Tuesday, 19 January 2010

The demand for growth

I just came across this piece I wrote back in October 2008 but never published. A little dated, but still relevant.

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As the financial crisis deepens, it is becoming a political crisis, a leadership crisis, and a global crisis of trust. Our economy has become disconnected from the creation and exchange of real value, and suddenly the ground that appeared so solid is shifting beneath our feet.

I believe that the roots of this crisis are very deep, and also very simple: our economic system demands exponential growth, and yet we live on a finite planet. The necessity of growth is hardwired into our monetary system, and when that growth falters the system comes under incredible strain.

We base our monetary system on these two premises:

  1. Money is loaned into existence by banks

  2. Loans must be repaid with interest


These premises are simple, yet when thoroughly understood they are extremely unsettling, for they clearly describe a system out of touch with reality, a system that simply cannot continue indefinitely.

The process of paying interest on loans is common knowledge. What is less well understood is that the money that we have been loaned is created by the bank at the moment that we borrow it. The implications of this are profound. Because money is created through loans, and loans must be repaid with interest, there is always more debt than there is money. The only way that debts can be repaid is if the supply of money is continually growing. Yet that means total debt is also continuously growing.

Although it has been unjust from the beginning, for generations this basic system has worked to grow our collective wealth. But now it is now under severe strain, and may be on the verge of failure. For generations, the money loaned into existence was invested to create real wealth. Because it generated real wealth, the loans could be repaid. But in a world of depleting resources, it becomes much more difficult to create real wealth, and more lucrative to invest in speculative enterprises based on perceptions. Houses that are assumed to increase in price forever are one such speculative investment. And because real value creation is waning, this speculation has become a cornerstone of our economy.

And now, the reality is dawning that we have invested massively into schemes that have not provided us with things of real value. Our houses are basically the same structures they were 10 years ago. The idea that they have doubled or tripled (or more) in value is proving to be an illusion. And our financial systems are buckling as the reality of our situation sets in.

The housing bubble may be the unfortunate basis of the unfolding meltdown, but the roots of our problem go much deeper than that. We have a money system that demands perpetual growth, and we live on a finite planet. We are seeing the collision between these two irreconcilable realities, and as vast and powerful as our market economy is, we are about to learn that the limits of nature cannot be overcome, and we ignore them at our own peril.

If this analysis is correct, then our political and financial leaders will be unable to stave off this crisis indefinitely, no matter how many trillions are pumped into the economy. This financial breakdown will affect us all, and we will all be called on to discover the strength, courage, and generosity to help ourselves and our communities find a way through the challenges we face.