Financial Crises and the Ideology of Continuous Growth

I’ve been trying to puzzle out the causes of our recent financial troubles, and I am beginning to think that such crises are inherent to the structure of how money is created by the banking system. A financial crisis is a funny thing. Suddenly, from one day to the next, stock prices plummet and companies fail and people lose jobs and homes, but nothing has fundamentally changed in the real world. There is the same number of people, with the same needs and skills, with access to the same resources as existed the day before. The problem, I’m coming to see, is that our current banking system relies on an inherently unstable dynamic to maximize the amount of money available for investment. Banks can create, by law, far more money (in the form of loans) than they have assets. In the US, they can typically create, I believe, about $20 in loans for every $1 of assets. And these loans can in turn be converted into even more credit in the same way, by layering  one financial instrument on top of the other. The result is that $1 of assets can be used to “justify” hundreds of dollars of loans. This all works fine, like a Ponzi scheme, as long the economy keeps growing and people are content to leave their money in circulation. But if something happens to make people worry about their money, and they try to get it back, they find that there is not enough for everyone, creating a self-reinforcing crisis of confidence in the investment system. In the last few decades, the financial services industry has been aggressively pushing to increase the amount of leveraging they can do, because more leveraging means they can sell more product and get more commissions, irregardless of whether the money is backed by sufficient solid assets or not. Once they’ve sold the product, they’re home free.  So this is one of the reasons for the ideology of the absolute need for continuous growth. If we rely on a highly leveraged financial system to enable a lot of investment, we either grow continuously or face periodic, and sometimes devastating, financial crises. And this is just one of several drivers for the ideology of continuous growth. Another is wealth inequity. Wealth inequity tends to increase in market economies, especially when large economic actors have a powerful influence on government and are thus able to influence the market rules so that they favor the wealthy even more. This can lead, however, to dangerous social unrest amongst the have-nots unless the total size of the economic pie continues to grow so that everyone’s wealth increases (albeit at starkly different rates). So the drive for continuous growth is also locked into place by the need to avoid social unrest where large wealth inequities exist. Continuous growth, however, is fundamentally unsustainable in a linear economy like ours i.e. where resources are converted, one-way, into (often dangerous) waste. So it seems we need to make at least two kinds of fundamental changes in the ways we create wealth:

1)     de-power the drivers (excessive financial leveraging, large and growing income inequity) that lock us into the need for continuous growth.

2)     change our economy’s use of resources from one-way to infinitely recyclable, so growth does not come at the expense of the requirements for further growth.

These are radical notions. Action (1) is foundationed in the premise that increasing immediate individual material wealth is no longer the paramount goal of our economic system. And action (2) means that we have to somehow internalize, in our economy, costs (e.g. resource loss, environmental and social degradation) and benefits (e.g. increases in social and environmental and even spiritual capital) that would otherwise only make their full impact felt sometime in the “imponderable” future.

I think one way to make this happen is to “de-materialize” our notion of wealth. Creating meaning and knowledge does not inherently undercut it’s own prerequisites the way material wealth creation does. And studies have shown that, while poverty undercuts happiness, material wealth does not create it. In other words, once we have enough material wealth to escape poverty, further “prosperity” does not seem to make us any happier, and we need to find a different metric for our success:

It appears that, once our basic material needs are met, people derive value from non-material “goods”, such as connection and contribution and the intense self-less immersion in skillfully performing something that is challenging and worth doing well. Imagine an economy where companies compete to provide opportunities for satisfaction and meaning. Where our GNP is measured in terms of personal and social and environmental health rather than goods and services. Will our economies naturally evolve toward that goal, as consumers experience the limitations of a focus on material wealth and come to better understand what they truly need? How can we speed that transition, given the enormous entrenched power of the institutions we created to pursue a material notion of wealth? Can we make the transition in time to preserve the personal and social and environmental legacies we find most precious?

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One Comment on “Financial Crises and the Ideology of Continuous Growth”

  1. Martin Lewitt Says:

    Reading the start of the entry, gave me a feeling of deja vu, since I have been critical of the money creation process for years. I quote something I wrote just yesterday (actually Thursday now):

    “The sad thing is it was all so unnecessary, the Federal Reserve creates money on a pyramid of debt via fractional reserve banking, so when $7 to $14 trillion disappeared from the economy, there was no way to replace the money except by rebuilding the pyramid of debt, things banks, consumers and businesses consider too risky to do in a financial crisis. A hard currency couldn’t disappear like this, it is really stupid that a fiat currency can’t be “printed” without building a risky pyramid of debt.”

    “If we are going to have a fiat currency, it should be totally transparent and owned by the people, not the banks. Fractional reserve banking should be severely cut back and money “printed” by direct deposit to individual debit cards. The people would know exactly how much money the Fed is printing. The Fed should still manage for full employment and 2 to 3% inflation. Probably only $2 trillion in direct money creation could have sustained consumption and private employment and prevented most foreclosures. That is over $6000 for every man, woman and child in the country, but far less than all the bailouts and stimuli. A family of four with $24,000 is unlikely to stop paying mortgages or cut back on computer and auto purchases, especially if their job loss has been prevented. Instead this government has thrown good money after bad. Let businesses and financial institutions fail, and, instead keep wall street crises from main street by well managed transparent, direct money creation. Yes, a currency backed by an essential commodity like energy would be better but in the mean time lets fix the fiat currency.”

    I don’t know why you uncritically accept this capitalism – inequality thing. Where is there more inequality that in Cuba than between the Castros and the rest of the people, or similarly for N. Korea. The U.S. economic engine lifted huge middle classes out of poverty in India and China. I submit the that qualitative difference in wealth between the middle classes in India or the US and the wealthy in the US is far less than the qualitative difference between the middle class in India or China and poverty in India or China. Like you I don’t get caught up in the numbers of materialism, I just think you are going in the wrong direction with it.

    Are you really sure that supply chain manager with 1.7 children, an intellectual spouse and a 6 figure income has won, while the 9-to-5 laborer with a job he can forget on evenings and weekends with a cheerleader spouse, 5 kids, who enjoys beer and football on Sunday’s has lost? I’m not materialistic enough to assume so, in fact, I rather appreciate the Darwinian conclusion on this one. If I were the supply chain manager and heard ignorant talk of equality, I might insist on my equal share of the cheerleader. But then, I’m not as materialistic as some.


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