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Can a system based on debt and payment promises work?


History has shown that this system only works for a certain period of time and then breaks down. The current situation differs from earlier ones only in that the debt is higher today than ever and that paper money is no longer backed by any effective value (see “What role does money play?”).

The global level of debt is around USD 160 trillion while global economic output amounts to about USD 45 trillion. This means the debt is three times as high as the output produced in one year. This debt is counterbalanced by assets, but their value will fall massively in the future as a result of radical currency devaluation.

Upon closer inspection, it becomes clear that less than 40% of this USD 45 trillion is attributable to the production of goods. Over 60% of the respective GNP is attributable to consumption and national government economic programs. These figures gain weight when one considers that the Western countries account for around 11% of the world’s population but consume 60% of all goods.

Paying off this huge mountain of debt is becoming an impossibility.

One man’s debt is another man’s asset. Hence, for wealth to grow, the level of debt must also increase to the same extent. This mechanism is supported by the interest rate system. The resulting scissor-like effect will keep widening until the point when the interest on the debt can no longer be paid. Once this happens, additional debt becomes unfeasible because lenders have lost their confidence in borrowers.

Individuals and corporations have long since reached their maximum debt potential. Only governments are now in a position to take on added debt, through the sale of additional government bonds. But today we are confronted with the fact that nations such as the USA, the UK and Japan are no longer able to find takers for their government debt securities. They buy them themselves, with new paper money created specifically for this purpose by their own central banks at no cost (0% interest).