The End of Infinite Growth, Part I: The Economic Face of Natural Limits

Posted on October 3, 2011 by


We are presently living through and extraordinary phase of modern human history.  Consider these developments from recent years…

  • The United States, the world’s most powerful country since 1945, is mired in intractable economic turmoil.  It came within days of defaulting on its enormous national debt and has seen the value of the American dollar, the global reserve currency plummet precipitously after a long gradual decline.
  • The debt crisis in the European Union continues its inexorable descent toward the collapse of the Eurozone and the common European currency.
  • Large-scale riots in London and across England, coupled with ongoing demonstrations in Greece, Spain and elsewhere across the Eurozone as the consequences of the European sovereign debt crisis for ordinary citizens becomes clear.
  • The Deepwater Horizon oil spill disaster in the Gulf of Mexico, which has caused catastrophic ecological and economic damage to the marine environment of the Gulf and surrounding coastal communities respectively.
  • The tsunami and Fukushima nuclear disaster in Japan, which have savaged the long ailing Japanese economy and dealt what could be a terminal blow to expansion hopes of the global nuclear power industry.
  • An unprecedented frequency of extreme climate-related natural disasters, in line with the worst-case predictions of climate change science, at a cost of approximately US$130 billion.
  • Rebellion and revolution occurring across the Middle East, in what has been dubbed the ‘Arab Spring.

Like many people, I have spent much time trying to tie together the connections between these events.  From my vantage point, they appear to be all symptoms of a wider phenomenon, a process whereby human societies across the world are slamming headlong into the limits of a finite Earth and confront endgame of the infinite growth paradigm.  The symptoms of exceeding these limits are clearly visible in the global debt crisis, the peaking of global oil production, and climate change.

This article delves into the terrain of macroeconomics, political economy and energy.  Compiling this posting has helped me, as a non-economist, attempt to piece together crises in the world’s monetary and financial systems with political upheavals across the world and the ongoing impact of intractable energy depletion.  This is not a perfect document.  I have written it for the purposes of my own learning, as well as to stimulate further discussion on these seminal developments of our time.  All constructive discussion and feedback is most welcome via the comments function below or through private correspondence with the author.

Limits in a Finite World

I have written many times on this blog of the urgent need for all of us to face the inescapable reality that we live on a finite planet.  This is not a radical concept; many people have noticed that there are limits to the amount of resources we can extract from the Earth and the amount of waste we can pollute, beyond which the biological processes of the planet and our human societies that depend on them come under threat.

The 'finite' Earth.

To put this another way, imagine Earth, society and economy as a set of Russian dolls.  Our economic systems are social constructions of human societies, which are themselves nested and inter-dependent components of the natural world (see Figure 1 below).

Therefore, human societies, along with the economies that facilitate the exchange of goods and services within and between them, can only grow to the extent that the physical limits of the natural world will allow.  Systemic breakdown is likely if these limits are exceeded, a reality with which we are beginning to grapple as ecological, energy and economic crises coalesce into a perfect storm.

Figure 1: Nested systems - Economies as constructs of human society, dependent on the natural world.

As climate change has been a regular discussion on this blog, I will concentrate here on the consequences of physical limits at the economic and societal levels, embodied in the twin crises of the global debt crisis and peak oil.  For more on the economic implications of the climate-energy-economy crisis, read the Stern Review on the Economics of Climate Change and Garnaut Climate Change Review, or watch the 11-part video series Peak Oil and a Changing Climate published online by The Nation magazine.

The Global Debt Crisis

You may already be asking: ‘Why do people in rich nations owe so much to each other?’  The answer is that the debts are contracts between different groups of people.  A highly developed financial system offers the opportunity for individuals, small businesses, large firms and corporations, non-profit organizations, and governments to borrow money.  At the same time, other people, companies, and governments will have surplus funds that they wish to lend or invest.  Over time, the financial system has evolved smarter and smarter tricks to allow almost every potential borrower to have access to credit (Warburton 2003, 166-67).

Let’s consider the ecology-energy-economy perfect storm in more detail.  All three levels of the system are under stress simultaneous but it is the smaller sub-system that is likely to break down first, which reflects what we are seeing with the implosion of the global financial system under the strain of massive sovereign (national) debt burdens.

This story began in the United States with the sub-prime mortgage crisis, where predatory lending institutions provided housing loans to sub-prime borrowers (borrowers of high default risk), usually people on low incomes.  These loans were then repackaged as complicated debt-based financial instruments (mortgage-backed securities) which were traded as assets on international financial markets.

Sub-prime borrowers in the United States began defaulting on their loans en masse in 2007, due in part to the expiry of sunset clauses on cheap interest rates in the original loan contracts, as well as the disproportionate exposure of many sub-prime borrowers living in outer suburban fringes to rising cost of living pressures stemming from high oil prices (which reached a record US$146/barrel in mid-2008).

The value of mortgage-backed securities traded on international markets were brought down by the weight of the voluminous bad loans upon which these instruments were based, bringing down American investment banks such as Bear Stearns and Lehman Brothers and prompting the US government to offer multi-billion dollar bailout packages to prop up various other exposed companies across the financial sector.

The end result was the nationalisation of all this private debt, a pattern repeated across the OECD, which transformed the debt obligations into public liabilities for which taxpayers were responsible.  Governments also offered economic stimulus packages (again, financed by debt) to keep the engines of growth ticking over through and avoid a second global depression.

They were successful in preventing a global depression, but in doing so they exhausted most of their available financial resources to only kick the can down the road a few years.  To use a battle metaphor, governments fired all their ammunition at a charging foe and only gave it a flesh wound.

Today, many nations across the developed world are saddled with debt burdens which they have no hope of ever repaying.  Because some of the world’s largest economies are included in this group, the sovereign debt crisis spells huge trouble for the global financial system.

The crisis in a typical state can take both a financial form (the inability to borrow more finance) and a monetary form (the inability to acquire the currencies required to pay the creditors). Typically, then, the government concerned is required to devalue its currency and simultaneously extract large resources from social groups within the country to pay off its creditors (Gowan 2004, 19).

Here we also need to note that all government finance their operations and services on credit, by selling government bonds on international bond markets.   Buyers on bond markets tend to shy away from purchasing government bonds when the risk of debt default and thus a loss on investment is high.  However without this credit finance, governments cannot continue to provide services to their citizens at existing levels and thus are forced to legislate savage austerity measures.  Such measures are also a standard condition of bailout packages, as the Greek experience illustrates.

The Perpetual Growth Engine: Money

To understand the mechanics of the global debt crisis, we need to know a thing or two about money.  Money is a means of payment for settling a debt, coming in numerous forms through history from gold to bank notes to sea shells.  It is accepted as a means of payment because it performs three functions: (1) it is accepted as a medium of exchange for goods and services (without which we would have to exchange goods and services directly through barter); (2) it is a unit of account, an agreed measure of the prices of goods and services; and (3) it is a store of value because it can be held and exchanged later for goods and services (McTaggart et al 2010, 506-507).

When we think of money in global commerce, the international monetary system is guided by three key concepts: compound interest, fractional reserve banking, and fiat currency (there are many other aspects of the international monetary system, such as currency markets, which for simplicity I will not consider here).  This system, which has evolved since the Renaissance into its present form, is the basis for the perpetual growth paradigm.

Banks today generally have two roles: to provide safe storage for customers’ savings, and to lend money to other customers.  In the financial world, interest is accrued exponentially through a process called compound interest.  This occurs when the interest that is added to a principal amount (e.g. a debt or savings) itself also earns interest, resulting in the exponential growth of the original amount deposited or owed.

Banks do not retain all of their customers’ savings deposits, but generally invest these funds to other customers as interest-bearing bank loans.  Therefore, the available funds a bank has at any one time (reserves) are only a fraction of the amount of deposits held by that bank.  This is known as fractional reserve banking.

There are two issues of concern here.  One, as a consequence of lending out more money than they actually hold in reserve as deposits, banks can effectively create new money out of thin air, which is a factor in the rate of inflation and devaluation of the money supply over time (for example, $1.00 in 1980 was worth more than $1.00 today).  As a consequence, a person, company or country needs to grow the size of its investment portfolio at a rate at or above rate of inflation to maintain the same level of wealth.  You can see therefore that there is a clear bias in the monetary system, indeed a necessity, for perpetual economic growth.

Second, banks get into trouble when many depositors attempt to withdraw their savings at the same time (a ‘bank run’), which leaves all that wealth liable to vanish back into thin air if individual banks or the banking sector collapses.

This leads to the third key concept of the international monetary system: fiat currency.  Money is a social construct that only has value because we agree that it does.  It is essentially a promissory note (an IOU), which may say that a given banknote may represent a fixed weight of a precious metal (for example, the ‘gold standard’), or it may only have value because of a government law regulation, which is known as fiat currency.  Almost all currencies in the world today are fiat currencies because they are not backed by any physical commodity.  Their value is theoretically guaranteed by the taxation revenue of the issuing government.

Anyone can issue money, but only sovereign government can issue legal tender for all debts, public and private, universally accepted with the force of law within the sovereign domain. The issuer of private money must back that money with some substance of value, such as gold, or the commitment for future service. Others who accept that money have provided something of value for that money, and have received that money instead of something of similar value in return. So the issuer of that money has given an instrument of credit to the holder in the form of that money, redeemable with something of value on a later date (Liu 2005).

As a consequence of compound interest, fractional reserve banking and fiat money, there is an inherent structural bias toward growth built into the international monetary system.  However, the promise of stored value underpinning this system becomes problematic with the economic contraction that is increasingly accompanying the end of growth, because that promise of stored value cannot be fulfilled.

Here Comes the Brick Wall: The Economic Growth – Energy Link

These monetary practices could continue indefinitely on an infinite world with unlimited resources and pollution sinks.  They become problematic, however, in the context of the physical limits of a finite world where perpetual growth is simply impossible.  Our economy is a wholly-owned subsidiary of the natural world.  All our material wealth, all of the goods we consume, are made with resources that have been extracted from the Earth.  The Earth’s finite resource base cannot accommodate ever-expanding economic production to provide returns on ever-expanding debt.

So what happens when we reach physical limits to the rate of oil production?  What happens if this particular limit is reached at a time when global supply and demand are at parity, with the demand for that resource is rising and supply declining?  This is the predicament we face today.  By many estimates, global oil production has reached its peak simultaneous to rapidly rising oil demand from newly industrialising powers such as China and India.

The peaking of global oil production—peak oil—describes the situation when half of all recoverable oil on the planet has been produced.  After this point the amount of oil that can be extracted begins to decline due to geological limitations.  The theory of peak oil is not controversial, but the date of the peak has been a matter of debate.  Forecasts for the global oil peak range from 2005 to 2030, although there is growing evidence that we the peak was reached in 2008, as the oil price spike of that year would suggest.

This does not mean that oil is running out, but rather that the remaining reserves are progressively more difficult and costly to extract.  All the highest quality and easy-to-get oil was produced first, which makes both logical and economic sense.  What’s left to be recovered is mostly lower quality, hard-to-reach oil, in geographically challenging locations such as deep water deposits in the Gulf of Mexico (including the ill-fated Deepwater Horizon oil platform), tar sands in Canada, and under the Arctic Sea, or in major oil-producing states that exist in politically unstable regions such as the Middle East, Central Asia, and Africa.

Indeed, the great irony of energy politics is that the major industrial countries have insufficient domestic oil supplies to fuel their economies and are reliant on foreign sources.  A state is energy-secure when it has access to adequate energy supplies at affordable prices.  Prices are defined as affordable if they stop short of causing severe disruption to normal social and economic activity.

When domestic supplies of energy do not meet a country’s energy needs, external sources must be found on the international oil market.  If domestic supplies decrease, a state must import energy to make up for the shortfall.  The more reliant a country is on imported energy, the more vulnerable its economy becomes to external forces that disrupt supply.  These external forces can include political problems such as war, terrorism, unfriendly governments, sabotage of oil infrastructure, or they can include other occurrences that take oil production facilities off-line, such as worker strikes, technical failures, accidents, or natural disasters.  Therefore, any supply disruption is likely push the oil price upward and accelerate the production decline process.

There is a clear relationship between gross domestic product (GDP) and energy consumption, particularly in relation to oil.  The direct economic consequence of peak oil is an upward trending oil price, punctuated by volatile price swings.  The upward price trend has occurred because oil consumption is at parity with oil production and is rising beyond production rates.

What, however, causes the price volatility?  Eventually, the high oil price makes some economic activities prohibitively expensive, which dampens demand and brings the price down temporarily.  As the price drops, those activities become economically feasible again and demand rises, forcing the oil price back up.  The lack of cost certainty caused by price volatility acts as a positive feedback loop, making it difficult for oil companies to invest in new exploration and infrastructure projects, which in turn is accelerating the rate of production decline (Hirsch et al 2005, 61; Skrebowski 2011).

Economic production cannot continue expanding indefinately in the absence of sufficient cheap oil.  Think about how important oil is for our economy.  Picture all the things you own that are either made from oil, such as plastics, or made using oil in their production processes.  Think about transportation and how you get around.  Think about all the goods you consume and how they are shipped from where they are made or grown, to where they are sold, to how they are transported from point of sale to your home, and then how they are disposed of.  Upwardly trending and increasingly volatile oil prices will make these products and processes prohibitively expensive to produce or maintain, resulting in economic contraction (Rubin 2009, 5).

Credit Crunch

As we have seen since 2008, economic contraction makes it difficult for people, businesses and even countries to repay their loans, which is problematic in societies where a vast proportion of economic activity takes place on credit.  Growth is necessary so that borrowers can produce the surplus necessary to make loan repayments upon which compound interest is calculated.

If mass loan defaults occur, loans that were previously income-bearing assets for the lending institutions—the banks—become liabilities that eat into their fractional reserve, making bank runs and bankruptcies more likely as banks find they have insufficient funds to fulfil their obligations to deposit holders.

In this kind of environment, lending tends to stop, causing what economists call a liquidity crisis.  Liquidity refers to “financial reserves sufficient to meet balance of payments deficits” (Gilpin 2001, 246).  To state this in simplified manner, in credit-driven economies, curtailed lending means curtailed economic activity and therefore curtailed economic growth.  This, of course, is another positive feedback loop in which economic contraction leads to further loan defaults and therefore more pressure on banks, which add further pressure to curtail lending, and so on.

When capacity is mothballed or destroyed prematurely, a large part of the original financial investment has been transformed into consumption.  It is not available to be reinvested in another project or industry. …An economy that suffers heavy financial losses in this way, as a result of the misallocation of capital, will discover that its scope to increase productive capacity has diminished (Warburton 2003, 172-73).

This also affects the perception of the value of money itself.  Remembering that fiat money is a social construction, if the value of a fiat currency is backed solely by the taxation revenue of the issuing government, declining taxation revenue resulting from economic contraction coupled with ballooning bad debts are likely to erode the confidence of investors in its value.  Therefore, it will no longer be useful as a store of value because it decreasing acceptability as a medium of exchange in international commerce (which helps to explain the declining value of the US dollar over the past half-decade and in the past year in particular).

In short, the basis for perpetual growth no longer exists.  Because we are now in a situation where economic contraction is being caused by physical limitations of the resource base upon which economic activity is based, the entire global financial system is in danger of collapse, which is exactly what we are seeing today in Europe and the United States.  In a globalised world, this contagion will inevitably spread to other developed economies, including across Asia and ultimately Australia.

Debt Crisis = Political Crisis

This is not to say that compound, interest, fractional reserve banking and fiat currency are inherently bad in and of themselves.  All three developed over time as practical mathematical and political solutions to difficult problems of finance.  Indeed the global financial system has been in a state of constant evolution since the birth of capitalism over five hundred years ago and it will continue to exist in a different form beyond this crisis (for an excellent overview, see Harvard University economic historian Professor Niall Ferguson’s book and TV mini-series The Ascent of Money).  The problem with the end of growth, however, is that the transition to this new form is likely to happen in revolutionary and destructive manner, with disastrous political consequences.

The conclusions of this article are clearly unpalatable, whichever way you choose to break them down.  Nonetheless, the end of growth is the elephant in the room of that we cannot avoid discussing any longer.  Indeed our capacity to adapt to the end of growth with as little disruption as possible depends on our intellectual and emotional ability to be honest about our predicament.

In Part II of this analysis, I will delve into the political ramifications of the end of growth.  Political instability is already evident in countries abroad where the breakdown of the growth paradigm is more advanced than it is here in Australia.  I will identify some warning signs to watch out for in the Australian political process which we need address constructively if we are to adapt to the end of growth in an orderly manner and avoid some of the social chaos seen elsewhere.

Further Information

Arab spring: an interactive timeline of Middle East protests,” The Guardian.

“Austerity Measures: Related articles, background features and opinions about this topic,” Spiegel Online,

Debt Crisis: Related articles, background features and opinions about this topic,” Spiegel Online.

Deepwater Horizon oil spill,” New Scientist.

Ferguson, N, The Ascent of Money, PBS Broadcasting.

Fukushima updates,” Fairwinds Associates.

Graphics Gallery: The Most Important Facts about the Global Debt Crisis,” Spiegel Online.

Latest News on the US Economy,” The Guardian.

Peak Oil and a Changing Climate,” The Nation, 5 January 2011.

UK Riots,” The Guardian.

World news about Greece published by Euronews,” Euronews.


Eichengreen, B, “The Dollar Dilemma: The World’s Top Currency Faces Competition,” Foreign Affairs, Vol. 88, No. 5, September/October 2009, pp. 53-68.

Escobar, P, “Decline and fall of just about everyone,” Asia Times Online, 27 September 2011.

Ferguson, N, Colossus: The Rise and Fall of the American Empire, 2005, Penguin Books, New York.

Ferguson, N, Niall Ferguson on the recent financial meltdown, YouTube, 9 December 2010.

GDP per capita versus energy consumption,” YouTube, 30 September 2010.

Foss, N, “Peak Oil, Ponzi Finance and the Next Financial Crash”, Financial Sense News Hour, 29 June 2011.

Garnaut, R, (2011). The Garnaut Review 2011: Australia in the Global Response to Climate Change, Cambridge, Cambridge University Press.

Gills, B, The Global Financial Crisis — A Primer, Newcastle University.

Gilpin, R, (2003). Global Political Economy: Understanding the International Economic Order, Princeton University Press, Princeton.

Gowan, P, “Triumphing Toward International Disaster: The Impasse in American Grand Strategy,” Critical Asian Studies, 2004, Vol. 36, No. 1, pp. 1-36.

Heinberg, R, “Peak Oil Day,” Post Carbon Institute, 3 July 2009.

Li, M, “Peak oil, the rise of China and India, and the global energy crisis,” Journal of Contemporary Asia, Vol. 37, No. 4, 2007, pp. 449-471.

Liu, H, “The Coming Trade War Part 2: Dollar hegemony against sovereign credit,” Asia Times Online, 24 June 2005.

Liu, H, “The trillion-dollar failure,” Asia Times Online, 10 July 2010.

McTaggart, D, Findlay, C, & Parkin, M, (2010). Macro Economics (6th ed.), Pearson Australia, Frenchs Forest.

Press Release: Overall picture of natural catastrophe’s in 2010,” Munich Re Insurance, 3 January 2011.

Rubin, J, (2009). Why Your World is About to Get a Whole Lot Smaller: Oil and the End of Globalization, Random House, New York.

Skrebowski, C, “A brief economic explanation of Peak Oil,” Energy Bulletin, 26 September 2011.

Stern, N, (2006). Stern Review on the Economics of Climate Change. Her Majesty’s Treasury, London.

Warburton, P, (2003). “Debt and Delusion,” in Pettifor, Ann (ed.), Real World Economic Outlook: The Legacy of Globalization – Debt and Deflation, Palgrave Macmillan, London, pp. 165-173.

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Currency”, Future Tense, ABC Radio National, 4 March 2010.

Euro Zone Crisis To Impact Asia: Singapore PM,”, 30 September 2011.

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Peak Oil Primer,” Energy Bulletin, 10 January 2011.

The Revolution Has Begun in Europe,” YouTube, 25 June 2011.


Dr. Benjamin Habib is a Lecturer in Politics and International Relations at La Trobe University, Albury-Wodonga. Ben’s research project projects include North Korea’s motivations for nuclear proliferation, East Asian security, international politics of climate change, and undergraduate teaching pedagogy. He also teaches in Australian politics and the international relations of the Middle East.  Ben undertook his PhD candidature at Flinders University in Adelaide, Australia, and has worked previously for the Department of Immigration and Citizenship.  He has spent time teaching English in Dandong, China, and has also studied at Keimyung University in Daegu, South Korea.  Ben is involved with local community groups Wodonga and Albury Toward Climate Health (WATCH) and Transition Albury-Wodonga.

Ben welcomes constructive feedback.  Please comment below, or contact Ben at

The views in this story are those of the author and not necessarily those of Our Voice: Politics Albury-Wodonga.