Why Societies Fail: The 'Other' Consequences of Debt

What will likely be absent in the inevitable debt debate before the election is any consideration of the relationship of debt to the requirement for perpetual economic growth and its role in the dramatic increase in economic inequality.
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By Richard H. Robbins

We will be hearing a lot about debt between now and the U.S. presidential election. What will likely be absent in the debate, however, is any consideration of the relationship of debt to the requirement for perpetual economic growth and its role in the dramatic increase in economic inequality in the United States and the rest of the world. If debts go unpaid, we face economic crises. But when debts are paid, money flows from the less rich (the "99 percent") to the more rich. Debt, as presently constituted, is a regressive tax and a trickle-up economy. How did we get into this dilemma?

We have a debt economy. Debt is the way that we create money; it is lent into existence. The government issues bonds (debt) to the Federal Reserve, which then takes the debt, which is now an asset of the Federal Reserve, and hands it out to member banks. For every dollar they receive, the banks can lend 10, further multiplying the money supply. There is no exception; every dollar represents a debt that must be repaid with interest. The interest is the key. Since every dollar must generate itself and the interest, the economy must grow to allow lenders and/or investors to realize a return on their investment. If the economy doesn't grow at a sufficient rate (at least 3 to 5 percent), bad things happen; unemployment and bankruptcies increase, banks fail and the economy tends to seize up as investors stop lending or investing. Thus by creating money as debt, we create also the need for perpetual economic growth. Furthermore, that growth is exponential. If the U.S. economy grew at the minimum desired rate of 3 percent real GDP growth a year (close to the growth rate of Japan from 1900 to 2000), in 2100 the GDP -- that is, what we are spending and producing -- would be more than $200 trillion, or 600 times what we spent and produced in 1950! And since emerging nations tend to grow at higher rates than wealthy nations, global GDP, now at about $70 trillion, could approach or exceed a quadrillion dollars.

To make matters worse, the wealthier a country, the more difficult for it is to maintain the necessary growth rate. Thus, while developing countries can grow at rates of 5 to 10 percent a year, developed countries struggle to maintain the minimum rate of 3 to 5 percent. Economists call this the "convergence factor," explaining that developing countries will "converge" to the growth rate of "advanced economies." More realistically, the reason has to do with the nature of exponential growth. Thus from 1990 to 1995 the lumber industry in the United States maintained a growth rate of about 3.5 percent by cutting down the equivalent of 1.5 million more trees than they had the previous five-year period. However, in order to maintain the same 3.5 percent growth rate from 2005 to 2010, they had to cut down the equivalent of 2.5 million more trees. Extrapolate those growth figures to automobiles, fish stocks, water usage, etc., and the difficulty of sustaining exponential growth becomes more easily apparent.

Such growth may or may not actually lead to an improvement in people's lives. But, regardless, the amount and scale of economic activity must increase as long as money must continue to reproduce itself and sustain its return to creditors.

What is the necessary rate of growth? The total debt in the U.S. (consumer debt, government debt, business debt, etc.) is approximately $60 trillion. With U.S. GDP (that is, our national income) at about $15 trillion, if we assume an average of about 7 percent interest on the debt over 10 years, the economy would need to grow roughly at about 15 percent a year for the debt to repaid to lenders and/or investors, a level approached only during WWII.

But, even assuming that we could maintain a growth rate that would allow all creditors to realize a return on capital, we would face even greater gaps in income and wealth than we have now. Quite simply, the higher the level of debt, the more rapid the flow of wealth from debtors to creditors, and the greater the degree of inequality.

The Western financial system that had its origin in the financial innovations of the 16th and 17th centuries has clearly produced dramatic increases in some people's standards of living. But it may now threaten to environmentally and socially bankrupt us.

We desperately need a debate on how to construct a financial system that can move money from where it is to where it is needed without requiring environmentally and socially unsustainable capital accumulation. We need to discuss the role of alternative currencies, and a role for the government in directly issuing currency, rather than leaving that right solely to private financial institutions. Existing debts must be modified; the current debt level of countries, governments, businesses, and financial institutions is unsustainable and must be renegotiated. Student loan obligations in the U.S., specifically, must be modified. Limits on interest rates must be lowered, laws regarding bankruptcy must be loosened, and the debts of developing countries must be renegotiated or, in some cases, eliminated. We need, as Ellen Hodgson Brown suggests, a new debtor's bill of rights; otherwise we face the continuing choice between periodic economic collapse or rising inequalities and social chaos.

Richard H. Robbins is a distinguished Teaching Professor of Anthropology at SUNY at Plattsburgh and author of Global Problems and the Culture of Capitalism (5th edition).

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