Before I begin, I need to distinguish the real economy of goods and services – something that has existed for as long as human society – from the financial economy of debt, banks, investments, and stock markets. Many aspects of the real economy are unsustainable at present, but it is the financial economy that will be my focus here.
The entire paradigm of modern economics is built on the assumption of economic growth. Unfortunately, economic growth is fundamentally unsustainable. The financial economy is tied to the real economy, in the sense that investments gain money when home values increase, when corporations expand, and when consumers purchase more goods and services. Since our planet has a finite capacity in terms of human population, energy, and resources, it follows that the global real economy of goods and services has a finite maximum size, and furthermore that the same is true of the financial economy. This is a simple, unavoidable fact, and it is independent of any choices we might make to embrace sustainable principles.
Globally, economies have been growing since about 1400 CE, in concert with the rise in global population and a corresponding rise in the amount of goods and services consumed by each person. The field of economics has developed over a period of multiple centuries marked by steady economic growth, so it not surprising that growth is taken for granted. There is, at present, a great deal of cognitive dissonance in economics, with scholars insisting that continued economic growth is essential while beginning to recognize that it is also impossible. Such is the origin of terms like “sustainable growth” which means either buying more stuff as long as it’s “green” or continuing to grow the financial economy after the real economy stops growing. Make no mistake, there is no such thing as sustainable economic growth.
Growth in the real economy is slowing to an inevitable standstill, which will be reached in the next 30-50 years. This is occurring because we are reaching the Earth’s resource limits. When a resource becomes limiting, its price rises. Conventional economics says that this price rise will trigger a supply increase until the price drops. That is only true if a supply increase is actually possible. In the cases of oil, copper, phosphorus, fresh water, and agricultural land, to name a few, we are approaching physical limits. When physical limits are reached, prices rise until demand drops to match the supply, with a corresponding drop in production that negates or reverses economic growth.
The main reason our society is attached to economic growth is that growth is required for money to make money. In a growing economy, it is possible for the majority of loans to be paid off with interest, as there will be enough additional money available in the future to cover both the premium and the moneylender’s interest “fee.” The lender thus makes a living without offering any real goods or services, and the receiver manages to buy a house or build a business, pay off the loan, and ultimately join the moneylending class. In a stable economy, money will not make money, and investments will on average simply keep pace with inflation. Less than half of loans will be successfully paid off with interest, as there will not, on the whole, be sufficient money available.
When investments do not on average make money, Wall Street and other markets in effect become government-sanctioned casinos where some people win big and many lose a little. As growth in the real economy slows to an inevitable standstill, the financial economy begins to generate bubbles. That is to say, some portion of the real economy becomes overhyped and overvalued, causing investment money to pour in until it becomes clear that the paper value of assets far exceeds their actual worth, at which point a crash ensues. The tech-stock bubble popped around the year 2000. The housing bubble popped in 2008. The shale-oil (“fracking”) bubble is just beginning to pop as I write this. Some other aspects of the economy – higher education and health care come to mind – are showing signs of being bubbles, with cost increases far outpacing any increase in the value of service delivered. The shrewdest investors manage to make money in bubbles, even betting on price drops as the crash begins, while many other investors lose millions.
In 2008, the US government averted a larger economic downturn by bailing out banks to the tune of over a trillion dollars, or $3000 per US citizen. In essence, the government placed a bet on a return of economic growth, which would increase tax income and allow the debt to be repaid. That hasn’t happened, and a new downturn appears to be on our doorstep. At this point the economy is growing primarily by increasing public and private debt, which appears as assets on the balance sheet of those who are owed. If that debt cannot be repaid, as is seeming increasingly likely, then those assets simply evaporate, resulting in a crash on the order of, or larger than, the crash of 1929. In my view, such a crash is highly likely in the United States within the next 30 years or so, and I do not think it can be avoided at this point.
A crash has the effect, after a fair amount of turmoil, of bringing the financial economy back into step with the real economy. Devaluation of money does not affect the ability of a doctor to diagnose, a farmer to plant seeds, or a carpenter to build. Inevitably, governments at all levels find ways to ensure that goods and services continue to flow, and a money system is rebuilt to facilitate this. This is a time when having skills is much more important than having assets, and the art of using money to make money becomes a liability. It is my hope that, following such a crash, we will collectively come to the realization that the real economy is no longer growing and craft a financial economy that neither assumes nor depends upon growth. Such a financial system could reasonably be called a sustainable economy, though we would still need to address unsustainable aspects of the underlying real economy (fragile infrastructure, open-loop resource flows, and fossil energy).
How then can we prepare for the end of economic growth? I should note here that I am a farmer and an energy researcher, not an economist, so my advice here may not be rock-solid. Nonetheless, these are my priorities:
- Learn essential skills. Make sure there is something you can do that others directly need and would trade goods or services for in the absence of money.
- Invest in real value. This includes stable foodstuffs, durable goods, productive land, housing, and utilities. Be aware that in many areas real estate cost is largely speculative and far exceeds the productive or housing value of the land. Traditional “secure” investments like precious metals have almost zero real value; no one needs gold to survive.
- Avoid debt and pay off existing debt.
- Do not count on traditional investments earning money or maintaining their value. Develop skills that can be continued into retirement, and/or aim to produce something (book, invention, business) that will provide ongoing income with less labor investment over time.
- Nurture community ties. If larger-scale safety nets like social security dissolve, we will become reliant on our friends and neighbors for support. This will be much easier if we have built a strong community ahead of time. Plus, being part of a community is fun, enriching, and empowering.
- Support alternative local currencies. These will continue to facilitate exchange of goods and services when national currencies are in turmoil, and the stronger such currencies are at the time of a crash, the better.