The goal of creating a sustainable environmental future is one which has been put under the headline recently, but the path by which to reach that bright future is one which has not found an answer. In our path to trying to seek a sustainable future, it may be interesting to look at the driving factors behind the consumption. The goal of trying to achieve higher standards of living and continuous and steady GDP growth has come at the price of the increased consumption of resources that are needed to support the economy, and which in their raw form represent the goods which we get to our houses. If looking at the financing behind all this though, the reality may become quite troubling as we begin to notice that it is only the continuous growth of GDP at a stable rate that is preventing our financial system from collapsing, putting yet another barrier in the way to a sustainable environmental or financial future.
Money as Debt, it is a video that I have recently discovered for myself and which explains the banking system from scratch to finish, and in the end shows why it is only continuous and sustainable growth that is stopping the system from crashing, which in turn requires the continuous increased consumption of the world’s resources. The video chews up the information and may seem quite simple at first to most people that have studied monetary policy and finances, but the conclusions which it presents are something that most of us do not think about when this matter comes to our head. It may be easier to watch the video in order to follow my post further, but here’s a little summery in short…
We will have to look at the principles of banking and the way that finances work. In simple terms banks make money by charging interest at an interest rate which is greater then what you get when you put money into a bank. So lets say, if you put $100 into a bank a year later you will have $110, while if you $100, a year later you will have to pay $130. The $20 difference is the bank’s profit which is used to cover all of its fees and to make it profitable. We then ask ourselves the question, where does most of the money which we currently have today come from? If we think back to Macroeconomics from first year university, we can remember fractional reserve ratio which is at the base of the financial system of pretty much all countries around the world. If one day ago this was related to an amount of actual gold which they had in their vaults, it is now just related to the amount of money which is stored in the accounts of the depositors, while 99% of the money in the accounts of depositors is in fact which was money created through the reserve ratio debt creating process. In order to show this, how a simple illustration. Let us assume the reserve ratio of 1:9 (Currently the US reserve requirements are 10%), so once a bank makes a deposit of $1,111.12 to the central bank (called-high powered money) it is allowed to provide a loan to a customer for the sum of $10,000. ($1111.12 x 9 = $10,000). If the borrower then writes a check to someone gives it to someone who in tern deposits the $10,000 into a bank, (And given the reality of life, the majority of the money which we have is not kept as cash) the bank is now allowed to give out a loan of $9,000 (Reserve ratio of 10% or 9:1). This process in turn continuous in an virtually infinite series, the result of which is the creation of close to $100,000, from the initial investment of $1111.12. This example shows the true extent of debt money that is put into existence, where the first question that comes to the head is how does the money to pay off all the interest come from then? If the banks have provided society with a total amount of debt worth $100,000, then the amount money that is owe’d back is $120,000 with the $20,000 of interest on the loan. Where can that money come from? Well the only answer is again more debt to pay off the interest from the previous part of the loan, thus making this system possible under two conditions: increasingly mounting total debt and continuously growing GDP, both being needed to prevent this system to collapse. The first condition explains the rise of the US government national debt of more then $9 trillion, and the latter explains the continuous inexhaustible drive to GDP growth – GDP growth that is in the end fueled by an increased consumption of our national resources. The scary part is that due to the GDP growth being a non-linear function as each next increase in GDP requires more then the previous one, the rate at which this degradation takes place only increases.
The current financial system which we have set up within the capitalist world, is unfortunately one that in the long run is not sustainable. Unfortunately, the only thing keeping us from financial collapse of the system is the continued increase in the Goods and Services that we produce. How do we get out of this loop is an immense question, and the solution to which will in the end help us find the path to a sustainable environmental future as well. There is no set solution to this problem yet, but it no doubt will require significant changes to both our mentality and our lifestyle, as well as intervention with regulations from the government.
– Andrei Ryan 19/05/08