Debt-driven Growth

The following is an extract from the highly recommended The Grip of Death by Michael Rowbotham. If you haven’t read it already, you can get a copy from the Positive Money bookshop or from your local bookshop:

“All around us, the gross failure of modern economics screams out to be addressed.

• The towering indifference of those shining offices scraping the sky above the menacing ghettos of Brooklyn;

• the speculative channelling of billions of pounds of volatile international finance, which can leave a country prosperous one week and plunged into decline the next;

• the ludicrous production of cheap goods of poor durability, so that jobs are `protected’, and we can recycle the mate­rials and make the goods all over again;

• the ridiculous export drives by which every country simultaneously attacks the economies of every other nation, under the pretence that such global free trade improves the general wellbeing;

• the stag­gering waste of a throwaway, quick-growth, all-new spiral of constant economic change;

• the outrageous financial debt which Third World countries have actually paid many times over, but which, due to interest, is now larger than ever before – a debt which forces those impoverished nations to compete to supply goods already in surplus;

• the cynical manipulation of human emotions into buying fashion-obsessed trivia;

• the burgeoning transport demands of escalating economic growth and centralisation, with identical goods crisscrossing the globe, regardless of environmental cost;

• the fact that despite the incredible productive capacity of the modern economy, people are obliged to work harder, with ever greater effi­ciency, forever forced to adapt and retrain or face a life of indignity and misery as one of the unemployed.

Both those in work and out must watch, as the world they know and under­stand changes almost in front of their eyes like some nightmarish Kafkaesque novel. This is the era of accelerating economic change. The benefits are highly dubious, and no-one even pretends that the economy is responding to what people actually want.

The only justification offered for the changes is that this is `the age of progress’, and `you can’t stop progress’, even if you are human and the progress you are discussing is supposed to be about people and the lives they might lead in the future. The world of economics has got mankind by the throat and everyone knows it, and no-one has a clue where we are going or why we are going there.

But is this surprising? If a monetary system is invalid or flawed, then the entire economy is based on the mathematics of error, and must be riddled with the effects. If the financial system upon which our economies are built is defective, and yet monetary considerations dominate our economic decisions, should we be surprised if the results are less than satisfactory?

The major role played by bank credit, which forms over 95% of the money stock in most developed nations, suggests that it cannot but be implicated in these trends. This is further suggested by the way that banking has literally become the focal point of modern economic management, through manipulating interest rates.

The stargazers of Whitehall and the Federal Reserve hold their councils, trying to tread the non-existent tightrope between growth and recession by debating quarter percentage-points of interest rates. Alan Greenspan, the Chairman of the Federal Reserve, engagingly describes his task in controlling the American economy through adjusting interest rates as a matter of `taking the champagne away once the party has started’. Businessmen around the world hold their breath, measuring his every word, wondering what he will decide.

There could be no greater indictment of contemporary financial economics than this; that a fluctuating financial digit on a single computer system in a single street in a single country should have the ability to dominate the economies of an entire planet.

The search for an alternative

The past thirty years are almost unique by comparison with the previous three centuries in the lack of attention that has been directed at debt and the financial system. Throughout the eighteenth century, there were repeated calls for reform. During the nineteenth century, excessive banking was held by many to be directly responsible for the waves of appalling poverty that swept Europe and America during a period of increasing industrialisation and agricultural development. In this century, during the depression of the 1930s, the financial system effectively seized up and brought virtual collapse to the economies of the world in an age which was, perhaps for the first time, obviously wealthy, and in which technology offered people real freedom as well as material prosperity. One observer judged that over 2,000 schemes for monetary reform were put forward at that time, ­all with a common theme in their outright rejection of the debt-based financial system as it then operated. The same system continues to this day, modified in small details, but unchanged in principle; and the recent financial crisis in Asia shows the potential for collapse still exists.

However the issue of economic volatility through booms, slumps, crises, and collapses has never been the sole point of criticism. It is the long-term trends that a debt-based financial system fosters which are most destructive. The most obvious of these is declining personal solvency. Mortgages support over 60% of the money stock in the UK and over 70% in the US. Housing-debt statistics for the UK and the US show that there has been a dramatic decline in true home ownership as mortgages become higher and ever more widespread. There can be little question that relying upon housing debt to supply money to an economy lacks economic and political justification. However, taken in conjunction with the marked rise in commercial debt, mortgages have a knock-on effect. In an economy where the price of goods is elevated by commer­cial debt and consumer incomes are deeply eroded by mortgage debt, there is a persistent and subtle advantage given to low-quality, mass-produced goods, and growth is fostered in this direction. The persistent decline in product durability and the growth-culture of a rapacious consumer society can be directly traced to the debt-based financial system.

The financial system has also generated a serious distortion of agriculture. Excessive farming debt has driven out the most efficient producers – small/ medium sized farms. Meanwhile, the relentless pursuit of farming and processing methods oriented towards a low-price market now involves the production of foodstuffs of poor nutritional value, inferior to that which the land can provide and inferior to that which consumers actually desire.

The nature of growth within a debt economy affects not only the quality of output, but distribution and marketing. Intense competition for sales within a debt-based economy results in the use of transport as a competitive strategy by businesses. This has led to a progressive breakdown of local and regional supply networks, and marketing over ever-greater distances, leading to escalating commercial traffic demands.

At the international level, trade is deeply affected by the debt-based financial system. The aggressive pursuit of maximum export revenues, rather than seeking a simple balance of trade, is entirely due to the fact that even the wealthiest nations operate from a position of gross insolvency.

International trade has degen­erated into a competition between nations to alleviate their indebtedness, rather than a process involving a mutually beneficial exchange of goods and services.

Endemic Third World debt is also directly attributable to the reliance upon debt and banking to supply money. The theoretical model of borrowing from the World Bank/IMF, investing in development and repaying loans from export revenues, is one of the great failures of contemporary economics. The persistent inability on the part of debtor nations to repay these loans suggests strongly that the nature of the indebtedness suffered by the Third World has absolutely no actual legitimacy or validity. Chapter 10 confirms this.

The more one explores the broad impact of debt, the more apparent it becomes that bank-credit constitutes a dysfunctional form of money. An economy based almost entirely upon bank-credit and debt experiences an intense drive for growth, regardless of need or demand. Bank credit engenders financial dependence, injects instability and fosters growth-distortions, both within an economy and throughout the international arena.

Reform of the debt-based financial system is clearly not a minor issue. It is not a matter of fiddling around with taxes, incomes and allowances to make things apparently more equal, more efficient, or perhaps more straightforward. Changing the debt-based financial system involves gradually altering the very foundations upon which national and international economics is based. Monetary reform is concerned with attempting to determine a new principle for the supply of money to an economy – the purpose being to create a supportive financial environment in which more constructive economic trends are allowed to emerge, and in which more benign systems of overall economic management become possible. In view of the rapacious onslaught on the environment, the waste of natural resources and the social and political friction caused by de-regu­lated commerce and capital flows, this is at once a promising, but a sobering prospect.

This is an extract from a book “THE GRIP OF DEATH – A STUDY OF MODERN MONEY, DEBT SLAVERY AND DESTRUCTIVE ECONOMICS” by Michael Rowbotham.