More on the money problem

How is our money system 'unsustainable'?

Saying that something is unsustainable simply means it cannot last. Our global monetary system is unsustainable because it has built-in flaws that mean it will someday self-destruct. We're already seeing evidence of this self-destructive tendency: the 2007-2008 global financial crisis, which is still playing out; New Zealand's housing price bubble and crippling levels of household debt; financial crisis in nations such as Greece, Argentina, and elsewhere.

The Club of Rome's 2012 publication Money and Sustainability, the Missing Link identifies five aspects of our global money system that make it incompatible with sustainability:

  1. Amplification of boom and bust cycles
  2. Short-term thinking
  3. Compulsory growth
  4. Concentration of wealth
  5. Devaluation of social capital

Together these lead to escalating debt, environmental damage, economic strain and social dislocation—regionally, nationally, and globally. The money system leaves a trail of destruction in its wake.

The gigantic credit bubble may take decades to unwind. In Greece, wages have fallen by up to 50%—much more than prices. New Zealand is vulnerable because our household debt is high and we are a trading country with long supply lines, importing 97% of our oil. We are also highly exposed to the Euro and to the Australian banking system.

Why does the collective debt burden grow exponentially?

Debt growth in the investment sector is exponential because any interest rate creates an exponential curve when the interest is continually added to the existing debt. This is compounding interest. Debt growth in the productive sector must also be exponential because the productive sector has to fund the investment sector debt.

What are the impacts of exponential debt growth?

As debt grows, it creates a pressure that shows up in a combination of these ways:

  • pressure to create real wealth to back of the expanding money supply
  • inflation and price bubbles
  • loan defaults, business failures, rising unemployment, and economic recession

Pressures to create real wealth to back the expanding money supply are socially and ecologically destructive. The only ways to create real wealth are:

  • increasing efficiencies through management and technology, and efficiency is only an indirect route to real wealth because it still requires increased productivity
  • increasing productivity through increased use of natural resources and, almost always, increased loads put on natural sinks (such as the climate and oceans)
  • increased productivity through increased use of human labour (increased population or more pressure on the existing population)

Increased productivity cannot keep up with the exponential growth of the money supply. We have passed the limits to growth.

Does our money system still hurt those who are debt-free and homeowners?

Yes. Even those without debts are in some way paying for our money system. Only the richest of the rich benefit financially, and even they have to live in the world our money system is actively destroying.

By far the heaviest cost New Zealanders bear is the interest charged on business and home loans. All New Zealanders —even those who owe nothing —are subject to this charge, since all goods and services are priced to cover the interest owed by debtors. Tax levels, for example, are set to cover the interest owed on government debt.

Those on fixed incomes, such as retirees, and all those whose wages increase more slowly than inflation help pay for the collective debt burden with the rising cost of each purchase they make.

What is usury?

Until two centuries ago, Christians, Jews and Muslims were united in condemning usury as sinful. The Catholic Church went so far as to excommunicate usurers.

Interest serves self-interest, however, and Christians and Jews gradually learnt to overlook the sin, so that the original meaning of 'usury' as any interest charged on a loan is now generally considered archaic. It is now seen as normal for banks to charge interest.

Islamic law preserves the original meaning of usury, however, and Islamic approaches to finance show how it is possible to take a socially responsible approach to lending and investment finance. It is quite possible to reward investors without paying interest, and it is also possible to pay for banking and professional lending services by other means, for example by charging set fees instead of compounding interest. Bank fees have a negative connotation to them in our culture, but that's in part because banks are currently hitting us twice, both with fees and with compounding interest. The advantage of having fees (only) is that they do not lead to an exponential growth of the debt burden. Instead, they are simply a market payment for a service rendered, kind of like paying the plumber.

How did banking develop?

For landless Jewish goldsmiths, charging interest on loans to fellow Jews or to Christians wasn’t an option. Gentiles were the exception: when they deposited their gold with the goldsmiths they were given receipts in exchange. On realising that depositors were using the receipts as currency rather than uplifting their gold, the goldsmiths began lending more ‘receipts’ than they had gold to back them. They also began charging interest, a practice eventually legalised by Henry VIII in 1545 after he had broken ranks with the Pope.

The charging of interest on unbacked loans remains the foundation of today’s banking system. Notes and coins created interest-free by the New Zealand government amount to a mere 1.6% of our money supply. The rest of our money is created by banks as interest-bearing debt.

Living Economies Educational Trust (LE) promotes exchange systems and investment models that build community strength and well-being, offer interest-free alternatives to 'business as usual', and respect both people and our living planet. Our network of volunteers can recommend resources and provide educational support for community initiatives. LE (CC 38114) is a registered educational charity, and we do not provide financial or legal advice.

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