Here is the direct link to the (updated) 64-pages paper as .pdf or as .epub. This blog entry contains just an excerpt from it.

About

Last week Enno put me into his blogroll calling me a One-Man-Think-Tank. I found this so flattering and encouraging that I decided to make available more of the stuff that is lingering on my hard disk, but never seems to be final or good enough to publish it.

When in the last year the financial crisis reached Germany I felt as helpless and clueless like everyone else, and I was curious to find out what might happen as a result of this crisis. The mainstream media was obviously not of much help, and even the public experts were talking mostly bullshit. So I started to dig through the internet, read books and talk to bankers and people who studied economics. And in good enlightment tradition, I used my own mind. In the end, all this turned out to be a good combination to get all the answers I was looking for. And because I understand things better when I write about them, I wrote everything down.

This became a 64 pages long paper which is way too long for a blog article, but written in blog style. I would have published it long ago, but a hard disk crash set me back and I had to recover the paper by scanning and OCR-ing the only version that survived.

Today I read it again with some distance and found it interesting and good enough to share it with the world, so here it is. If you read and understand it you will probably know more about money, our financial system and the crisis than the average banker or MBA. I also had the idea to turn the paper into micro-site so you can easier get to the chapters you are interested in, but whether I will put in this effort will depend on the feedback I get.

The text is written for someone who has absolute no clue about economics, but should be also enlightening and fun for professionals.

Here is the Table of Content:

• Common Knowledge about Money
• Many Mysteries
• Types of Money
• Money
• How Money is not created
• A Quantum Physics Analogy
• Real Money Creation
• Destruction of Money
• The Path of Money
• Hierarchy of Banks and Money
• Why do Banks create money?
• Businesses
• Stocks and Balance Sheets
• Houses
• Consumers
• Gross Domestic Product
• Economics
• The Path of Debt
• Derivatives
• Collateralized Debt Obligations Illustrated
• Problems with CDOs
• Credit Default Swaps (CDS)
• Short Selling
• Hedge Funds
• Alpha and Beta
• Martingale
• Carry Trade
• Money Revisited
• Velocity of Money
• Time Value of Money
• Do-It-Yourself Credit Money
• Money Summarized
• Outlook
• Radical Alternative Economic Systems
• Doing Some Justice
• Towards a World Government?
• The World in 2050
• Final Remarks

I decided to put a few chapters of the paper directly (those marked bold in the above TOC) into the blog. These chapters do not go that much into the details, and are hopefully an entertaining read. But if you are a nerd and you really want to get a feeling for the way the financial world ticks, if you want to know what money is, how it is created and destroyed, how debt is traded, what derivatives, futures and short selling are, why "hedge funds" promise to deliver "alpha", and how investment bankers created and sold "Collateralized Debt Obligations" to Fireman’s Widows and Orphan funds and what the future will bring, you should read the whole paper.

If your time is limited and you just want some entertainment and quick enlightment, you can continue reading here.

Time Value of Money

The concept of the Time Value of Money is based on the assumption that having one million dollars today is better than having one million next year. The reason is obvious: With one million today, I can build or buy a house now, and don’t have to spend the winter freezing and sleeping under the bridge or in the woods.

Or I can rent out the house and have a nice income. Or buy a fishing boat and have a year worth of catch and my family does not have to die of starvation, or I can buy a factory and have one year of profit more, compared to waiting one year before I can use the money.

Or I might not even get to enjoy the million in a year because I am dead, or the million evaporates because those who I am supposed to get it from go bankrupt.
And there is another issue: Because of inflation, I can probably buy more stuff for a million today than I will get in one year.

All these three factors together are the justification for charging an interest when loaning out money: The utility of money (opportunity costs), the possibility of not getting it back (credit risk), and the decline of its value must be compensated (inflation), otherwise there is no economic reason to loan out money.
In fact there may be many other reasons to make a loan, but these lie outside this basic economic theory.

In the past many religions regarded time as a property of god, and charging money for something that belongs to god was regarded as sin. Another moral reason was that in medieval times borrowing was uncommon and happened mostly as a result of exigencies like crop failures or conflagrations, and it was seen as immoral to benefit from someone else’s misfortune.

But since the renaissance people became more mobile and engaged in commerce and entrepreneurship, so money became also a mean of business and production and a merchandise itself, which changed the view on the morality of interest.

The idea of the time value of money has been first developed by spanish theologians in the 16th century, known as the School of Salamanca, where a lot of groundbreaking intellectual reformation of the roman catholicism was done. They for example reformulated the concept of natural law and derived that every human has the same rights to life and liberty because all humans share the same nature, and that there are not only limits to the legitimate power of governments, but government itself is a consensus of free wills and is only entitled by a temporary transfer of the people’s divine sovereignty to the ruler. These guys practically came up with an intellectual foundation for the modern understanding of democracy where everyone has the same rights, unlike Greek and Roman democracy, where slaves, other races and non-citizens could not vote. They also invented the concept of just war, outlawing expansionist wars, wars of pillage and wars to convert infidels. These theologians were way ahead of their time, and in some respects our modern society still does not live up to their philosophy.

I am stating all this because I think it is important to put the question about the morality of interest into some context. Today, there are still people who hold on to the ancient thinking that taking interest is immoral and we all would be better off having an economic system with outlawed interest like under islamic law.
But today even all islamic banks of any significance charge interest in some form. There are however some interesting concepts in islamic banking regarding the share of risk and profit between creditor and debtor, and as islamic banking experiences extraordinary growth rates, western bankers would be well advised to look into some of these principles as an interesting opportunity for creating new and possibly sustainable credit products.

However, it seems to me that all these principles in islamic banking are mainly ways to find loopholes in islamic law to accommodate for the existence of the time value of money without explicitly charging interest.

One common example in islamic banking is to buy the financed asset on behalf of the debtor and sell it to him for a higher price, which is not different from charging interest. But there are important differences in islamic banking how defaulting on payment is handled in most cases: Creditor and Debtor split losses or gains when the asset is sold, and there is no additional penalty for the debtor in case of defaulting, which is substantially different from the western principle where in theory the debtor bears all the losses and additional fees, but in practice often the creditor loses a lot because the debtor is bankrupt. In islamic banking, the interests of creditor and debtor seem to be better aligned from the start, and although I do not consider the sharia as an adequate basis for life in the 21st century, often artificial restrictions bear interesting solutions.

The problem with interest in general is not that it is charged, the question is how much is adequate. And one problem with the american style turbo-capitalism is that expectations on what an adequate return on investment should be are totally insane.

If you apply the concept of time value of money to these rates, you will easily see how insane this is, and how these expectations can only lead to unsustainable business practices by focussing on short term results, completely ignoring the long term.

Let us assume we have an idea that will bring a company 1 Mio. Euros of net earnings, but it will take five years of research and development before the stuff can be sold. At the same time, the management of the company promises a return on investment of 20% per year. From todays perspective, this 1 Mio. earnings in five years is just worth 400.000, which not only means that such a long term project has to bear the risk that in five years the market will be totally different and we might not be successful, but even if we are successful, a sure success in five years today is worth only 40% of what it will yield then. This makes any long term project even more undesirable.

Here is a table that shows the present value of 1 Mio. € in five years, discounted by different rates of expected return on investment:

Therefore, as a rule of thumb you can say: The more return on investment a management sets as goal, the less likely the company will pursue long term projects because future earnings are heavily discounted.

The numbers get really troublesome if you consider even longer time scales, for example 20 or 50 years, which are time scales you might think about when investing into growing trees, education or economic transformation. Depending on your expectations about economic growth and the return on investment, it seems prudent not to invest too much into long term projects. On the other hand, you should invest at least a little as early as possible in your life, because if you are lucky, you might as well get rich without risking too much.

As you can seean ROI of 10% turns 8000 € into a million in fifty years, which is something many people could have enjoyed who invested into U.S. stock fifty years ago.

On the other hand, investing now large amounts into sustainable energy when the we run out of oil not until in twenty or thirty years is not justified when you are a company that calculates with 20% ROI. The crux is, not investing now may kill billions of people then.

By the way, Exxon’s 2006 ROI has been 32.6%, and has even increased until 2008, when the company announced earnings of $11.68 billion in the second quarter of 2008, the highest quarterly earning any company in the history ever made. In 2008, the operating income was 33.8% of the total assets, and the net income 40% of the total equity. The revenue per employee was about 4.4 Mio. U.S. Dollars. With a revenue of $477 Billion, it would rank #18 in the list of countries by GDP, between Turkey and Sweden.

What confirms that companies with a high ROI do not invest into long term projects: Exxon spends only about 1% of it’s earning or 0.3% of its revenue on alternative energy.

But there is another astonishing number that puts this into other proportions: Exxon only produces 3% of the worlds oil and 2% of the worlds energy supply.
But let us get back to the topic money.

Do-It-Yourself Credit Money

When banks can create money out of nothing, why can’t ordinary people perform this miracle? They can. In many countries there is even a legal framework for doing so. This personal money is called a negotiable instrument and comes in two primary types: Promissory Notes and Bills of Exchange.

A Bill of Exchange is what is commonly called cheque, a written order to one’s bank to pay a specific sum to someone, and when the payee is unspecified respectively specified as the bearer, a cheque is like a bank note representing newly created credit money as long as it is not presented to the bank. If you want, you could print a truckload of nicely looking cheques of different denominations and circulate them.

A promissory note is very similar, except there is not necessarily a bank involved. A promissory note is an unconditional promise of payment of a specific sum. There are also numerous different types of promissory notes, and paper currency is basically a bearer negotiable promissory note or sola bill when the promising party and the party the note is presented to are the same.

Such promissory notes however are not what is called legal tender, which is by law a payment that can not be refused to settle debt. Most jurisdictions are quite protective about using other money than legal tender, and for example outlaw the use of foreign currencies and alternative currencies, or heavily regulate the use of negotiable instruments.

However, in Scotland for example there currently is no specific legal tender. The british 1£-Note is the only legal tender by law, but since it was taken out of circulation in 1988, there is no legal tender any more. But this does not seem to be a problem because scottish law says that “anything reasonable” must be accepted to settle a debt.
 

In practice however, five scottish banks print their own bank notes, which are just bearer negotiable demand promissory notes. These notes are accepted everywhere in Scotland, but you may have problems to pay with them in London, or get them exchanged back at home into your local currency. You may however present them at the issuing bank and exchange them for the amount of British Pound Sterling printed on the note. This is at least what the text on these bank notes says: “CLYDESDALE BANK PLC – PROMISE TO PAY THE BEARER ON DEMAND AT THEIR OFFICE HERE TEN POUNDS STERLING” – “BY ORDER OF THE BOARD OF DIRECTORS”, signed CHIEF OPERATING OFFICER.

 So here is an example of my personal bearer negotiable promissory note:

This would be real money when I would sign it by hand, and to my surprise and best knowledge, according to german law it seems to be even legal and enforceable, although such a paper issued by a private person is supposed to be illegal in many jurisdictions. (However, as a formality “payable to the bearer” must be noted on the back side). By German law, this note is also only valid for three years from the date it is issued. Now, by printing and signing a truckload of these promissory notes, I could effectively increase the money supply on my own. The only problem is that this is not legal tender in Germany, so no one has to accept it is as payment, and I would not be able to pay taxes with this money. However, if enough people would trust in it and accept it as payment, this should work quite well, and they could even present it in court to get their money when I would refuse to pay. The picture of me btw. is totally superfluous, but it might help to build trust, and it makes it look more like a bank note.

However, it just references the Euro as currency, so it is a kind of “proxy”, and its value is exactly one Euro. It might be worth even less than one Euro when people would factor in the credit risk, but I could even make up for that by promising on the note interest to be paid; this is also covered by the law.

 Now, what about this Note?

First of all, instead of my grinning face it has a picture of my daughters cat sitting on my brothers laptop on it, which looks really cute, but that is not the point.
Legally it is not a promissory note because it does not properly specify the amount of money to be paid: “One Fnord” is nothing a court would be able to make any sense of. However, when people would decide that this note for whatever reason has some value, they could use it as money. But in order to build trust for my new Fnord currency, I have a lot more options beside putting a cute cat on the note.

First of all, I could set up a business where people can pay with Fnords, getting something of real value in exchange, organic cat food for example.

Second, I could set up a currency trading exchange where people can post offers to buy and and sell amounts of Fnords for a whatever price in Euros they want; I would just pocket a small fee for every transaction.

Third, I could open up the Cute Kitten Reserve Bank, printing a whole range of notes with cute kitten on it, with different useful denominations. People could also make Fnord loans there against collateral, or deposit Fnords and receive interest.

Fourth, to maintain the value and a good exchange rate, I could publish and enact a responsible monetary policy for the Fnord. I would be careful to not to circulate more Fnords than there is demand for, and the Cute Kitten Reserve Bank would open up a Euro account in a normal bank, maintaining some foreign currency Euro reserves, and daily publish the amount of euro reserves and the amount of Fnords in circulation on the Cute Kitten Reserve Bank’s website.

I could also throw in my personal twenty ounces of gold reserves I own and promise not to touch or sell them except in case of a monetary crisis. Note that I would refrain from promising people gold in exchange for Fnords, that would be too easy and old fashioned.

And fifth, I could allow merchants to act as Commercial Fnord Banks, maintaining private Fnord accounts for their customers, and make Fnord loans. Of course they would have to deposit a fraction of their customers deposits at the Cute Kitten Reserve Bank.

On the side, I could mint small denomination Fnord coins with cute kitten on it, and pocket the money as seignorage.

Finally I could apply for membership in the International Monetary Fund, depositing Fnords, some of my Euros and a few ounces of Gold there, and get Special Drawing Rights in exchange that I could use to stabilize my Fnord currency in case I get under pressure from evil Hedge Fonds or Carry Traders who engage in speculation against the Fnord, or in case cat lovers flee out of the Fnord because of unsubstantiated rumors about me mistreating our cats.

Looks like a lot of work to establish a new state of the art currency, but it could be done, except probably the IMF membership. And a large corporation or bank could easily establish a new currency. However, there is no good reason to do this, except maybe having notes with cute kitten on it.

Multiple currencies within the same jurisdiction are an unpleasant thing. They change their value against each other, merchants need different kinds of cash and must put multiple price tags on their goods. But the main problem is that smaller currencies will easier come under pressure, causing bank runs and heavy inflation when people move from one currency to another.

And this is not just a theory; in the past, in many countries there was exactly this situation, and in the United States there was the so called “Free Banking Era” between 1837 and 1862, where about thousand different banks issued all their own bank notes, and some of them engaged in so called Wildcat Banking. These banks were located in remote areas to make it difficult to redeem the notes against gold or silver. And although the bank notes were supposed be be backed by gold and silver, many notes did not trade at face value because of the logistics involved. Another problem was that the average lifetime of a bank was just five years, and more than a few bank owners screwed the depositors and ran away with the gold before people could redeem their notes.

However, this “Free Banking Era” was not what is really considered as “free banking” by the proponents because the banks still had been regulated by the individual states, and the currency was just representative money backed by specie (Gold and Silver coins). The experience with free banking seems to be generally negative, with the possible exception of Sweden. With free banking, banks are are businesses like any other, without monetary authority, reserve requirement and legal tender, and everyone is allowed to run a bank without special licensing.

Having multiple currencies in one country is like having a 19th century isolated and heterogenous electrical power system with different voltages, plugs and even direct current instead of alternating current in different cities. You were not be able to use light bulbs, electrical appliances or machines in another city, and had to endure long lasting power failures when the local power plant broke down or ran out of fuel.

A central banking system is a bit similar to a national power grid. It makes the power supply more stable and helps to balance load, but when it fails, much larger areas will be affected.

Money Summarized

Money today is credit money, created out of nothing by simultaneously creating the same amount of debt. Money and debt are a product of trust, and money is a unit of account for trust. The government and the state is technically not behind the money, and does not and can not create money. Money is backed by debt, so while technically the government is not behind the money, the value of money is in multiple ways dependent on the government. First of all, governments are very large debtors, normally the largest single identifiable debtor, so when the trust into the government to meet its obligations is weakened, the trust into money is substantially weakened. This alone is able to play havoc with a currency. But there is even more: The government defines the policy of the monetary authority which controls the money supply. And finally, the government enacts legislation that regulates and monopolizes the sort of money that is used by declaring it fiat money and legal tender, effectively banning alternative currencies, which must be considered a good thing as long as the government acts responsibly on the first two issues, being a reliable debtor, and enacting a good monetary policy.

However, when the government fails on these issues, the result is hyperinflation and domestic credit money becomes unsustainable. People then fall back to use a foreign currency and commodity money. Both alternatives pose problems for the domestic economy: Using a foreign currency in such a situation typically results in a way too small money supply, and the use of commodity money just is not up to the task sustaining a modern economy.

Outlook

All those new financial instruments are very clever and useful inventions, like nuclear power plants, but the risks involved, the lack of regulation and the amount of greed, stupidity and hubris in the financial world brought our financial system to the brink of collapse.

What makes the situation especially unpleasant is that our financial system has become dependent on these new financial instruments, and with many of these instruments discredited and inoperable, the financial system in triple jeopardy: Fixing the problems these instruments caused, operating without these instruments, and developing new instruments in a climate when everything new or innovative in this field will be treated with extreme suspicion.

Our financial system is in a state of regression, falling back to old tools and old methods of direct government intervention, which is going to cause new problems on its own. Direct government intervention is inefficient and wasteful, and the decision makers are usually personally isolated from the consequences of their decisions. It is not their own money that is at risk, and in this respect the government decision makers are not much different from the many investment bankers that were playing with other peoples money. The incentive structure however is different, and becoming a politician who decides about billions does not require any specific qualification or even rudimentary economic knowledge at all. And when talking about more regulation, which is absolutely necessary, people often forget that more regulation also means more bureaucracy, which in general does not help to accelerate things.

Under the “metal theory of money” this crisis should be over as soon as the markets will have completed the deflation of the asset bubbles and the losses are written off, but our money and our financial system are not directly based on assets like houses, estate, factories, machines, licenses, commodities, raw materials, weapons, energy and manpower.  

Otherwise the only events that should cause real economic problems would be natural disasters, crop failures, overpopulation, nuclear accidents, plagues, wars, ecological disasters or the depletion of natural resources. The latter three may have contributed to the current crisis, as we probably have reached peak oil at the time the crisis began, and the wars in Iraq and Afghanistan did cost some serious money.

But in a world of credit money, with the exception of energy supply, assets do not really matter economically that much, and we live in a credit world for more than hundred years. Take Germany’s economic recovery after the loss of WWII. Unimaginable amounts of resources have been wasted in the war, a lot of infrastructure has been destroyed, large parts of the territory lost, but as soon as confidence into the future was restored, there was a huge economic growth that turned Germany into the third largest economy in the world. The first world countries also have decades ago crossed the point where covering the basic needs of their population poses any problems for the economy. In Germany, Europe’s largest producer of agricultural products they contribute less than 1% to the GDP.

The current crisis is a crisis of trust, and because we live in a world of credit money, our economy is mainly based on trust. Unfortunately many participants of the global financial system have made poor decisions that made them less trustworthy.

Without trust, the whole machinery started to deconstruct itself faster than most could cope with, and the strain on some components became too severe, with the threat of cascading failures. If the governments would not have come out to stabilize the whole thing, we might be living of food stamps by now.

Despite cracks and casual implosions, the system did not collapse yet, but the danger of collapse is still imminent, although the situation has stabilized a bit. In April 2009 we may possibly still not have reached the bottom, but since March 2009 DAX and Dow Jones are climbing for a month now, and crude oil is also on the rise for two months.

The DOW is already below its 2002 low, but the DAX is still above its 2003 low. When the "new economy" bubble did burst in 2000, it took two years to reach the bottom, and one year at the bottom before the stock markets began to recover. Right now we are just one and a half year on the way down, but this does not mean anything. No one can claim to know what will happen in the next years. The consequences of the failures of the new financial instruments are not well understood, and there is still no transparency in the whole market. No one really knows how much he has lost yet.

The outlook is still grim, but there might be also a positive effect of some of the new financial instruments. The markets have become more volatile, so we could get to the bottom faster, and recover faster. And on the plus side, the oil price has fallen by 60%.

But this is not the most probable outcome. Overshadowed by the current financial crisis, we probably ran into another oil crisis, that was stopped by the financial crisis.
The financial crisis can be overcome with time and moderate effort, but the next oil crisis is already lingering on the horizon, and this problem requires substantially more effort to solve. And we still have the global warming, deforestation, overfishing, pollution, population growth in some countries, and unfavorable population pyramids in many countries. These fundamental problems are not only unsolved, they are worsening.

So we will definitely see a really bad crisis at some point in the 21st century that will dwarf everything we have seen since WW2, but we don’t know exactly when this will happen, but it will happen within a lifetime, very probably between 2030 and 2040. Currently the world population still grows exponentially, but every possible model predicts that we will have at maximum a linear growth in the next decades, with a much higher probability that the curve will turn to logarithmic growth or even decline. Now, when the curve changes, this will not happen because of a voluntary decision of the people, it will be due to famine, plague and war.

The other fundamental problem is the energy crisis. Without a substitute for oil, gas and coal up to 90% of the world population will die when we run out of it. We just won’t have enough energy to feed and shelter more than a billion people in the world. Oil, coal and gas account for 85% of our global energy supply. While coal will last for another 150 years at current consumption, at least 50% of the oil and gas consumption need to be substituted by 2050. This will cost some serious money, no matter what will be chosen as substitute. But it is affordable, it will cost us just in the order of one year’s world GDP to achieve that, so if the world dedicates annually 5% of its GDP to this cause, it should be done within 20 years. However, this would mean that the U.S. alone will have to invest $700 billion every year into energy supply change.

It is all a matter of timing. Starting too early will make it expensive, starting too late will be a disaster for the latecomers because all the money needed to make the change will be siphoned away from them by a high oil price. At $50 per barrel, the U.S. consume $365 Billion worth of oil per year, and the oil price is expected to reach $200 in a few years after the current crisis is over.

So is the current crisis just the popping of a virtual bubble caused by greed and stupidity, or do we actually start to feel the "Limits to Growth", approaching a possible Malthusian catastrophe?

Just looking at the numbers of consumption and reserves, judgement day is still a couple of decades in the future. The current crisis even might be godsend by acting as a reminder that the hunt for money is not the purpose of human existence.

And money is no substitution for trust. Money is a product of trust, and to cite WP: "Trust is a relationship of reliance. A trusted party is presumed to seek to fulfill policies, ethical codes, law and their previous promises."

In our complex world, we have to live with incomplete information about almost everything, and trust is the state of mind that allows us to overcome this problem and act with confidence despite incomplete information and comprehension.

It takes just two seconds to destroy trust, but many years to build it. That is the most unpleasant fact in the current situation. It will take time to rebuild trust, and trust will not come back just by sitting there and waiting for a better time.

Currently people turn to their governments, but the governments around the world are also to blame for the current crisis, with the U.S. government being the economic opinion leader in the world for decades.

The United States are still the most powerful economy and can change faster than many other countries in the world, but from a european point of view, they are a cruel society that ignores poverty, practices the death penalty and has more people locked up in prisons than any other country in the world. And thanks to eight years of Bush Administration, the United States are close to morally bankrupt and did lose a lot of authority in the world. What however speaks for the american people is that they too regarded Bush as the second most unpopular president in history when he left the white house, only surpassed by Richard Nixon.   
It is unclear how that might affect the U.S. and the world economy. Money and morale are known to be different things, and countries also do not exist by moral codes.

On the other hand, this crisis has proven that the world has become a small planet, and everything is linked by the flow of money and debt.
The dilemma we all now face is, that in times of scarce money, those who have it become even more powerful, and it is a good idea for every person or business to keep money to itself. For all of us and the economy this is a disaster.

So the only solution I can see is that the society in form of the governments will strongly motivate people to spend and invest their money. There is an easy way how this can be done. The one thing that people hate most when it comes to money is to pay taxes, so when you give people the choice to either pay taxes or invest the money, they will happily invest it and even borrow money and spend much more than they save on taxes, even making totally unsound and risky investments. And this way the government still leaves some control and the execution to the individual, instead of collecting and distributing itself, which is always a problem.
So what are useful investment the government should subsidize by specific tax reduction and deduction?

There are many useful things that can be done, but my list looks like follows:

• Forestry: Planting and growing trees is a long term investment (20-100 years), but you get energy, oxygen, building material, soil, water, a better climate, recreation space and good karma from growing trees, and most of the time you can leave the trees unattended, they know how to grow by themselves
• Education: Also a long term investment, but possibly the next best thing to trees. Invest money into schools, teachers, universities and facilitate life long education.
• Sustainable Energy Supply: The transition will be unavoidable, and there are already many useful things that will even give you a good return on investment: Energy saving cars, houses, house appliances, solar heating and power generation, wind power, water power, biofuels and energy saving in production, just to mention a few.
• Information Society Development: The future economy will be an economy based on efficient information processing. This does not only include technology, it is about new businesses, services, administration and new ways of life. If we want to stay a first world country, we must not only make sure everyone has access to information technology and can master it, but also make sure political and economic decisions are driven by it. This can be mitigated by free and open access to as much information and tools as possible, on all levels of government, educational institutions and businesses. Wikipedia is a primary example, but there should be also practically free access to digital libraries containing all books of the world, all TV programming, all teaching material of schools and universities, and all research results paid for with public money, and all kinds of work of art. To make that possible, in some cases new remuneration schemes for those producing and making this works accessible should be subsidized.
• Housing: Yes, even after the housing bubble, there is always need for new houses, especially in the U.S., where many houses are not very durable so every year over a million houses must be replaced; think about making them longer lasting and more energy efficient, and put some policies on urban development in place so people can live closer to their workplace, shops, schools and other places they need to go to.
• Water Supply: No water, no life.
• Transportation Infrastructure: A good transportation infrastructure pays for itself, and people also understand that it is a good thing because they benefit directly.
• Recycling – Instead of creating landfill, most of the raw materials from properly designed products can be reused, helping to preserve limited natural resources

And finally some stuff the government should not subsidize or where it should reduce spending:

• Military: I am a proponent of having adequate military forces, I believe that every country should be able to defend itself. However, the U.S. military spending accounts for 50% of the worlds military spending; this would make only sense if the U.S. would be planning against an invasion from outer space, or for a military conquest of the whole world. Some military is needed, but the current status is ridiculous. If you drop U.S. military spending to 40% of the current budget, the U.S. will still be spending more than the European Union. And if everyone drops military spending to a necessary minimum, we all profit. Arms control works.
• Intelligence: All the fifteen intelligence services were not able to prevent 9/11, and they also did not prevent a criminal like George W. Bush to cause much more political, financial and geo-strategic damage to the United States than any foreign service or conspiracy could have ever achieved. All this money and brainpower could have been put to much better uses. Secret Services are mostly useless and harmful. If China, Russia, Israel or Pakistan would chose to nuke New York, the services would not be able to prevent it; right now the only thing they are capable of doing is to give some groups a reason to nuke U.S. cities.
• Nuclear Power: It might be tempting to solve our energy problems using nuclear power, but we will run out of Uranium in 70 years without breeder reactors, and breeders are expensive and dangerous. Nuclear power is useful in the outer solar system where there is insufficient radiation energy from the sun, be we don’t need it on earth, except for submarines and aircraft carriers. The main reason why countries like nuclear power is to be able to build "the Bomb" in case they need it. Germany and Japan for instance could have a bomb production factory up and running within 30 days if they would choose to do so.
• Incompetitive established Industries: Especially those industries where excessive world wide over-capacities exist like in car manufacturing should either survive on their own or vanish from the market. However, tariffs should be introduced for all imported products that are not produced under sufficient social and ecological standards.

Remark

This was only a small excerpt from the whole paper, which continues to discuss some alternative economic systems, how justice can be done, the question of a world goverment and what the world in 2050 in expected to look like.