30 Apr 2008
Borrowing Money to Enable Transition? That’s Dangerous!
I spoke at the weekend at the Triodos Bank AGM in Bristol, an excellent day with an interesting mix of speakers, some great stalls and lots of people who wanted to buy Transition Handbooks (thereby saving my having to lug them all home again). I was speaking in the same session with Patrick Holden of the Soil Association, and Patrick spoke very powerfully of his own attempts at Transitioning his life. Near the end of his talk, he raised a very interesting point which I wanted to explore up here at Transition Culture. He referred to a book that he reads with his youngest son called ‘That’s Dangerous!’
Patrick’s point was about the dilemma of going into debt in order, in the long run, to make oneself more resilient in the face of peak oil and recession. He spoke about how when he first heard me talk about peak oil, I gave him a copy of the booklet we did for the Fuelling the Future conference in Kinsale in 2005, which had a section called “10 Things to do when you get home from FTF to prepare for a Post-Carbon future”. Number 3 was “Get Out of Debt”. It read;
“When the shortage of oil starts to hit home the economy will enter a very difficult period. It will not be a good time to owe large amounts of money to a bank. Take a look at your situation, to what extent do you live on credit? If you have a large house, could you make do with a smaller one, and reduce your repayments? Make getting out of debt a family priority and use it as an opportunity to simplify your lifestyle”.
When Patrick got home and sat with his family and took a stark look at how his farm operated, how energy dependent it was, and how dependent on transport and distant wholesalers it was, he began to draw up a plan for the Transitioning of his farm. This has so far included moving from selling milk to his son and daughter-in-law returning to the farm and starting to make cheese from the milk (reducing the weight to be transported by 90%), focusing more on local markets, looking at options for renewables and making the whole operation more energy efficient. He tells some of his story in the BBC programme below;
Part Two ¦ Part Three ¦ Part Four
The reality is that in order to do this, to build the farm’s long term resilience, requires money, money which needs to be borrowed from somewhere. This was the point at which Patrick talked about ‘That’s Dangerous’. It is a book for kids about what not to do… “putting your tongue in an electric socket, THAT’S DANGEROUS!”, “sitting in front of a moving vehicle, THAT’S DANGEROUS!”, that kind of thing. To this, Patrick added a new one; “lending money to Patrick Holden, THAT’S DANGEROUS!”. Lending money to a business already in debt that wants to borrow more money in order to take radical steps in an uncertain economic world.
It is an interesting dilemma, one I am also facing personally in a much lesser scale as I look to put solar panels on my house as part of the Transition Town Totnes Solar Hot Water Challenge. Money is tight, do we borrow more in order to do it? I also want to build a chicken greenhouse, and start to work my way through our ‘make your house zero-carbon’ plan a colleague drew up for us recently. Patrick’s point to the Triodos Bank was that those of us who want to get further into debt in order to become more resilient could be seen as the green movement’s equivalent of the sub-prime market.
What is needed are lenders, such as Triodos, Ecology Building Society, and to some extent the Co-operative Bank, who at least appreciate the thinking behind such proposals. The other option is that we lend money to each other. I was impressed the other day by a website called Zopa.com. “Zopa” stands for ‘Zone of Possible Agreement’, defined on their website as “the overlap between one person’s bottom line (the lowest they’re prepared to get for something) and another person’s top line (the most they’re prepared to give for something). If there’s no Zopa, there’s no deal”.
You can find a very thorough list of Zopa FAQs here. It is a form of Social Lending, where people get together and lend to each other, sidestepping the banks. Have a look around on the website and see how it works. Struck me as an excellent tool for funding our personal Transitions, where those of us with a few bob spare can support those of us who need a few quid for things. It is something we need to think about.
Thinking about all this brought to my mind the Hirsch Report. In its famous opening paragraph it states;
“The peaking of world oil production presents the U.S. and the world with an unprecedented risk management problem. As peaking is approached, liquid fuel prices and price volatility will increase dramatically, and, without timely mitigation, the economic, social, and political costs will be unprecedented. Viable mitigation options exist on both the supply and demand sides, but to have substantial impact, they must be initiated more than a decade in advance of peaking.”
What I hadn’t really thought about before was the fact that once we get beyond the peak, much of what we need to do will get more and more expensive, indeed in some cases, increasingly unfeasible. It is one thing to argue that practically we needed to have started this Transition 10 or ideally 20 years ago, but the reality is that once we go beyond the peak, the sharp rise in prices, the economic tightening and the increase in the expense of transportation will make these things harder to do. There will never be a less expensive time to retrofit, to fit renewables, to install essential infrastructure. Indeed from the recent quotes I have had for solar panels, it would have been considerably cheaper to have bought them last year.
One insight into this came from the ever-eloquent Nate Hagens in an article on OilDrum.com, where he observed that “The Grangemouth refinery shutdown has apparently caused work on a new wind farm in Scotland to shut down for lack of diesel fuel”. I’m sure that high oil prices will lead to many other such stories.
So, one could argue that delaying starting work on peak-proofing our lives is actually what’s dangerous, rather than borrowing the money, when we take our future savings of much more expensive oil and gas into account. It’s an interesting dilemma, one for which I have no answers, but I’d be interested to hear your thoughts.
30 Apr 8:31am
Well, here’s my personal thoughts on the matter. If getting out of debt is the No. 3 requirement for a post-carbon future then surely it is going against basic principles to take on more. Or take on any at all if you have none.
How can it be said that debt is not a good thing but to then to take some/more on? To me that seems more like the “I want” culture we are in at the moment and it is teaching nothing if those of us who are somewhat enlightened as to the seriousness of the situation do not follow the principles. In fact, it detracts from the message because you can be sure that someone, somewhere will latch on to this and then you will be subject to accusations of hypocrisy. Like the people who tell us flying is not good, but that their flying is important and they must continue to do it.
Your argument that post-peak purchases like this will be more expensive therefore we should get them now, whether it means debt or not, sounds to me like the excuses everyone under the sun uses to justify their next purchase, whether it be solar panels or a summer holiday (“better go now because if flights increase in price we won’t be able to afford it in years to come…”).
I’m not remotely convinced and my personal opinion is that if one can’t afford it one doesn’t have it, simple as that. I just don’t see how getting further into debt solves anything at all; it doesn’t create resilience, it creates dependence. And gives out totally the wrong message to boot.
30 Apr 8:45am
I have often wondered if as our individual Transition initiatives get off the ground, one of the working groups which will need to emerge will be around the issue of peak proofing our homes and how to set up the necessary systems (including and particularly financial ones) to support people, especially those on low incomes, to do this.
Here in Bristol we have recently seen the demolition and reconstruction of the City Centre at the cost of billions of pounds. As the economy goes further into recession, I can’t help feeling that the money used to build something which will probably become a ghost town once the effects of peak oil really hit hard could have been used to help millions of people in this city to retrofit their homes.
So many people in Bristol are on really low incomes and I don’t think it will be possible for them to consider retrofitting their homes on their own without massive support from local and national government and a strong local infrastructure to advise and support them. This is one of the many reasons that the Transition step of building a bridge to local government is important. We need to connect with them and National Government to get finance for community support schemes of this nature instead of seeing money spent on white elephants, as many people just won’t be able to afford retrofitting on their own.
I certainly could not afford to retrofit my home and would not consider borrowing in order to do it. It would just give me too much worry to get into more debt in this way, even knowing what I do about peak oil.
30 Apr 11:47am
I was just talking to David Holmgren (co-originator of Permaculture) about this, and his take was that either one is an individual or a small business in which case the ideal is to avoid going into debt wherever possible, or to borrow so much money that those from whom you are borrowing have a self-preserving interest in your success, i.e. that if you go down you take them with you!
30 Apr 12:58pm
For info: In France there is “La Nef”, “New Fraternal Economy”, a “coopérative de finances solidaires”. Since early 80’s. Growing fine, Triodos and them just missed a merger (I think the co-op people want to keep it co-op – good for them), planning for a sort of merging with 2 other banks – Spanish and Italian.
The website I put a link for is theirs, not mine (i.e. I do not work for them – but hope to soon be one of their members).
30 Apr 4:21pm
When borrowing you need to borrow against future income to match. When you get a home mortgage, you are borrowing against the assumption (hope) that you will be employed long enough to pay it off, and/or the home will keep its value and can be sold for equal to or greater than the loan plus interest paid. When a business takes a loan or buys on credit it does so against future earnings (or increase in value of the company itself, either in the form of its stock if public, or its (more subjective) valuation if intending to be sold.)
If you’re borrowing to buy equipment necessary to change your living system (solar panels or whatever), what future income can you match that to? Savings from avoiding external costs (electric or gas or oil bills)? And on what basis are you predicting those costs? We may predict that energy costs will continue increase, but it’s hard to say with great certainty how exactly. [Part of the problem that we are having is UNcertainty in energy costs and effects.]
Or we might make a prediction that different systems for living will be an enabler for future success or survival while you might otherwise be in trouble, as externalaties like energy costs change. Or that the stuff you’re buying (solar panels or whatever) will be worth the same or more as your loan plus interest if sold sometime in the future.
If you don’t have a future income to match to the borrowing, then it’s just an expense, whatever additional benefit (other than pure economic) it might have, and you ought to use cash savings.
30 Apr 5:39pm
Yes this post really resonates with me. I am on the verge of having to get a mortgage for the first time (which interestingly translates as ‘the grip of death’) . This is for my unit in an eco-village in Ireland http://www.thevillage.ie and will be a much much smaller mortgage than any of my peers have been getting. My move to the Village is my resilience plan – I have no plan B so I have to do this, However as the global economy starts to unravel will the bank even let me borrow what I need? I like what David Holmgren says and think I will just risk borrowing as much as i can.
30 Apr 9:50pm
This is a really interesting question. I’ve wondered whether, as the global economy to starts to unravel, will the banks themselves be victims, and therefore will they be there for you to pay back your debt to? In which case, borrow whatever you need!!
1 May 5:19am
Maybe instead of adding, try subtracting. Figure how you can live without a car, without electricity, without the public water supply. But then, I’m not sure how I’ll afford a concrete rainwater cistern, even though no home should be without one.
1 May 5:49pm
“It is an interesting dilemma, one I am also facing personally in a much lesser scale as I look to put solar panels on my house as part of the Transition Town Totnes Solar Hot Water Challenge. Money is tight, do we borrow more in order to do it?”
If you’d bought some gold when it was $590/oz, you could probably afford them now 😛
Two things to bear in mind:
1) Anything you do to reduce your energy bills will probably be in tandem with the value of money. You could invest in PV on a loan, and as everything gets more expensive, its payback will be better and better (assuming the cost of electricity rises in tandem with everything else).
2) The money that’s lent is, to some extent, intangible. The banks are going to have a really hard time chasing all of the defaulters. You could amass lots of debt, default, get a bad credit rating (which you wouldn’t care about because you don’t want to be in debt anyway) and then arrange an IVA, where you pay e.g. £1/month to each lender. Most people see defaulting as some kind of “failure”, but if you don’t care about your credit rating then it’s actually a blessing because you stop paying interest on the loan according to the IVA arrangement. The point is that being unable to pay back your debts isn’t necessarily the end of the world. Don’t be scared by the threatening letters the banks send; they really prefer to avoid court cases.
2 May 6:30am
Isn’t it interesting how people’s thinking seems to change when it concerns money. Try looking at it in a couple of other ways.
In earlier times it was not uncommon for people to ‘lend’ to a farmer to buy seed in return for a share of the crop. It was a necessary arrangement -if the farmers can’t buy seed they cant grow a crop, and people want food. Of course there is the risk that the crop will fail, and there is no monetary interest but I can’t see that style of lending/borrowing is a bad thing.
You might also care to look at the opportunity cost of the borrowed money. If you buy it to instal solar panels, that borrowed money is not available for someone else to borrow to spend on a new gas guzzling car, or an ozone depleting oil consuming holiday to the other side of the planet. Put that way your borrowing might be doing everyone a favour.
Fundamentally money represents some token of control over an abstract set of resources. So the question then is: will you use there resources for a better purpose than other would? It is the issue of charging/paying interest that makes borrowing in the modern world a questionable activity.
In that respect does anyone know if countries that have a strong adherence to Sharia , and particularly prohibition on lending at interest have credit crunch related problem like the US and ‘western’ world does?
6 May 2:45pm
One other thing to remember about getting out of debt it that it reduces the money supply by 8 times the amount that you pay back!
7 May 6:52am
“getting out of debt it that it reduces the money supply by 8 times the amount that you pay back”: interesting figure. How does that one works?