The inevitability of the diminishing marginal utility of debt… part II

The social promises that activists, unions and individuals thought had been won over the past 40 years are being blown out of the water for the expedient political stratagems they were.

http://www.telegraph.co.uk/finance/financialcrisis/8932687/Portugal-raids-pension-funds-to-meet-deficit-targets.html

A debt based fiat monetary system (DBFM) can only work provided credit markets can be expanded. Credit markets can be expanded only when:

a) GDP must expand at a greater degree than the debt market

b) Interest rates must progressively be lowered

c) A combination of the above two conditions

Clearly as already pointed out here, condition ‘a’ has not been met since 1980. However, this  can be obviated by assimilating other markets and currencies in your monetary system. Hence the abrogation of Bretton Woods and the institution of the Floating Exchange Rate mechanism which led to the Euro and globalization. So regardless of how you achieve condition ‘a’, this is a strategy that is limited mathematically.

Condition ‘b’ is obviously limited mathematically too. The alternative of course would be to allow some inane program as was proposed last year to put a ‘use by’ date on money or charge savers.

When credit expansion has outpaced GDP expansion by orders of magnitude for four decades and when interest rates are knocking on the 0 limit, there is an absolute point at which it is mathematically impossible to expand credit. Greece is there now.

Simply put, our current monetary system is a pyramid scheme. This means that all our economic constructs are predicated on a constantly growing number of contributors to the system. For as long as more input outpaces more output, the system can be expanded and looks solvent. When more is taken out than what is put in, the system detonates.

Social security is a noble idea. Social security as it has been devised, implemented and managed is a pyramid scheme. Social security is a preordained consequence of DBFM. Social security as it has been implemented is predicated on the perpetual expansion of credit markets. If for whatever reason credit markets can no longer be expanded or, Ye Gods!, should contract, social security cannot be maintained… and will be reneged upon…

This message is important. It is particularly important that this message be understood by those entities that are used by government to enforce government policy. For example. It is very important for the police in the USA and for the new international Gendarmerie that has recently been set up in Europe to understand that they are in the same boat as everyone else.

Our current monetary system has a well defined mathematical limit. When this limit is approached, all social promises and public expenditure will gradually be rolled back. Historically speaking the way out of this mathematical dead lock is a war.

How the war starts and where it starts matter not in the least. Historically speaking, the insolvency of prominent sovereigns has always resulted in war. The EU and its individual members are insolvent. China is insolvent. The USofA is insolvent.

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6 Responses to “The inevitability of the diminishing marginal utility of debt… part II”

  1. Jim Says:

    You may enjoy this article:

    http://www.leisnetwork.com/2011/12/complexity-financial-crisis/

    Elsewhere on that website I also explain why Bass is correct not just for Japan, but for all of western Europe, with graphs for most countries’ debt.

    • guidoamm Says:

      … I am humbled… what is a luminary like you doing reading a rag like mine?. Thank you for the link. Some very helpful information and interesting analysis.

  2. Pat Donnelly Says:

    War is only inevitable if people are stupid enough to accept it. You may be correct, but it does require a widespread conspiracy that I believe will actually result in revolts!

  3. Pat Donnelly Says:

    The countries are NOT insolvent. But we are being told they are, by the msm. That is so that the rollbacks can begin and deepen to try and avoid Japan consequences. Debts can be written off voluntarily or by denunciation. Borrowing has been shown to be a trap and therefore, it is not needed in the future! So credit status is not needed. If the state needs something, it may raise taxes etc! However, those PTB need to steal more, so we need to borrow more.

    A country cannot be insolvent. It cannot be bankrupt unless for some reason, it abrogates sovereignty as in the euro system. Thieves will take that decision!

    I have been advocating the jury system of government for a few years now. It dates back to Athens after all! Professional agents = thieves. We do not need that temptation!

    • guidoamm Says:

      I have to disagree with you that a sovereign cannot be insolvent. Empirically, history is replete with examples of dominant countries that have gone bust. Even countries that were rich naturally or through trade can go bust.

      Rich countries become insolvent when they anticipate spending before they collect the revenue. Countries anticipate spending when they securitize their future revenue. In doing so, they have to pay interest. Thus, arithmetically speaking, unless consumption and/or inflation can be unlimited, then regardless of your type of wealth, if your year on year expenditure increases at a faster clip as a percentage of your GDP, your ability to leverage future revenue is inherently limited arithmetically.

      I will go on a limb here to say that even countries that today are thought to have unlimited revenue like Abu Dhabi or Qatar, will eventually succumb to compound interest. I’ll grant you that the time line could be rather long, but I am 46 years old now, so I think I’ll witness these entities going super nova… sooner rather than later.

  4. guidoamm Says:

    http://www.telegraph.co.uk/news/politics/nick-clegg/8934674/Nick-Clegg-Pensioners-benefits-should-be-means-tested.html

    That should read: “Despite people having contributed to their pension fund over the years, successive governments have mismanaged and diverted said funds for political/economic expediency. Today, there is not enough money left (if there is any at all other than government IOUs) to pay out what was promised to the current crop of retirees. So, let’s “mean test” benefits so we can set the bar low enough that we might, maybe, potentially, with luck, be able to scrape enough funds from here and there to, God willing, save face.

    The arithmetic is clear. We must reduce spending and we must reduce it now. Any attempt at increasing the debt load will result in a greater catastrophe.

    Somehow we must force the demise of central banks. We must force the demise of fractional reserve banking and we must force the demise of DBFM.

    That done, “politician” as a career must be banned. Government should be run in turn by all citizens for limited periods of time.

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