The macroeconomic money-nature nexus: Are growing money supplies a relevant obstacle on the way to an ecologically sustainable global economy?

Stefan Möckel

doi:10.1371/journal.pstr.0000095

What is it about?

The Money-Nature Nexus opens up a new perspective on socio-economic processes and enables a better understanding of the Great Acceleration of the 20th century. It shows why the global money supply, which has been growing exponentially for 300 years, is not only fostering economic growth but also steadily increasing the use of natural resources despite all the progress in efficiency and sustainability efforts.

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Why is it important?

In the article, I have developed a model of the hitherto little recognized interaction between money growth and the use of natural resources (Money-Nature Nexus), which complements existing economic theories. In addition, I propose a calibration of the global money supply to the earth's natural capacities by using the global Ecological Footprint Indicator and the Living Planet Index. In my opinion, this would be the most effective and efficient way to keep the global economy and the anthropogenic use of natural resources within planetary boundaries as only a global regulation of an artificially created resource would be necessary. The alternative would be a global governance of the multitude of global resource demands through permit reservations, bans, quotas or taxes with the corresponding extensive national and global controls. Despite extensive explanations by Hans Christoph Binswanger, the ecological relevance of growing money supply has so far hardly found its way into sustainability debates and concepts, although in the 20th century the global growth in money supply (and credit volume) was significantly greater than the growth in production output, inflation and world population. The denial of an ecological interrelationship between the money supply and anthropogenic resource use is based primarily on the rejection of a causal effect in economics, since according to orthodox, (neo)classical economics, inflation neutralizes money supply growth within 2-3 years. Their models therefore do not depict money supply growth at all. Although heterodox economists disagree with this, they do not see money supply expansion - unlike Keynes - as a driver of growth either, but only as a consequence of economic growth. Representatives of modern money theory even propagate the expansion of (state) money creation as the solution to all of humanity's problems. The shows firstly that the orthodox neutralization claim is empirically refuted, as the growth rates of the money supply globally and in many countries have been on average 5 percentage points higher than inflation rates in recent decades. Secondly, that the post-Keynesian view negates the enabling factor of money creation out of nothing by central and commercial banks and wrongly classifies money supply growth as only a temporary phenomenon of an allegedly closed credit cycle. Well-known economic theories, on the other hand, can explain very well why money growth is not neutral, but enables both economic growth and an expansion of natural resource use. In the article I argue and graphically illustrate why the availability of liquidity significantly determines the level of production, consumption, construction activity and wealth and that the supply of money by central and commercial banks is of central importance for the size and growth of economies as well as for the anthropogenic use of resources and ecosystems. Conversely, the extracted natural resources and the goods and services produced from them give the money created out of nothing a material equivalent, which keeps inflation low. The money-nature nexus was clearly illustrated by the financial crisis in 2008, in which a global liquidity shortage led to a decline in production, consumption and resource use until growth resumed in 2010 due to massive liquidity injections by central banks and governments. The money-nature nexus also explains why efficiency gains in resource consumption and even environmental taxes do not reduce the overall use of natural resources in the economy as a whole.

Perspectives

Thus, a further expansion of the global money supply is a relevant obstacle on the path to an ecologically sustainable humanity and global economy. This also applies when money is newly created for green investments, as this money enables a wide range of further non-green investment and consumption expenditure after the initial investment. The necessary financial resources for the ecological transformation should therefore be obtained through reallocation and not through the creation of new money (aka expansion of credit volumes). Furthermore, the article suggests to calibrate the global money supply with nature's capacities. All that would be needed is an international regulation on the allocation of the global money supply to the individual currencies, as there is no global currency, and a corresponding national control of the national money creation by central and commercial banks. The distribution of the global money supply would also be an opportunity to achieve a much fairer distribution of wealth and resource use between countries than is currently the case.
Stefan Möckel
Helmholtz Centre for Environmental Research GmbH - UFZ

This page is a summary of: The macroeconomic money-nature nexus: Are growing money supplies a relevant obstacle on the way to an ecologically sustainable global economy?, PLOS Sustainability and Transformation, January 2024, PLOS,
DOI: 10.1371/journal.pstr.0000095.
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The macroeconomic money-nature nexus: Are growing money supplies a relevant obstacle on the way to an ecologically sustainable global economy?
Production, consumption and nature depletion have been growing rapidly for more than 300 years, even faster than exponential population growth. A comprehensive understanding of the causes behind this great acceleration is necessary if we are to achieve a sustainability transformation. This paper is intended to draw the attention in the sustainability debate to the amounts of money that have been growing rapidly all over the world. The money supply has not been a main focus so far, since for the economic mainstream it is not a growth driver, as according to the neoclassical view, money growth is largely neutralized by inflation, while for Keynesians it merely follows economic growth. However, the growing money supply means greater liquidity for consumption as well as for investments in production, assets and resource exploitation. An expansion of the money supply is even a prerequisite for a simultaneous increase in investment and consumer spending. At the same time, the expansion in the supply of raw materials, goods and services keeps inflation rates behind money growth globally. The paper aims to identify and illustrate the causalities of how the money supply and the use of natural resources are interconnected by means of economic activities. This money-nature nexus would explain why, due to high money growth rates, both the real economy and the depletion of natural resources and ecosystems continue to increase despite all efficiency improvements and sustainability efforts to date. It should therefore be a realistic fear that without a global limitation of exponential money growth, ecological sustainability cannot be achieved.

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Stefan Möckel
Helmholtz Centre for Environmental Research GmbH - UFZ

Why money growth is driving economic activity and the overexploitation of nature

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Why is it important?

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