Monday, October 4, 2010

Monetary System and the Environment

Tullett Prebon is a one of the world's largest inter-dealer money brokers. I'm not exactly sure what that means, but the Director of Global Operations, Tim Morgan, put out a paper called Dangerous Exponentials. It is not an academic paper, and I'm interested in whether there is potential for research in this area.

We need to know the impact of the monetary system on the environment and resource use. The monetary system of most of the world depends on an ever-increasing money supply for stability and thus constant but non-zero interest. There may be some value in analyzing how much of production and consumption is simply to service debt and interest rather than actually improve welfare. In Beyond Growth, Daly argued that exponential growth of real economic output per capita is not physically possible. A recent report by Tim Morgan, Dangerous Exponentials, echoes this concern, and describes society and the economy as "energy constructs." He proposes a theory that the abundance of cheap energy has allowed the monetary system to grow. Now that energy return on energy invested (EROEI) has now begun to decrease, the exponentially increasing public and private debt will not be able to be serviced. While some might claim that technological improvements will be able to outrun the needs of the monetary system, I am not convinced.

An environmentally sustainable society is technically possible, although it may require behavioral changes as well as radical innovation. However, the endogenous growth function does not give any insight into whether or not there are effects or constraints posed by the banking system. The financial sector is usually thought to be completely irrelevant to reaching environmental goals. There should be some formal analysis to show that the American monetary and financial system can support an economy seeking to reduce material consumption. Alternatively, theory may show a certain baseline of growth in energy usage and material throughput is required for a stable financial system.

Many economists are concerned about the high level of debt in developed countries. The political problems of this large debt make it difficult to build support for the environmentalist agenda, but it is unclear if there are technical problems as well. Private and public debt has been steadily increasing for the past 30 years in many developed countries such as the US and the UK. There are some perfectly legitimate or at least predictable reasons for the high level of debt that the US government currently has. We are still funding a war in Afghanistan and we just had an economic crash. The American public has been encouraged to consume and keep economic growth robust, although now it has become clear that we have been spending beyond our means. Furthermore, much of the US debt is held by China. The trade deficit with China and other Asian countries can be analyzed with an endogenous growth function with trade dynamics, but there may be unexpected behaviors that arise from the particulars of the US and Chinese monetary systems. It would be important to know how these behaviors interplay with reducing environmental impacts.

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