6.Money and Environment

8/10/2019 6.Money and Environment

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Money, Interest and Environment

Ahamed Kameel Mydin Meera

In the recent UN climate change conference in Bangkok, scientists from all over the

world concluded that the earth is in peril, caused primarily by the actions of mankind

!he Intergovernmental "anel on #limate #hange $I"##% warned that the atmospheric and

environmental pollution and the conse&uences thereof on climate change can have

devastating effects if proactive mitigation actions were not taken immediately

!he main reason for the environmental destruction could be nothing but economic greed,

devoid of environmental'conse&uences considerations !his article argues how the

monetary system itself contributes to the environmental destruction

Many academics have linked in detail the monetary system to the environmental

destruction particularly deforestation, global warming and climate change At the bottom

of the problem is the nature of interest in the fiat monetary system (hile fiat money is

money not backed by gold or anything of value, interest charges in this system have some

uni&ue and important characteristics relevant for the argument !hree of them are

pertinent here

)irstly, debt cannot be repaid in total, ie principal plus interest, in the aggregate at any

given time !his is because the interest portion that need to be paid along with the

principal does not e*ist in the form of money in the economy !he implication of this is

that, in the aggregate, interest payments can only paid in real terms, ie goods, services or

other assets including those placed as collateral for the loans !his is the reason why, in

the aggregate economy, debt default is by the design of the system

+econdly, debt service $ie the repayment of principal plus interest% is considered as a

riskless cashflow since the borrower is obligated to pay back, as per the contract,

according to a predetermined repayment schedule But nonetheless, the business world is

a risky world !his brings about a mismatch, in terms of their risk profiles, between the

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nature debt'money and the real economy which it is supposed to facilitate And it is

important to note that indeed, in most if not all countries, debt'money ie money created

in the form of loan constitutes a much higher proportion in their monetary aggregates

!he third characteristic of interest that is pertinent to our discussion is that it is in counter

to the physical law of entropy, a law of thermodynamics that refers to the tendency of

physical systems to move towards greater disorder According to this law, order can be

maintained or increased through the consumption of energy and matter from outside the

system !he rotting of food, the decaying of dead bodies, the depreciation of assets etc

are e*amples of enthrophy when new energy and matter are not consumed

Applying the concept to economics, in a barter economy for e*ample, when a farmer

does not consume part of the paddy he had harvested, it would represent as his savings in

the real form If he does not invest it by replanting, then over time, the seeds can rot due

to the entropy process, and become not suitable for consumption or further investment

But however, the entropy process can be reversed so as to achieve greater order by

replanting the seeds, for e*ample !herefore, by taking energy from the sun and matter

from earth, a greater order is achieved, in the form of plant, fruit, seed etc Accordingly,

in the real physical economy, savings that is not .invested/ can deteriorate (hile

investing on the other hand, of course, involves risks, like what if, for e*ample, the

replanted seeds die due to draught etc !herefore savings in the real economy that is not

invested by taking on risks would fall in value due to entropy

Interest charges violate this principle (hen money is saved, it actually should represent

something in the real economy that is being saved (hile those real things would

e*perience entropy, money saved in the present system increases in value due to interest0

!his fact is further worsened in a fiat monetary system where money and interests are all

.virtual/ !his is why some development economists tell us that a negative interest rate is

necessary to achieve sustainable economic development Negative interest rate implies

that if one saves and does not wish to take risks of investing the savings then the value of

the savings should fall over time !his then matches the entropy law But in today/s

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monetary system one is able to save without taking on any risks and still earn interest

income0 !herefore, money and interest in a fiat money system indeed go against the

natural order where the real economy works

Now the working of those three characteristics of interest in the international economy is

of concern (hen countries, particularly the developing nations, borrow internationally

they should remember the three implications for the aggregate global economy2 1 !he

loans are not repayable in total at any given time 3 +ome countries are bound to default

4 !he interest portion and defaults can be only repaid in real term

5ence developing nations that borro oney from international financial institutions like

IM) and (orld Bank must remember that collectively their loans are not repayable and

therefore some nations got to default and likely to plunder further their natural resources

in the attempt to repay the loans

!he developing nations being generally not industriali6ed nations, would service their

debt using agricultural products or natural resources available Accordingly, countries

with forests would tend to deplete them in their attempt to pay off their e*ternal debt

+uch deforestation, in turn, have been linked to global warming and climate change As

mentioned earlier many academics have provided detailed evidence for e*ternal debt as

being a cause of deforestation A simple evidence is provided below !he table below

provides the data for the top twenty deforesters in the world and the relationship between

deforestation and e*ternal debt for the period 177- to 3--8 !he correlation strength

between deforestation and the increase in e*ternal debt is indeed a high value of -98

+ince most money in the present fiat monetary system is created .virtual/ in the form of

debt that carries with it compounding interest charges, this demands the economy to keep

.working/ to pay back that virtual loan plus the non'e*istent interest money !he system

basically causes the plundering natural resources, ie transforms real wealth that is in the

form of trees, health etc into virtual wealth, like electronic records as money

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!he I"## report says that greenhouse gas emissions had risen by -: since 17- $about

the time when total fiat global monetary system started%, and will rise by between 38:

and 7-: over the ne*t 38 years under present scenario #arbon dio*ide $#;3% emissions

greatly contributes towards this, brought about by mainly the use of fossil fuels in

industries and automobiles


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o!r"e# Food and Agriculture Organization of the U.N.: The State of the World's Forests 2003 !"ternal de#t data fro$World %e&elo$ent (ndicators 200) World *an+.

The correlation strength #et,een Annual %eforestation and the (ncrease in !"ternal %e#t is 0.-/

Interest charges in the monetary system contributes to both sides, ie to .overwork/ the

industries since money is scarce and thereby encourage competition and contributing to

deforestation since interest charges must ultimately be paid in real terms Many of the

highly indebted countries are not even able to service the interest portion of their debt

5ence it is of surprise that they tend to plunder their forests indiscriminately in their

attempt to pay'off their loans

=ven though billionaire +ir >ichard Branson and former U+ vice president Al ?ore have

launched a multi'million dollar competition to come up with an innovation that can

remove carbon from the atmosphere, I cannot think of a better way than preserving and

replanting forest trees to do the @ob

In my opinion, firstly the world must urgently revamp its global monetary system

in order to bring it in'tune with the natural order !his, of course, can be very tricky in

current global circumstances Additionally, governments should stress on afforestation,

reforestation, reduced deforestation and encourage the use of non'fossil renewable energy

sources

;n the sideline, recently the "rime Minister Abdullah Ahmad Badawi called upon

for new homes to be constructed with built'in rain water catchers !his indeed is an

e*cellent idea considering the fact that fresh'water is e*pected become a very scarce

resource in the near future In the same tone, perhaps the government could encourage

the public to go for alternative non'fossil fuels like biodiesel, solar, wind, hydroelectric

and even geothermals if there/s any possibility !he government for a start could, for

e*ample, give ta* benefits for the production, distribution and customer installation ofsolar panels, for e*ample 5omes fitted with solar panels would considerably reduce the

use of energy from fossil fuels

+cientists tell us that fossil fuels significantly come from the .pea'brained/

dinosaurs that once ruled the earth for a period of appro*imately 3-- million years, and

which have been e*tinct for about 8 million years before the emergence of man on earth


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But mankind, likely the most intelligent being ever, has been on earth relatively for only a

very short period !he +tone'Age, when he was dwelling in caves, was only about

3-,--- years ago But at the current state of global affairs, it/s obvious that this

intelligent man could not even, for a short period, take care of his only planet of dwelling,

losing to the dinosaurs/ multiple folds (hat shame

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6.Money and Environment