Collapse and stabilisation instead of degrowth?

Why the global debt burden means there will be

no recovery

Richard Douthwaite

Feasta, Foundation for the Economics of Sustainability

The debt problem...

Debt presents a serious problem for de-growth The share of national income required to service it

grows as the economy shrinks A way to reduce debt is therefore an essential part of

any de-growth strategy. Massive debt write-downs seem inevitable in the near

future as a result of an economic collapse. The collapse will give the de-growth we want. Our task

will be to stop the pro-growth systems being restored afterwards.

World debt has grown 250% in the past decade

•

Some countries' debt has become unsupportable

Why debts and asset values rose so much

There are two types of money – stratospheric and grounded – disguised as one

Banks created lots of stratospheric money by lending against assets.

Grounded money also became stratospheric money when it was used for buying energy and other commodities at the height of the boom and the producers could not spend it all back with their customers.

Debt has not been stimulating the US economy recently

Source: Hannes Kunz, IIER

The massive growth of debt within the United States

US stockmarket valuation as % of GDP

For four years, world oil production was on a near plateau

Relationship between spending on oil as a percentage of US GDP and economic activity.

British debt growth since 1987 – mostly financial

Small (under $300 m assets) US banks in big trouble

• The green curve shows the drop in the proportion of 'healthy' loans by small US banks from about 80% in 2005 to under 43% today, the lowest on record.

• The blue line is the growth in the % of non-performing loans to total loans. At 3% it is the highest for 20 years

When one major bank goes, they will all go

Global oil production has fallen from the plateau and gone into decline

The range of rates at which it was predicted that oil output might fall

Source: Hannes Kunz, IIER

Poor prospects of a real return

• Global situation (2009)• Debt plus stock market value equals 345% of global product.

6.9% real growth required to give 2% real return

• German situation (2009)• Total debt plus stock market value is about 560% of GDP .

5.6% real growth required annually to give 1% real return.

• US situation (2009)• Total debt plus stock market value is about 505% of GDP. 5%

real growth required annual for a 1% real return. • Source: Hannes Kunz, IIER

Short-term solutions

Injecting debt-based money into an economy adds to the debt burden so it needs to be spent in a way which increases incomes rather than asset values. A better solution would be to

Create non-debt money by quantitative easing Give it to everyone equally to pay off debts Those without debt could spend This would boost demand, lower unemployment and

boost taxes. And cause inflation, which would raise incomes in relation to debt.

The alternative...

The banks go bust. Everyone's deposits are lost. Riots break out.

Asset values plunge to near-nothing. Trade breaks down. Russian barter companies thrive

but most people are unemployed. Social welfare payments and pensions become distant

memories. Many are cold and hungry. Some starve. Attempts are made to establish new money systems. Further de-growth is unattractive. Everyone wants the

abundant life they enjoyed “before”.

A longer-term solution

Have two types of money, one for spending, the other for saving, with a variable exchange rate between them.

Saving the spending currency would be discouraged, perhaps by inflation, perhaps by demurrage.

Would-be savers would convert their spending currency to the saving one at the current rate of exchange.

Anyone selling an asset would be paid in the savings currency and have to convert it to the spending currency if they wanted to use the payment as income.