Let’s talk about debt and the economy

Like a bad recurring dream, we in the US are once again talking about the “debt ceiling”.

The discussion about public debt is often buttressed by two misconceptions about the economy I would like to dispel.

The first has to do with the government being constrained like a family by its budget and having to spend no more than it brings in.

The second has to do with government debt and how important it is to reduce it.

Both concepts reveal a complete ignorance of basic macroeconomics and make possible the abomination of “austerity” – a brutal and counterproductive economic policy.

An interview about the next economy

Santa Cruz Permaculture recently interviewed Marco Vangelisti, who has a background in finance and investment management and was a founding member of Slow Money. He is a 100% impact investor and helps communities increase their capacity for local investing. Marco’s workshop is titled “Essential Knowledge for Transition: Understanding the economy, money and investing and how to transform them for a regenerative world” and will take place February 23-24.

Our interview began by acknowledging the fact that some people think economics is just plain boring. Others find it confusing, or overwhelming because while they know it has direct effects on their lives, how it functions and the various forces at play can seem complicated and beyond our control, and that can cause anxiety. Why is this, and how do we overcome the inertia around understanding economics so that we can actually transform our current systems for a regenerative world?

SC Permaculture: For many people, the concept of “economics” is either boring or frightening orboth. What drew you to economics and finance, and what keeps you interested in this work?


Marco: The economy and the logic of the market have permeated every aspect of our lives and the way we interact with each other to meet our daily needs, yet most people feel unable to or uninterested in understanding how the economy works. 

Part of the problem is the way economics has been taught in school in the U.S. in the last forty years. Case in point–I came to the U.S. after studying math in Italy and attended economics classes as UC Berkeley. Economics as taught in college had taken a quantitative turn and my math skills were very useful. Only after the financial crisis of 2018 I finally understood that the assumptions required to “quantify” economics and apply to it the mathematical apparatus rendered it not only inaccessible to the regular public but also irrelevant for understanding how the actual economy worked. 

It turns out that understanding how the economy works not only does not require understanding economics (especially the current hegemonic strain of neo-classical economics) but it is actually accessible to anyone with a basic level of education and curiosity. 

Economic decisions made by the financial and economic elites in this country, without our understanding let alone our consent, profoundly affect our lives. To exercise true democracy we need to reach a collective understanding of how the economy actually works and challenge the economic decisions made by the few which affect them many. I see this as the necessary path to bringing about a more just and compassionate society. This is was motivates me to share with regular people my understanding of the economy and of the financial world.

SC Permaculture: You touched on this a little already, but why is understanding money, banking, economics, and finance important for the average person?

Marco: Basically the money and banking system, the economic system, and the financial system act as the operating system of society. The way these systems are currently configured leads to a number of undesirable outcomes like concentration of wealth and power, increased inequality, the housing unaffordability crisis, mounting levels of debt, increasing insecurity of the labor force, environmental degradation. It does not have to be that way! A systemic approach is called for and can be brought about by citizens equipped with a critical understanding of those systems and the more benign alternatives we can to create.

SC Permaculture: How have your years of experience working in finance influenced your current views on money, the economy, and capitalism?

Marco: My 20 years in finance made me understand the extent to which great wealth has been accumulated in the hand of the few through a process of extraction. One of the primary mechanisms of value extraction and expropriation has been finance and investing. Capitalism has been transformed into a form of financial capitalism that has sucked the life out of labor but also out of the old industrial capitalism of the prior century. 

To understand our current economic situation it is also critical to understand the role of banks in the creation of debt and money therefore inflating asset bubbles, creating business cycles (or increasing their magnitude) and the process of expropriation.

SC Permaculture: What is the main problem with our current banking system and what could be the role of public banking in the new economy?

Marco: Our current banking system is based on a private for-profit model which has not served our economy well. A common description found in most of the introductory economic textbooks describe banks as intermediaries that collect excess savings and lend it to expand productive activities in the economy. It turns out that banks create the money they lend and very little of their lending goes to productive activities. Most of their lending now goes to fund acquisition of existing assets – mostly in real estate. This causes asset bubbles and the housing unaffordability crisis experienced by most desirable cities in the U.S. A significant portion of their profit comes from fees and very high credit card interests.

The private banks also rely on government subsidies in the form of FDIC (Federal Deposit Insurance Corporation). As we have seen in the build up to the financial crises of 2007-2008 banks created too much money, lent it recklessly to fuel a massive housing bubble and when the whole edifice of credit collapsed the U.S. Government had to step in and clean up the mess. Banking in a modern economy has become an essential component of the economic infrastructure and the private sector has demonstrated that it cannot be trusted in managing the awesome privilege of creating the money we use every day.

An obvious solution is to turn a large portion of the banking activity into a regulated utility owned by the public through a network of local, state or federal governments. The public banking sector in Germany is considerable and is credited with the post WWII stability and resilience of the German economy. A network of public banks in the U.S. could provide credit where credit is needed (especially to rebuild our failing infrastructure and to support the productive economy), would not fuel financial speculation and asset bubbles, would not engage in usurious practices or unscrupulous lending, and would not be a drain on the economy through ever increasing fees and high interests.

SC Permaculture: Could you briefly describe the mission behind Slow Money? How did it get started and what have been some results of this organization so far?

Marco: Slow Money is a movement that emerged out of the Slow Food movement. It recognizes that our industrial food system and our financial systems are problematic and that a new ethos is called for to address the problem caused by both. 

The idea is to direct some of the personal investments towards the goal of restoring the fertility of the soil in our own foodshed by supporting local farmers and food producers who treat soil and people with respect. The idea is to measure the success of our investments by the world they make possible and not just by the financial return they generate. 

There are currently about 20 local Slow Money groups around the U.S. that have mobilized around $60M of capital to fund more than 600 small family farms and food enterprises.

SC Permaculture: What does impact investing mean? What is one example?

Marco: Impact investing refers to a form of holistic investment that is aware of the non-financial impacts an investment has on communities and ecosystems. Socially responsible investments mostly consists of screening the worst offenders out of a mutual funds of the stock or bonds of publicly traded companies (mostly multinational corporations). Impact investing usually focuses not on publicly traded companies but on funding specific project that try to address a social or environmental problem. 

One example is Community Foods Market (CFM) in West Oakland. West Oakland is currently a food desert and its 28,000 residents don’t have access to a full grocery store where they live. After a decade-long effort, Community Foods Market will open the very first full-service grocery in West Oakland in decades. California residents can invest in the project through the DPO (direct public offering) of CFM shares. This would be a very clear example of an investment that is trying to solve a social problem–in this case eliminating a foods desert in the Bay Area. 

SC Permaculture: In the past decade, you’ve seen changes already taking shape in our economy and society. Can you share a few of your favorite examples of these changes?

Marco: One of the most positive changes I have noticed in the last decade has been the resurgence of worker-owned cooperatives which represent a systemic alternative to capitalism. Unlike most privately owned and all of the publicly owned companies out there, worker-owned cooperatives are democratic institutions bound to other cooperatives by an ethics of collaboration and support instead of competition. 

Another hopeful sign has been the eschewing on the part of many of the Millennials I know of the consumerist fervor that has characterized the American society since the middle of the 20th century. The social enterprise movement has also grown and young people are more likely to dream about building a social enterprise than becoming a CEO of a large multinational corporation. 

SC Permaculture: Thank you so much for sharing your perspectives, Marco! We look forward to seeing you in February.

Learn more with Systems Change and the Next Economy: Regenerative Design for People & the Planet

Join us this February 23-24 in Santa Cruz, CA to spend the weekend learning about all of this and more with Marco Vangelisti! Register online here. Additional information about the Systems Change & The Next Economy course, including dates, workshop titles, and instructor biographies for our January, March, and April workshops, is available at http://santacruzpermaculture.com/economy/ 

The Origin Story of EK4T

What was the impetus for creating Essential Knowledge for Transition?

In 2009 I left the finance industry and embarked on a quest to understand the causes of the financial crisis of 2007-2008. I was also looking for a different set of perspectives so I signed up for a permaculture design class and joined a number of movements including Occupy, Transition Towns, Public Banking, and Slow Money.

What I soon discovered was that the financial crisis was brought about by the collapse of the shadow banking system – the complex chain of financial intermediaries that turned mortgages into progressively more liquid and allegedly safer financial instruments, and that the various movements I had joined were not very familiar with the inner workings of the systems they were trying to change.

The first component of Essential Knowledge for Transition was Economy for Transition. As denizens of a society now profoundly shaped by the logic of the market and the drive towards the progressive commodification of all aspects of our lives and interactions, it is imperative that we understand how the economy works and stop deferring its managements to so-called experts if we want to maintain a working democracy. My initial task was therefore to explain in layman’s terms how the economy worked, and the key design flaws that caused it to operate in the interests of a progressively small fraction of society and at odds with the health of ecosystems and cultural and biological diversity.

As I looked at the economic system more closely, the role of the monetary and banking system came into stark relief. Even though standard economic texts treat money almost as an afterthought, it became clear to me that understanding the process of money creation and credit allocation was key to understanding the economy and especially the fluctuations in the business cycle and the recurring asset bubbles whose implosion cause so much economic suffering and dislocation.

Finally, the last piece of the puzzle was finance and the world of investing. Understanding how the financial system works is even more important now as we move into the late stages of a particularly complex form of financial capitalism (as opposed to the industrial capitalism of the 19th century).

The outcome of my research was a series of three talks – Money: The Invisible Operating System, Beyond Capitalism and Investing for the World We Want.

Here are the links to gain access to the content on money & banking, the economyand the financial system.

You might also enjoy this interview with Prof. Yanis Varoufakis on the importance of democratizing economic knowledge.

Other People’s Money

I recently read Other People’s Money by John Kay – a great book exploring the role of finance in society, the transformation in the sector and society at large brought about by financialization, the structural causes of the financial crisis and ways to reform the financial sector to serve society again rather than itself. 

So, what is finance for?

In the words of John Kay, finance can contribute to society and the economy in four principal ways:

First, the payments system is the means by which we receive wages and salaries, and buy the goods and services we need, as well as enabling business to contribute to these purposes. Second, finance matches lenders with borrowers, helping to direct savings to their most effective uses. Third, finance enables us to manage our personal finances across our lifetimes and between generations. Fourth, finance helps both individuals and businesses to manage the risks inevitably associated with everyday life and economic activity. 

According to Kay, the evolution of finance in the last thirty years has increased the role of trading over relationships through the process of financialization. It has increased the complexity of the sector, increased the risks to the economy and transferred to itself a greater share of national income without improving the quality of the four key services it provides to society. 

Here are a couple of salient paragraphs from the book.    Other People's Money

The finance sector of modern Western economies is too large. It absorbs a disproportionate share of the ablest graduates of our colleges and universities. Its growth has not been matched by corresponding improvements in the provision of services to the non-financial economy – payments systems, capital allocation, risk mitigation and long-term financial security for individuals and households. The process of financialization has created a structure characterized by tight coupling and interactive complexity, and the resulting instability has had damaging effects on the non-financial economy. […]

The belief that the profitability of an activity is a measure of its social legitimacy has not only taken root in the financial sector but has spread its poison throughout the business world. […] There has been a wide failure to distinguish profit generation from wealth creation, or to see the difference between the appropriation of resources and their production, and a willingness to license activities that border on fraud and which sometimes cross that border. Both supporters of the market system and its critics have failed to recognize that the trading floor of the investment bank is not the epitome of the market economy but an excrescence from it. 

I took the liberty to quote two extended paragraphs from John Kay’s book hoping they will provide a motivation for you to pick up a copy of this very insightful and authoritative work.

What are we to do about it?

I am a very big proponent of DIY when it comes to large scale system change. No point in waiting for government action when we can take matters in our own hands and start moving the system in the right direction.

The first thing you should consider is moving all your banking business including your mortgage away from the large four banks and towards a regional bank or a credit union. This would be a no-risk way to support your local economy. While the regional banks and credit unions in the US control about 20% of the deposits in this country they are responsible for more than 50% of local lending.

The other thing you can do is learn the basics of portfolio management and investing (maybe by signing up for my webinar series) and shift some of your personal savings from the opaque and over-intermediated financial system towards your local economy and investments aligned with your personal values. You might want to look for a Slow Money group active in your area and join it to turn local investing into a fun team sport activity!

I am looking forward to supporting you in your quest to align your investments with your values and leave a positive legacy behind.

What Returns Could We Expect from Local Investing?

This is a key question that is often posed when talking about local investing, yet it is impossible to answer in a few words. To answer it properly I will take you on a little journey. First I will challenge the assumptions implicit in the question, then I will explore the meaning of return and finally I will attempt an answer.

First of all we must recognize that when someone asks what returns can one expect from local investing, one usually has some sort of expectation or comparison in mind. Most often the concept of expected return is associated with a particular asset class  – a group of investments that share similar characteristics and risk profile. Examples of asset classes are US stocks, US bonds, international stocks, international bonds, venture capital, real estate, etc., or subsets thereof, for example US small cap stocks, US large cap stocks, US short term bonds, US medium term bonds, US long term bonds, etc. In any case the common assumption is that investments that belong to the same asset class have similar risks, share similar characteristics and therefore have on average similar expected returns.

It is also common to assume that the historical return of an asset class is a reasonable estimate for its expected return going forward. More risky asset classes like venture capital are assumed to have higher expected returns than less risky asset classes like short and medium terms bonds.

In fact, over the last few decades the financial industry and specifically financial advisers and investment consultants seem to have adopted mythical “market rates of return” for the various assets classes which seem to abide by some sort of divine right of capital – a transcendent expectation impervious to the changing world we live in and sometimes even at odds with the actual historical performance of those asset classes. So, venture capital is somehow expected to generate between 15% and 20% return per year, stocks around 8%, real estate between 8% and 10% and so on.

It turns out that the performance of an asset class is very much dependent upon its valuation, its recent performance and the trend in interest rates (we have experienced an unprecedented secular downward trend in interest rates now for a few decades which boosted returns for most asset classes). For example, real estate in the US experienced a bubble in the years leading up to  2007 leaving the asset class overvalued and poised to deliver negative returns over the following few years. Similarly, technology stocks rallied in the late 90s and ended up grossly overvalued by the end of 1999 delivering large losses to investors who bought them at the wrong time.

In 2012 the Kaufmann Foundation ​published a study[1] by based on their 20 year experience investing in venture capital funds which revealed that on average venture capital funds failed to return investors’ capital after fees. This means that rather than delivering between 15% and 20% per year, venture capital funds delivered on average a negative annual return to investors!

I believe this is just the early sign, an omen that the whole world of investing has entered a completely different phase and that the future of investing will bear very little resemblance to that of the past.

Since I left the industry in 2009 I have been on a quest to understand the big picture and the large systems shaping society – the economic system, the global system of finance and the money and banking system.

The key conclusion I reached is that we now have too much investment capital chasing financial returns around the world and that historical returns and return expectations based on historical performance are no longer a valid guide for what we are likely to experience in the next few decades.

Let me explain.

Speaking epigrammatically, investment capital originates as money and money originates through an expansion of the balance sheet of central banks and private banks around the world. Central banks create money when they purchase assets, mostly government debt; the private banking sector creates money when it issues loans[2]. There is theoretically no limit to the amount of money and therefore of investment capital that can be created through this magic of accounting. The world is currently swimming in an unprecedented level of private and public debt and in an unprecedented amount of investment capital – these two facts are manifestations of the same process of money creation[3].

A study[4] published by McKinsey Global Institute in 2011 revealed that the investment capital in bond markets and stock markets worldwide amounted to $212 trillion – about 3 times the global GDP (the sum total of all goods and services produced that year around the world). About 50 years ago, investment capital in world stock and bond markets was about 50% of global GDP. Now, how can we expect this ever increasing amount of investment capital, whose growth has outpaced that of global GDP for more than half a century, to continue growing by generating positive financial returns?

If we use an assumption of expected return of 5% per year, more than $10 trillion would be required to deliver such return. In other words, about 15% of global GDP would be needed to deliver the 5% financial return just for the portion of investment capital invested in global stock and bond markets. Do we really believe this can continue indefinitely? That investment capital will continue to grow more rapidly than global GDP and swallow an ever increasing share of it as “market rate of return” [5]?

One likely scenario is a global balance sheet recession, similar to what Japan has experienced in the last couple of decades, caused by the recognition that large amounts of the global debt outstanding will default or never be repaid. Such contraction in debt outstanding will reverse the process that created money and investment capital in the first place and cause the shrinkage of the global stock of investment capital. In other words, an overall negative return for global investment capital is not only conceivable but in my view probable in the next couple of decades.

There is no denying that global investment capital has overall enjoyed strong financial returns in the last few decades. A recent study commissioned by the UN sheds some light on how those returns were generated, at least in part.

The Economics of Ecosystems and Biodiversity (TEEB) is an UN sponsored global initiative focused on “making nature’s values visible”. In April 2013 TEEB published Natural Capital at Risk: The Top 100 Externalities of Business[6] – a 15-year study conducted by TruCost to identify the world’s largest risk to the natural capital and to quantify in financial terms environmental externalities such as damage from climate change, pollution, land conversion and depletion of natural resources, across business sectors and at a regional level.

The study demonstrates that the profits of high impact business sectors would be wiped out if the costs of environmental damage and unsustainable natural resource used were accounted for. The study showed that in 2009 the global economy used $7.3 trillion worth of unpriced natural capital in the creation of about $70 trillion of total global economic activity (World GDP).

Nature of course does not charge us for the natural resources it built over the millennia – forests, underground aquifers, oil, coal, metals, etc. nor does she charge us for its ecosystem services– water purification, oxygen production, pollination, soil fertility, nutrient cycle regulation, climate regulation, etc. Not only have we humans taken advantage of the ecosystem services provided by nature for free but we have started dismantling the very natural capital that makes those services possible.

The $7.3 trillion worth of unpriced natural capital used by human economic activities in 2009 represents a subsidy to our global economy at the expense of nature’s integrity. We are effectively treating nature as a business in liquidation and converting its very assets into economic activity and financial returns.

While it is impossible to make direct measurements, it is eminently clear that part of the financial returns obtained by investment capital in 2009 were subsidized by the destruction of $7.3 trillion worth of natural capital.

The conversion of natural capital into financial capital has been happening for a very long time but the process has accelerated as the amount of global financial capital has grown exponentially for at least the last half century and with it the pressure to generate financial returns.

We also have to keep in mind that investment capital and more fundamentally the money that created it, is at the end of the day a claim on real things – goods and services created by the economy and other assets whether man-made or natural. Since there is no limit to the amount of money and therefore investment capital that can be created with the disembodied magic of accounting, since we know economic activity and financial returns have been subsidized by the destruction of the natural capital and since we are now experiencing the early signs of the stress our extractive practices have caused to natural systems (climate change, species extinction, pollution, deforestation, etc.) it is logical for us to conclude that the current gargantuan amount of financial capital will not experience going forward the type of financial returns it enjoyed in the last half century and in fact might shrink as the constructed reality of money and finance collides with the physical reality of a diminished biosphere.

Having realized that financial returns going forward, far from being guaranteed by some sort of “divine right of capital” might more aptly be characterized as a chimera, we are now ready to take a closer look at the very concept of “return”.

Most of us[7] don’t invest with the goal of being able to die with the largest possible amount of money and personal property. We invest to have money in order to satisfy our future needs and desires. What we really care about is what money can buy to satisfy our physical and psychological needs. It would be ironic if the investments we make today were undermining the very conditions that make the satisfaction of our future needs possible! Yet, that seems to be our destiny if we don’t expand the concept of return.

An example might help clarify this concept.

Carol Peppe Hewitt in her book “Financing our Foodshed – Growing Local Food with Slow Money” tells the story of the Chatham Marketplace in Pittsboro, NC. Chatham Marketplace is not only a well-established co-op grocery store committed to local sourcing but is also the social gathering place of this small town of 4,000 souls. Carol said that if you lived in Pittsboro and wanted to meet someone, all you had to do was hanging out at the Chatham Market and the person you were looking for would eventually show up.

The Marketplace launched in 2006 and was financed in part by a large loan at nearly 9% interest from an out of state bank.  The $300K balloon payment for the balance of the loan was coming due in 2012 and the bank, reeling from the recent financial crisis, had made it clear it was not going to renew the loan. No one was sure where that money was going to come from and the Marketplace’s future was uncertain. Carol, upon learning of the challenge to this beloved establishment, organized a team of local investors and formed an LLC for the purpose of buying out the loan from the bank and refinancing it at 5%.  By fall of 2011 a group of 16 investors living within 100 miles of the Marketplace had raised $400K, and they bought out the Marketplace’s loan from the out of state bank, a year ahead of its due date.

Net of administrative fees the investors are receiving a 4.5% return. The lower debt servicing costs have also greatly helped the Chatham Marketplace. Moreover the interest payments that used to leave the state are now remaining in the community.

It is important to understand that in this case the “return” to the local investors was much greater than the 4.5% they are getting in interest – without their investment they might have lost a beloved market and a place to gather; they might have also lost access to the locally grown produce and locally crafted food products they enjoyed. The disappearance of the Marketplace could have also caused the demise of a number of the 200+ local food producers in the area that counted on the Chatham Marketplace as an important distribution outlet, with significant negative employment and economic consequences for the local economy.

When we invest in local projects we can experience or understand intuitively the non-financial benefits of our investments – they are tangible to us even though they might not be precisely measurable.

Another example of the opportunity offered to local investors for expanding their concept of investment return is Community Foods Market (CFM) in West Oakland.

West Oakland is a predominantly black neighborhood in the San Francisco Bay Area that has suffered institutional discrimination and neglect for many decades. Polluting industrial facilities have been located there; red-lining policies have starved the community of bank credit for decades; the construction of the Bay Bridge in the 30s eliminated the economic activity generated by the ferry link between West Oakland and San Francisco; the construction of Interstate 880 cut West Oakland off from its downtown and further reduced its economic vitality; and predatory lending practices by large banks in the run up to the real estate bubble about a decade ago further impoverished the community.

The 28,000 residents of West Oakland have access to hundreds of corner liquor stores but not a single full-service grocery store in more than a decade. Brahm Ahmadi, a former resident of West Oakland and a passionate environmental and social justice advocate has taken on the challenge and worked tirelessly for the last decade to build Community Foods Market – a full-service grocery store that would serve and employ people from West Oakland. For about a year he went around the country trying to raise capital from angel investors and venture capitalists and even from “impact investors” with no success. He was offering preferred equity shares that would pay a 3% dividend.

Angel investors and venture capitalists use the following arithmetic when investing. They know that early stage companies are risky and most of them will not succeed. In other words they know that between 6 and 7 out of 10 of their investments will result in a complete loss. One or two will do okay and return the capital and possibly a modest return, while one or two will be big winners and return 5 to 10 times their capital compensating them for the losses incurred in the majority of their portfolio. When they invest they therefore look exclusively for companies that have the potential for rapid growth and for delivering 5 to 10 times the original capital (therefore a return between 500% and 1000%) in a few years. On a portfolio level they therefore expect to make between 10% and 20% annualized[8].

When angel investors and venture capitalists, and even so called “impact investors” looked at the CFM investment through the narrow lens of conventional finance they made the following assessment – this venture, as any early stage pre-revenue enterprise has at least a 50-50 chance to fail therefore generating a -100% return. If it succeeds it will return 3%. The expected return for this investment would therefore be  R = 50% * (-100%) + 50% * (3%) = – 48.5%. In other words, rather than the usual expectation that the investment might provide on average a return between 10% and 20% once adjusted for the risk of failing, this particular investment had a negative expected risk-adjusted return. No investor motivated exclusively by the prospect of financial returns would take on equity risk in a start-up company for the prospect of a 3% return if the company succeeds.

That’s why Brahm decided to register the security with the state of California through a DPO (Direct Public Offering) and offer it to the local community. The investment is a preferred equity stock offering 3% cash dividend but also a 1% in-kind dividend as a store credit once the grocery opens. Beyond these dividends, for local investors the non-financial benefits of having a full-service grocery store are very real and tangible. I am also an investor and, although I don’t live in West Oakland, I find it unacceptable having a food desert just a few miles from my house, in the middle of the food abundance of the San Francisco Bay Area.

Are we going to condemn all great projects like Community Foods Market that attempt to solve a social or environmental challenge but don’t provide sufficient financial returns to investors to the dust bin of great ideas that will never be realized? Or are we going to expand our idea of return so that we can build together the world we want to live in?

Local investing, by making tangible the non-financial returns and benefits of a business or project, offers the possibility of escaping the straightjacket of conventional finance and helping us remember that we invest to eventually enjoy the goods and services money affords us. Money is just a means to a greater end and investing itself can become a greater end than just accumulating financial capital.

Now we are at the end of our journey and able to provide an answer to the original question.

If we are talking strictly about financial returns, the original question is simply unanswerable since local investing is not an asset class. Local investing is very idiosyncratic and spans a very large and creative range of possible investments that do not share common risks and characteristics. A 3-year collateralized loan to an established bakery looking to upgrade its bread mixer is a completely different investment than an equity position in a local start-up creating a new nanotechnology-based coating to improve the efficiency of solar panels. A two-year loan to an established CSA with interests paid in the form of a monthly box of produce is completely different than a royalty loan to a compost company still in the prototype stage. Therefore it is not possible to talk about expected financial returns for local investing in general terms.

What we can say is that a community can unlock the benefits of local investing only if its local investors are able to transcend the straightjacket of strictly financial considerations and appreciate the rewards local investing offers in terms of local economic vitality and community health. Odessa Piper[9] said “local is the distance the heart can travel.” Within that distance the promise of local investing has the opportunity to blossom.

[1]We have met the enemy…and he is us – Lessons from Twenty Years of the Kauffman Foundation’s Investments in Venture Capital Funds and The Triumph of Hope over Experience” May 2012 by Ewing Marion (Kauffman Foundation)

[2] As this bulletin of the Bank of England states “…the majority of money in the modern economy is created by commercial banks making loans”

[3] More information on this topic can be found on my website

[4] Mapping Global Capital Markets 2011 – by Charles Roxburgh, Susan Lund and John Piotrowski (August 2011)

[5] Prof. Thomas Picketty, author of “Capital in the Twenty-First Century” certainly does not think so.

[6] Natural Capital at Risk: The Top 100 Externalities of Business

[7] A minority of the US population, mostly among the wealthy, is engaged in the positional game whereby a 50’ yacht becomes a liability as soon as a neighbor shows up with a 70’ yacht. Someone trapped in the positional game, will unfortunately never experience “enough” and will behave as if his/her ultimate life goal is to die with the largest possible amount of money and property.

[8] Let’s imagine 6 out of ten of their investments failed therefore generating a -100% return, two just returned the capital therefore generating 0% return and two were big successes, one generating 5 times and the other 10 times the capital invested within 5 years. The total portfolio return over five years would be R = 0.6 * (-100%) + 0.2 * (0%) + 0.1 * (500%) + 0.1 * (1000%) = 90%. In other words the investment portfolio almost doubled in 5 years for a (simple) annual return of 18% per year.

[9] http://en.wikipedia.org/wiki/Odessa_Piper