Sustainable Economics has long advocated the case that our current financial system of debt-based money (or rather a system in which money has been replaced as a means of exchange by bank credit) underpins our growth obsessed economy.  It is interesting that this idea has been picked up by Richard Heinberg and others in the "Peak Oil" school.  They argue that the breakdowns in transport, shortfalls in agricultural and manufacturing production, and military conflict that will arise directly from the peak in oil production - which they predict will occur within the next 5-10 years - will be compounded by an implosion of our debt-based financial system once realisation grows that its central assumption of perpetual economic growth is no longer valid.   

The Peak Oil thesis raises an interesting question on the direction of causality between debt-based money and economic growth.  It has often been asserted that increasing levels of debt drives economic growth as individuals, firms and governments seek to generate additional income in order to service the interest as well as repay the principal of their loans.  However, in theory, economic actors could accept interest charges as the price for taking out a loan to satisfy their (personal or social) time preference of consuming at an earlier date the goods and services they desired, rather than deferring their gratification in order to save the money required to fund the same expenditure at a later date.  In other words, we could - over a given period of time - choose to trade lower net income in return for earlier satisfaction of our wants - without increasing our level of economic activity to increase our income.   

Of course in practice, we wish (or are manipulated by the propaganda of the commercial media to want) to increase our standard of living as well as enjoying it sooner.  So we work harder, faster and "smarter" and make our contribution toward further economic growth.  For 500 years, this strategy for achieving human happiness has been made physically possible by the exploitation of the resources (both natural and human) of the "developing" world and by the release and conversion of energy from hydrocarbon fuels; first coal, and then - with dramatic results in terms of an explosion in human population and levels of economic activity - oil.   

Financially, sustained economic growth has been enabled by freeing the supply of money from the constraint of stocks of scarce physical goods (be it cowrie shells, or precious metals such as gold); lending it into existence in the form of bank credit, or other freely negotiable financial instruments.  Through this artful mechanism money supply has been able to expand to accommodate not only economic growth, but also an atomic explosion of financial speculation - manifesting itself in the form of stock market and house price bubbles.  

If the "Peak Oil" thesis is correct and the production of oil begins to decline, then economic growth cannot be physically sustained.  And, without economic growth, the vast stock of debt that backs our money supply becomes financially unsustainable .  Without an expectation of sustained economic growth, it will not be possible to increase the level of debt based money: the risk of default would become unacceptable to lenders, and borrowers could not be confident that they would succeed in increasing profits or earnings sufficiently to service their additional loans.  As the physical economy begins to contract, a turning point will be reached when borrowers seek to reduce their exposure to debt and bankers seek to reduce the risk of their loan portfolios and increase the liquidity of their balance sheets.  The house of cards which is our modern financial system will collapse. 

The arrival of the "Peak Oil" moment may be good news for reducing C02 emissions and the rate of global warming, but the prognosis of Heinberg and others of subsequent economic and social collapse is somewhat alarming - particularly when I look at my two daughters and consider the future they face in trying to raise their own children.  Time to get more active in my local Green Party!