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Is debt-money a scourge in a zero-growth economy?

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ravochol posted on Mon, Jun 27 2011 3:26 PM

n 2011, almost all money used in the West is based on debt-with-interest. What effects can we expect this to have if for some reason (for example peak oil/resources, war or natural disasters) the economy ceases to grow on a per-capita basis?

Debt creates a kind of imperative for growth in the economy - growth in both the quantity of money and the quantity of goods and services - or it leads to structural defaults, inflation or both.

Imagine a debt-based currency economy where the average annual interest rate is 5%, the money supply grows at 5% annually, and the quantity of goods and services available also grows by 5% annually. This is a stable situation - on average, debtors will be able to repay creditors, and both will be better off for it. The economy will experience neither price inflation nor price deflation, on average, since the money supply is growing at the same rate as the availability of goods and services. 

Now, imagine an economy where the average interest rate is 5%, the money supply grows at 5%, but the supply of goods and services does not grow (0%). This economy will experience persistent price inflation, as the quantity of money increases but the supply of goods and services remain constant. 

Finally, imagine an economy where the average interest rate is 5% but the money supply grows at 0% annually.  In other words, 1X of money exists at the end of the year, but 1.05X of money is owed to creditors at the end of the year - in this situation, large-scale structural defaults are inevitable, regardless of how many additional goods and services are produced. The situation will be disastrous for the average debtor, as the average debtor will be unable to repay on account of the structural mathematics. In situations like this, taking on debt is akin to gambling, even with a prudent business plan. 

To sum up, it seems that a debt-based currency is only a stable social arrangement if both the money supply and the real economy are capable of expanding at least in parallel with interest rates demanded. A debt-based currency without a growing real economy results in inflation without tangible benefit, while a debt-based currency without growth in the money supply leads to structurally inevitable defaults and a consolidation of wealth by creditors at the expense of debtors, without any tangible benefits for the economy.

If this line of reasoning is accurate, it may explain why lending money at interest - 'usury" - was taboo for so much of history. Until the industrial revolution, most economies were incapable of sustained, signifigant growth. How much an economy could produce was set by how many peasants and craftsmen it had, so the growth imperative that comes with debt made no sense at best. Observations that "usury" was socially destructive were probably often accurate in pre-modern economies, similar to how gambling at casinos and lotteries in hope of economic benefit can be harmful today - a few win but the majority lose through involvement with it, and the main outcome is to concentrate wealth without adding much value to the economy. 


Economic growth rates are today very low in the West by historical standards. What happens if, for whatever reason, they dip to zero, or even below zero, for a year or more?

Also, is a "growing" economy necessary for prosperity, or is it only necessary to satisfy the requirements of a debt-currency based economy? Could there be an economy where the quality of goods increases year after year, resulting in increasing standards of living, while population, resources used, dollars spent and hours worked all stay stable? If so, would such an economy be possible with a debt-based interest-bearing currency, or what type of currency would be best suited to it?  Could an economy fixed or even shrinking in scale, but innovating and improving in quality be desireable?

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bbnet replied on Mon, Jul 4 2011 8:03 PM

The currencies of the world are doomed by design, it remains to be seen how long the kan can be kicked before smacking us all in the face.

The real assets of the world will remain, although they are likely to be valued differently after the storm, unless they are destroyed by war.

Notice the common denominator in both problems is the gunverment.

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And we are not sent here by the politicians you drink with - L. Dube, rip

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The money supply has to grow in order to create enough money to pay back existing loans.

Please explain, how my refutation of this statement is inadequate.

The Voluntaryist Reader - read, comment, post your own.
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