ABSTRACT
In recent years the term ‘sustainability’ has often been used in conjunction with financial markets, banks or government debt. Interest and compound interest would lead to debt loads that are not sustainable, some say. The MerriamWebster dictionary connects sustainability to ecology, to ‘methods that do not use up or destroy natural resources’. Given the description of money and credit above, it seems problematic to transfer the concept of sustainability into the realm of money and credit, debt and financial markets. Here’s why: Sustainability implies that (natural) resources or goods are limited, and with that comes the responsibility to not reduce the stock of natural resources too quickly, or to stabilise the stock if it is a renewable resource. However, money in the form of central bank deposits, cash or bank deposits is potentially available in any quantity. Deposits in all forms are created by keystroke. There can be no talk of sustainability, since money that is spent by economic units is not ‘used up’ – it remains in the monetary circuit, more or less active depending on the balance of hoarding or spending, until the underlying bank debt that gave rise to a given tranche of money is paid off. Also, entering a number has no limiting effect on the ability to enter another one. The ‘consumption of numbers’ in balance sheets has no negative effects due to scarcity, and this is why there is no need to limit the use of numbers (more or less) voluntarily. Another problem of the use of the ‘sustainability’ concept in the context of debt is the fact that debt is often limited in time. A loan is not created to last forever – quite to the contrary: a typical loan is amortised in a series of instalments, and ultimately the loan is gone. This is intended, since nobody wants to pay off debt forever! How can we usefully employ the concept of ‘sustainability’ in conjunction with financial markets? Some economists see a problem in compound interest, which they worry will ultimately lead to a breakdown of the credit system. We have seen above that this cannot happen to public actors with sovereign currency. However, private actors – households and firms – could indeed suffer from rising interest rates. The crucial issue is the distribution of income and net income. As long as debts can be amortised, they are ‘sustainable’. Interest rates on loans for the private sector always include a risk premium, because the borrower could become insolvent or illiquid. The loan could be
defaulted upon, and the bank would have to write-down part of the loan. If, for instance, a household were to fail to repay a mortgage, perhaps due to income reductions caused by unemployment, then the value of the mortgage would be adjusted. How that works exactly depends on the respective national laws. Let’s take a closer look at this. We’ll assume here that the value is reduced by half in order to allow the household to pay off the remaining value of the mortgage. Compared to the status quo ante situation, we’ll say the price of houses has fallen from 200 to 100, and the household has spent its deposits. The bank has some equity, which is the mirror of a surplus of assets over liabilities.
