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Debt Compels Growth---Why the Numbers are Stacked Against Steady-State Policies

"If the American people ever allow private banks to control the issue of their currency, first by inflation, then by deflation, the banks and the corporations that will grow up around the banks will deprive the people of all property until their children wake-up homeless on the continent their fathers conquered." Thomas Jefferson

Lesson number one, Economics 101:

Credit institutions make a living by charging interest on the money they lend you. It is not a gift---they lend it. And they want it back one day. But in the meantime you must pay a sum of money to rent it. How do you keep up your interest payments and pay back your balance-owing? By earning income. You get income from working for it, or you let your assets do your working for you and use the interest or rent they earn to pay off your loan.

How do you work for that income? You have a job, and jobs are less secure in a shrinking economy, as is rental, pension or other investment income. The return on stocks, bonds and other investment instruments require the same economic momentum that banks require to see their loans repaid. The vast majority of us are all, to one degree or another, “hooked” on growth. The growth-economy is like a dog forever chasing its tail, and with so many caught in the cycle, the growth lobby will always be irresistible. How many politicians will dare to retract the economy in the name of resource limits or ecological barriers that their advisors, the high priests of classic economics, will not acknowledge? No wonder the medieval church identified usury as a cardinal sin, the agent that could unravel a stable society where even merchants did not venture much beyond their accorded place.

Economic growth relies on debt to push all the players in a market economy toward behaviour that encourages growth. Debt after all, is essentially a claim made against future economic growth. No debt, no growth, and no income or durable assets to generate the income to service that debt. But is most important, the greater the debt, the greater the pressure to stimulate more growth. That being the case, you are invited to review a snapshot of the US economy, as it stood on Saturday, October 10th, 2009, almost a year go, at approximately 3:15 PM PDT. The figures were as they appeared on the “Debt Clock”, and in the instant the numbers were recorded, greater numbers replaced them with terrifying rapidity. A glance at the Debt Clock a day or even an hour after you last looked at it would make the data look quite dated.

Take a look at this:

GDP per person $34, 764
Debt per person $38,802

GDP per worker $ 76,792
Debt per taxpayer $118,000 (changing too quickly to record)

Private debt per person $54,247
Personal savings per adult $ 1, 996

Liabilities per citizen $349,180
Assets per citizen $237,178

In round numbers, these were the expenditures in 2008-9:

Military $618 billion
Social Security $499 billion
Subsidies $ 51 billion
Medicare/Medicaid $643 billion
Interest on the debt $369 billion
Sub-total appox. $ 2.5 trillion

Government bailouts $11.5 trillion

Little more than 11 months later, the Debt Clock has climbed about $2 trillion to $13.39 trillion at the end of August, and about $5 trillion more than it was five years ago. At this pace, the federal government will require $2 trillion in 2020 just to pay the interest. Since September 28, 2007 the national debt has grown by an average of $4.11 billion per day, and the per capita share of this debt has risen by $5330 from October 10th of 2009 to $43,332.28 as of August 31st, 2010. To this add $8100 of consumer debt per person, exclusive of debt secured by falling real estate assets, while credit card charges average $11,300 per cardholder. Some 13% of disposable income in America is now being spent on servicing mortgage obligations and consumer debt. No wonder one in four children rely on food stamps to survive.

Of course, debt burdens can be measured in several different ways, and the promise of continuing growth can be recruited to assuage undue concern. But debt to GDP ratios of greater than 90% or total external debt to GDP ratios over 60% can be cause for alarm.
When the world’s supreme economy cannot generate enough income to cover its debt obligations, it will be like a vortex that sucks the global economy down with it. The trillions thrown at consumers to ‘fix’ a system that is not broken but fatally flawed will not suffice in the long run to rescue it from the body-blow of rising fuel prices. And the kind of money needed to shift to renewable energy solutions dwarfs what has been spent or can ever be spent in the coming decade. The US government has shot its bolt, thrown most of the chips on the table. Expanding the money supply will be the last fatal gambit. It is through hyperinflation that interest on debt payments can be diminished when growth hits the brick wall of resource shortages. Expect foreign debt holders, currently clutching about $4 trillion in IOUs, to one day pull the plug completely, and then the real free-fall will begin in earnest. In retrospect, the current “downturn” will look like a peak, and the hope riding on this fake recovery will be likened to the brief relief Titanic passengers felt when the ship broke in two and for a short while leveled off.

Whatever fiscal rabbits they pull out of the hat, the brutal fact remains. Ours is an economy predicated on growth, but growth ultimately does not rely on imaginary wealth, but upon the supply of cheap energy, productive soil, accessible and abundant water and a resilient natural environment. Our economic system is locked into a fatal contradiction. While money grows remorselessly and exponentially by the rule of compound interest, the physical economy does not. As Dr. M. King Hubbert observed, “A reasonable co-existence between the monetary and physical systems is possible when both are growing at approximately the same rate. (That) has been happening since the industrial revolution but it is soon going to end because the amount the matter-energy system can grow is limited while money’s growth is not.” Real growth cannot keep pace with phantom growth because it will eventually collide with geologically imposed limits. Even liberals and socialists can’t win an argument with the laws of physics, so neither Keynesian prime-pumping nor a radical reversal of the Republican legacy of socialism for the rich will spare us of this fatal reckoning. If class barriers on the Titanic had been eliminated there still would have been a shortage of lifeboats.

This is not a liquidity crisis that can be avoided by printing more money or keeping interest rates on the floor, because real wealth does not come out of a printing press. Instead it must ultimately derive from the use of energy to transform physical objects subject to the laws of entropy. Nate Hagens, the editor of “Oil Drum” put it plainly, “If you go from using a 20-1 energy return fuel down to a 3-1 fuel, economic collapse is guaranteed.”

As the Romans discovered in the last century of their crumbling empire, money is a fiction, not an elixir. People will stop believing in it when they come face to face with a reality that can’t be fooled by confidence tricks and greenwash. When that realization hits, my hope is that they will look for scapegoats, and find them in the financial industry, the universities, the think tanks, the journalism schools, parliament, the media, and last but not least, the offices of environmental NGOs who have accepted donations from banks in return for their accommodation to growth. The promotion of debt must be regarded as a white collar crime of epic proportions which flourishes by custom and want of scrutiny. While Jefferson was right about banks being more dangerous to our liberties than standing armies, their silent partners and witnesses must be held equally accountable. Let them be hung from the lamp-posts as Mussolini was, like a slab of meat on a hook in an abattoir, as befits liars and collaborators. With apologies to Diderot, I would not rest content until the last politician or banker is strangled by the entrails of the last environmentalist on the take---too busy sucking on corporate tits to alert us to the perils ahead, trying to “manage” growth rather than stop it.

Tim Murray
September 2, 2010

Comments

In seeming contradiction to the title of this excellent article, I don't think there are any compelling reasons for humanity to allow a situation which is clearly as harmful to its survival as the interest-driven 'growth' Ponzi economy to persist, except that our society is not run for the benefit of the majority of its members. Our global society is run for the benefit of a small minority who have calculated that they can profit in the short term by allowing a situation that threatens the natural world and, hence, humankind to persist. This could be rectified if we were to re-establish true representative democracy across the globe.

Bulls-eye!

For a very compelling summary of the nature of money and debt and the financial system's dependence upon ongoing growth see:

The Google video Money as Debt

An updated version of the original video is now available at:

www.moneyasdebt.net

They also have a new film out canvassing the topic in context to the recent GFC.
I haven't seen either of these two newer films yet. I can't find them anywhere online. I'll have to order copies.

On the subject of unsustainable growth schemes, I hear the government constantly harping on "skills shortage" and the need for "skilled migrants". This doesn't make too much sense, for a number of reasons. Then it occurred to me that "skilled" is actually a code for "wealthy".

The Australian economy has apparently become dependent on a constant influx of cashed-up newcomers injecting money into Australia, and more importantly buying houses, thereby pushing up housing prices and keeping the building industry busy. Is this how we avoided the global recession? Maybe in part, but it really is unsustainable long term.

Quite right CSI, the wealthy foreigners taking their place in Australia is the prime driver of demand inflation - costs of living, housing prices, government budget stress by snowballing demands on public infrastructure and services - health, housing, education, transport, childcare, electricity, water, you name it. The stress is in Australia's capital cities where the migrants settle. And migrant-aligned LibLabs pour billions of our taxes into the capital cities (tollways, desal plants, etc) while ignoring traditional Australia in outside regional and rural areas.

The successive LibLab policies since Whitlam's multiculturalism, ideologically supported by Fraser, has created in Australia, Skilled Migrant-led inflation.

Whereas the asylum seeker issue is as relevant to the problem as the price of toothpaste in Greenland. It is a blatant LibLab propaganda red herring, promulgated by the LibLab aligned media.