but since land and sunlight are
finite, this amounted to a zero-sum game.
But all of that changed when feudalism was
replaced with capitalism. What made the
change possible was the exploitation of
nonrenewable resources, the most important
of which was energy from burning fossilized
hydrocarbons: first peat and coal, then oil
and natural gas. Suddenly, productive
capacity was decoupled from the availability
of land and sunlight, and could be ramped up
almost, but not quite, ad infinitum, simply
by burning more hydrocarbons. Energy use,
industry and population all started going up
exponentially. A new system of economic
relations was brought into being, based on
money that could be generated at will, in
the form of debt, which could be repaid with
interest using the products of
ever-increasing future production. Compared
with the previous, steady-state system, the
change amounted to a new assumption: that
the future will always be bigger and
richer—rich enough to afford to pay back
both principal and interest.
With this new, capitalistic arrangement, the
old, feudal relationships and customs fell
into disuse, replaced by a new system in
which the ever-richer owners of capital
squared off against increasingly
dispossessed labor. The trade union movement
and collective bargaining allowed labor to
hold its own for a while, but eventually a
number of factors, such as automation and
globalization, undermined the labor
movement, leaving the owners of capital with
all the leverage they could want over a
demoralized surplus population of former
industrial workers. In the meantime, the
owners of capital formed their own
pseudo-aristocracy, but without the titles
or the hereditary duties and privileges.
Their new pecking order was predicated on
just one thing: net worth. How many dollar
signs people have next to their name is all
that's necessary to determine their position
in society.
But eventually almost all the good, local
sources of hydrocarbon-based energy became
depleted, and had to be replaced using
lower-quality, more remote,
harder-to-produce, more expensive ones. This
took a big bite out of economic growth,
because with each passing year more and more
of it had to be plowed right back into
producing the energy needed to simply
sustain, never mind grow, the system. At the
same time, industry produced a lot of
unpleasant byproducts: environmental
pollution and degradation, climate
destabilization and other externalities.
Eventually these started showing up as high
insurance premiums and remediation costs for
natural and man-made disasters, and these
too put a damper on economic growth.
Population growth has its penalties too. You
see, bigger populations translate to bigger
population centers, and research results
show that the bigger the city, the higher is
its energy use per capita. Unlike biological
organisms, where the larger the animal, the
slower is its metabolism, the intensity of
activity needed to sustain a population
center increases along with population.
Observe that in big cities people talk
faster, walk faster, and generally have to
live more intensely and operate on a tighter
schedule just to stay alive. All of this
hectic activity takes energy away from
constructing a bigger, richer future. Yes,
the future may be ever more populous (for
now) but the fastest-growing form of human
settlement on the planet is the urban
slum—lacking in social services, sanitation,
rife with crime and generally unsafe.
What all of this means is that growth is
self-limiting. Next, observe that we have
already reached these limits, and have in
some cases gone far beyond them. The
currently failing fad of hydraulic
fracturing of shale deposits and steaming
oil out of tar sands is indicative of the
advanced state of depletion of fossil fuel
sources. Climate destabilization is
producing ever more violent storms, ever
more severe droughts (California now has
just a year's worth of water left) and is
predicted to wipe out entire countries
because of rising ocean levels, failing
monsoon seasons and dwindling irrigation
water from glacial melt. Pollution has
likewise reached its limits in many areas:
urban smog, be it in Paris, Beijing, Moscow
or Teheran, has become so bad that
industrial activities are being curtailed
simply so that people can breathe.
Radioactivity from the melted-down nuclear
reactors at Fukushima in Japan is showing up
in fish caught on the other side of the
Pacific Ocean.
All of these problems are causing a very
strange thing to happen to money. In the
previous, growth phase of capitalism, money
was borrowed into existence in order to
bring consumption forward and by so doing to
stimulate economic growth. But a few years
ago a threshold was reached in the US, which
was at the time still the epicenter of
global economic activity (since eclipsed by
China), where a unit of new debt produced
less than one unit of economic growth. This
made borrowing from the future with interest
no longer possible.
Whereas before money was borrowed in order
to produce growth, now it had to be
borrowed, in ever-larger amounts, simply to
prevent financial and industrial collapse.
Consequently, interest rates on new debt
were reduced all the way to zero, in
something that came to be known as ZIRP, for
Zero Interest Rate Policy. To make it even
sweeter, central banks accepted the money
they loaned out at 0% interest as deposits,
which earned a tiny bit of interest,
allowing banks to make a profit by doing
absolutely nothing.
Unsurprisingly, doing absolutely nothing
proved to be rather ineffective, and around
the world economies started to shrink. Many
countries resorted to forging their
statistics to paint a rosier picture, but
one statistic that doesn't lie is energy
consumption. It is indicative of the overall
level of economic activity, and it is down
across the entire world. A glut of oil, and
a much lower oil price, is what we are
currently witnessing as a result. Another
indicator that doesn't lie is the Baltic Dry
Index, which tracks the level of shipping
activity, and it has plummeted too.
And so ZIRP set the stage for the latest,
most queer development: interest rates have
started to go negative, both on loans and
deposits. Good bye, ZIRP, hello, NIRP!
Central banks around the world are starting
to make loans at small negative rates of
interest. That's right, certain central
banks now pay certain financial institutions
to borrow money! In the meantime, interest
rates on bank deposits have gone negative as
well: keeping your money in the bank is now
a privilege, for which one must pay.
But interest rates are certainly not
negative for everyone. Access to free money
is a privilege, and those who are privileged
are the bankers, and the industrialists they
fund. Those who have to borrow to finance
housing are less privileged; those who
borrow to pay for education even less so.
Those not privileged at all are those who
are forced to buy food using credit cards,
or take out payday loans to pay rent.
The functions which borrowing once played in
capitalist economies have been all but
abandoned. Once upon a time, the idea was
that access to capital could be obtained
based on a good business plan, and that this
allowed entrepreneurship to flourish and
many new businesses to be formed. Since
anybody, and not just the privileged, could
take out a loan and start a business, this
meant that economic success depended, at
least to some extent, on merit. But now
business formation has gone in reverse, with
many more enterprises going out of business
than are being formed, and social mobility
has become largely a thing of the past. What
is left is a rigidly stratified society,
with privileges dispensed based on
hereditary wealth: those at the top get paid
to borrow, and get to surf on a wave of free
money, while those at the bottom are driven
ever further into debt servitude and
destitution.
Can NIRP underpin a new feudalism? It
certainly cannot reverse the downward slide,
because the factors that are putting limits
on growth are not amenable to financial
manipulation, being physical in nature. You
see, no amount of free money can make new
natural resources spring into existence.
What it can do, however, is freeze the
social hierarchy among the owners of
capital—for a while, but not forever.
Everywhere you care to look, the
ever-shrinking economy eventually results in
populist revolt, war and national
bankruptcy, and these cause money to stop
working in a number of ways. There is
usually devaluation, bank failures,
inability to finance imports, and the demise
of pensions and of the public sector. The
desire to survive causes people to focus on
getting direct access to physical resources,
distributing them among friends and family.
In turn, this causes market mechanisms to
become extremely opaque and distorted, and
often to stop functioning altogether. Under
these circumstances, how many dollar signs
someone has next to their name becomes
rather a moot point, and we should expect
the social hierarchy among the owners of
capital to become unstable and capsize. A
few among them have the talents to become
warlords, and these few fleece the rest out
of existence. But overall, in a situation
where financial institutions have failed,
where factories and other enterprises are no
longer functioning, and where real estate
holdings have been overrun by marauding mobs
and/or invaded by squatters, one's net worth
becomes rather difficult to compute. And so
we should expect the org chart of the
post-capitalist society, in spreadsheet
terms, to look like this. (“#REF!” is what
Excel displays when it encounters an invalid
cell reference in a formula.)
A good, precise term for this state of
affairs is “anarchy.” Once a new, low level
of steady-state subsistence is reached, the
process of aristocratic formation can begin
anew. But unless a new source of cheap
fossil fuels is somehow magically
discovered, this process would have to
proceed along the traditional, feudal lines.
Dmitry
Orlov is a Russian-American engineer and a
writer on subjects related to "potential
economic, ecological and political decline
and collapse in the United States,"
something he has called “permanent crisis”.
http://cluborlov.blogspot.com
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