I’ve been trying to follow a nagging thought through to its conclusion. We know to expect that flooding risk will extend to an ever increasing proportion of the UK housing stock. But in the context of financialisation, mortgages underpin bank lending, and by extension the wider financial system. And a majority of households depend on their house as a savings vehicle. So what happens when physical climate impacts destroy the real assets that households and the financial system are relying upon?
This is part 4. The absolute limits of finance-led growth.
The simplicity of the finance-led growth model is also its fundamental fragility: private debt generates demand that would not otherwise be there. Finance-led growth may drive up property prices and fuel the consumer economy through the creation of demand, and it may do so in a way that appears to be stable, but it can never do this in a way that is truly sustainable.
At its core, finance-led growth works by bringing future spending into the present through borrowing. When someone takes out a loan – whether for a house, a car, or consumer goods – they’re able to spend money today that they haven’t yet earned. This creates economic activity and demand that wouldn’t otherwise exist at that moment. In isolation, this might seem like a reasonable financial tool for smoothing consumption over time.
However, this borrowing creates a crucial mathematical problem. When someone borrows to spend today, they must use part of their future income to repay not just the principal (the amount borrowed) but also the interest on that loan (the cost of borrowing). This means that in the future, they’ll have less disposable income available for new spending, since some of it must go to debt service. For the economy to maintain the same level of activity, someone else must therefore borrow and spend more at this future point to offset this reduction in disposable income. Note that this isn’t just about individual choices – it’s a systemic requirement.
The problem compounds over time. Continued growth implies that more households and businesses will be taking on debt, meaning a growing share of society’s income becomes committed to debt service payments. To maintain economic activity, the rate of new borrowing must continuously accelerate to offset both previous debt service requirements and create new spending. In the housing market, for example, each new wave of buyers must take on larger mortgages than the previous generation, requiring an ever-greater share of their income for repayment.
This creates an unsustainable spiral: debt must grow faster than income to maintain economic activity, but debt cannot mathematically grow faster than income forever. Eventually, the system hits a wall – either because borrowers can’t take on more debt, lenders become unwilling to extend more credit, or a shock (like an interest rate increase) makes existing debt service impossible. When this happens, the mechanism that drove growth becomes the very thing that forces a contraction, as happened in 2008. The crash isn’t just a possibility in this system – it’s an inevitability built into its basic arithmetic.
thejoyofrachel 
A certain Wikipedia article comes to mind. It starts like this:
“A pyramid scheme is a business model which, rather than earning money (or providing returns on investments) by sale of legitimate products to an end consumer, mainly earns money by recruiting new members with the promise of payments (or services). As the number of members multiplies, recruiting quickly becomes increasingly difficult until it is impossible, and therefore most of the newer recruits do not make a profit. As such, pyramid schemes are unsustainable. The unsustainable nature of pyramid schemes has led to most countries outlawing them as a form of fraud.”
Some comparisons may be drawn.
I’m really enjoying this series, Rachel, as ever.
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