Doomed by Debt

Unfortunately for the romantics out there, it is not love that makes the world go around. It’s money that makes the world go around, right? Well, if you think of money as those units of currency you carry in your wallet or pocket, then no it’s not actual money. Actual money (currency) is in relatively short supply. No, what makes the world go around is money created out of thin air; otherwise known as credit or debt. Think fractional reserve lending. Credit/debt is money that was never generated by the real economic production of a good or service. Credit/debt is, however, a claim against the future real economic production of goods and services.

Credit, in and of itself, is not a bad thing. Most people could never hope to own a house or other big-ticket items, if it were not for credit. The problem comes when a nation’s economic growth becomes dependent on ever-increasing amounts of credit. Economies like ours depend on consumption. Credit allows for more consumption, which drives the producers of goods and service to expand and hire, which means more people have income and more people will use credit to consume the increased production of goods and services. Sounds great, right? Prosperity for all. A rising tide floats all boats. Unfortunately, there is always a “but” or, in the case of credit/debt, there are two “buts“. First, all debt must be paid back with interest. If it is not paid back, the lender takes a haircut and that diminishes the economy. And, this is important to understand. Although the credit money was not backed by real economic growth in goods or services, the interest and principle must be paid back from the real production of goods and services. Ouch!!! Second, as the economic pie grows, in part due to credit, it takes more credit to achieve the same result as earlier credit did. In other words, maybe there was a time when a dollar of credit generated 90 cents of economic growth. As time went by, it took $10 of credit to produce 90 cents of economic growth and then it took $100 and then $1000…. It;s the law of diminishing returns.

Today the world is buried in debt and America is no exception. If we were to ask any John or Jane Doe their opinion on debt in America today, they would likely throw up their hands and say how insane it is that our nation is more than $17 trillion in debt. It’s understandable they would talk about the national debt because that is the number that gets the most news coverage. Sadly, seventeen trillion dollars is only a small part of America’s indebtedness. If you look at the US Debt Clock, you will see in the upper right hand corner that our national debt is $17.5 trillion. But, scan down in the center ad you will see Total US Debt, the sum of federal, state, and local government debt and corporate debt and individual debt, is _ are you ready for this? _ $61.5 trillion. Now, if you look to the left on that same line, you will see that Americans are paying a whopping $2,5 trillion in interest payments on all of that debt.

Charles Hugh Smith, in this article, uses rounded numbers of $60 trillion in total debt and $2.4 trillion in interest being paid each year and points out something very disturbing. The economy, for the last several years, has been growing at a lack luster 1.5%. That means our approximately $16 trillion-dollar economy is growing at about $240 billion per year. Think about that for a moment. Our economy is growing at the rate of $240 billion per year while we are transferring  over $2 trillion from the productive sectors of our economy to the banking sector; just in interest payments. And, this is after six years of the lowest interest rates ever! Interest rates have nowhere to go but Up! Then what? ( BTW, the CBO estimates that even at present low interest rates, the interest on the national debt will double in five years and triple in eight years.)

A commenter here at Asylum Watch recently suggested that we need to pass a law to stop borrowing. The Charles Hugh Smith article uses this graphic to show what happens when the beast isn’t fed regularly:

ng debt.

Taking the necessary corrective measure and the pain and suffering that entails was not politically acceptable in 2008 and it certainly is even more politically unacceptable today. The status quo is unsustainable but no one has the guts to stop feeding the beast; a beast we all helped to create with our spending, borrowing, and voting habits. The consumer driven, credit driven, ever expanding economy is an illusion. It always was an illusion. The bankers knew from the beginning that they would end up with all the marbles. After the smoke clears, the bankers will be there to offer the survivors a new start (credit).

Well, that’s what I’m thinking. What are you thoughts?

 

 

 

 

 

 

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15 thoughts on “Doomed by Debt

      1. It means we spend more on that, and here’s where the borrowing really comes in, than we do on anything other than SS and Medicare – the care for our elderly. And you wanna talk about socialism? All the military is is a conservative welfare state, with a huge dependent class. And the real dirty scummy lousy stupid shame of it – if we just spent the money on higher education, I’d bet most of the young folks would never have signed up in the first place. A stupid lousy shame. All to have a military at the ready to do what? Vietnam? Iraq? Afghanistan? What a horrible, horrible thing the MIC has become.

        JMJ

  1. I took a drive through the Eagle Ford Shale yesterday. I’d read in the Wall Street Journal a couple days ago that Texas is on the verge of its biggest oil boom ever in Eagle Ford and the Permian. It was hard for me to believe, given Texas is already one of the biggest of producing regions in the world. A scroll through Google Earth satellite history shows a mind boggling amount of drilling going on.

    There is more flaring down there than you can shake a stick at. A drive from Tilden to Three Rivers is peppered with massive rigs and shiny new white pumping stations. It’s an odd mixture of new fracking operations and rusting old pump jacks silent sitting played out traditional wells.

    The point being that development like in Eagle Ford costs 10s to 100s of billions of dollars to make happen and that is all financed by borrowed money. Credit is what drives new development and creates new wealth, when it is used properly.

  2. Let’s do it so we can’t buy any more produce fertilized with human excrement, light bulbs with mercury, solar panels with asbestos, children’s toys with lead etc, etc from the Chi Coms if they can’t extend us credit. 😀

      1. Once their manufacturing base expands to America Del Sur and eventually to America Del Norte then they will have us where they want us. They have the canal and our ports. What’s next the concession stands at the Statue of Liberty and the 9/11 memorial?

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