Debt

This is the thing about debt.

If you take a loan and use the money to invest in something that produces a revenue stream, for as long as the revenue stream allows you to live and pay the loan back, you could eventually take out another loan to expand your investments.

For as long as the above holds true, you could reasonably make use of borrowed money to expand your revenue generating projects. This option is theoretically unlimited.

Conversely, if you take a loan and use the money to invest in something that produces insufficient revenue to live and pay the loan back, the only way you could take out further loans is if interest rates decline. If in the process of taking out subsequent loans you are unable to turn around the revenue situation, this latter option is arithmetically limited.

But here is the interesting thing. Intuitively, the latter option is limited by the zero limit of interest rates. What is less intuitive is that the latter option is also limited by the utility of every new Dollar borrowed. That is, when every new Dollar borrowed generates less than $1 dollar of revenue.

FRED Graph
The point at which each new Dollar borrowed generates less than $1 of revenue there are only two options left to deal with debt.
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Once debt only offers negative returns, it can be paid down or it can be written off.
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There is no third option.
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Here is the other thing.
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You can be French, British, German, Japanese or Canadian but if your sovereign accepts US Dollars as a reserve currency and/or is a member of the Floating Exchange Rate regime, you are running a Dollar economy. You may call your sovereign currency the British Pound or the Euro but the reality is that your currency is a US$ because it derives its value directly from your sovereign’s US$ reserves. This is what the role of a reserve currency is. It allows you the “dignity” to call your currency what you want but it strips you of any power whatever to mange your currency.
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All that to say that if the US$ has reached the point at which it generates only negative returns, then all countries that use the US$ as reserve currency are in trouble.
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And that is the magic of Debt Based Fiat Money.
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As outlined above, once adding more debt only generates negative returns the only viable options are to pay the debt down or have it written off.
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Here is the final thing.
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On one hand, neither the USA nor, indeed, any Western country could arithmetically pay the debt down.
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On the other hand, none of the creditors to Western countries are going to write the debt off.
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What are we going to do?
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One Response to “Debt”

  1. Patrick Donnelly Says:

    Now, that was well worth reading!

    We may all have known it, but it was sub-conscious, not explicit!

    So, Japan everywhere?

    Some have already decided to ignore global interconnection, such as Iceland? Eventually, most countries will have supped with the devil enough to realize that continued benefits, credit, has ceased to flow and that a new order is required. The new reserve will be established along the old lines, last a few years and the same thing will again happen, until the debt is forgotten?

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