Why the financial system must and will collapse

PrivatisetheNHSnow

Pretty simple article - anyone care to rebut it?

written in 2005

http://www.financialsense.com/fsu/editorials/2005/1212b.html

Debt is self-liquidating when used to generate future income, from which interest is serviced and principal repaid. Used for any other purpose, it is non-self-liquidating and results in payment obligations with no countervailing source of income....at least 75%, or $2.25 trillion, of the debt (that exists in the US today) has produced a future burden rather than an income stream.

A debt-based monetary system has a lifespan-limiting Achilles heel: as debt is created through loan origination, an obligation above and beyond this sum is also created in the form of interest. As a result, there can never be enough money to repay principal and pay interest unless debt is continually expanded. Debt-based monetary systems do not work in reverse, nor can they stand still without a liquidity buffer in the form of savings or a current account surplus.

When debt grows faster than the economy, the burden of interest is bearable only so long as the rate of interest is falling. When the rate of interest reverses course, interest charges start rising faster than debt growth. This point was reached on 16 June 2003, the day the yield on the benchmark 10-year Treasury bottomed at 3.09%.

When interest charges exceed debt growth, debtors at the margin are unable to service their debt. They must begin liquidating.

Dipping into savings or running a current account surplus can offset liquidation for a time. The greater the pool of savings and the current account surplus, the longer an economy can endure liquidation at the margin without experiencing cascading cross-defaults. The US in the early 1930s and Japan in the early 1990s had such a liquidity buffer. In both cases, mobilizing domestic savings to increase government debt reversed the decline in total debt outstanding in two to three years and interest rates stayed low because savings financed the new debt. As a result, interest charges no longer exceeded debt growth and the need for marginal debtors to liquidate disappeared.

The US is now in a fundamentally different position than it was in 1930 or Japan was in 1990. Aside from a dearth of domestic savings, its vulnerability is compounded by a current account deficit. There is no buffer and no margin for error. Thus, when interest charges, now $2 trillion per year and accelerating, overtake annual debt growth, now $3 trillion and decelerating, liquidation will immediately trigger cascading cross-defaults. Without domestic savings to mobilize, the Fed cannot facilitate the expansion of government debt to fill the breach and simultaneously hold down interest rates. It cannot win the battle to keep debt growth greater than interest charges, the precondition for the viability of a debt-based monetary system. Once started, cascading cross-defaults consume all debt within an economy.

CLAPTON

an english summary would be useful

lvader

This seems mostly about the US, while the markets stay scared, there seems to be an insatiable apitite for US government bonds. Even if that stopped being the case there is nothing to stop them printing more money to pay for debt. Eventually we will simply see a devaluation of the US$ nothing more.

PrivatisetheNHSnow

CLAPTON wrote: »

an english summary would be useful

1. our economy runs on credit (debt). all money is interest bearing debt.

2. when banks create credit, they only create the principle, not the interest payments.

3. the interest payments for the existing debt can only be made by expanding the money supply/creating more debt

4. if debt is not used for expanding production (producing future income), rather for consumption or simply to service existing debt, we eventually we reach a point where the volume of outstanding debt is so high that the interest payments are mathematically unpayable

5. if businesses/individuals/governments cannot service debt on a systematic level, they will go bankrupt, the economy/production will collapse in a deflationary spiral.

think of compound interest. if the money supply never expanded, with the right to earn compound interest you would eventually end up owning all the money.

therefore the system must expand to survive. when it doesn't expand (because banks aren't lending/companies borrowing or governments aren't borrowing), there is not enough new money to pay interest payments on all that outstanding debt, and the system collapses.

PrivatisetheNHSnow

lvader wrote: »

Even if that stopped being the case there is nothing to stop them printing more money to pay for debt. Eventually we will simply see a devaluation of the US$ nothing more.

well they'll have to print a lot more than they are now - because credit growth in the US is negative at the moment, not positive.

if credit growth is ever negative, it means deflation is inevitable.

as the article says, deflation in a heavily indebted consumption based economy with a current account deficit = 100% guaranteed collapse

lvader

Analysts can't seem to agree if the likely end is going to be deflation or hyper inflation, when there are pressures for both neither are likely.

PrivatisetheNHSnow wrote: »

well they'll have to print a lot more than they are now - because credit growth in the US is negative at the moment, not positive.

The US Government is able to raise as much money as it wants at the moment so I'm not sure how that makes credit growth negative.

CLAPTON

are there consequences?

so far things have got pretty good for most people

in the long run of course the hydogen will run out and the sun will start to burn helium and turn into a red giant
sadly this means it will expand to include the earth... the money supply will no longer matter

PrivatisetheNHSnow

lvader wrote: »

Analysts can't seem to agree if the likely end is going to be deflation or hyper inflation, when there are pressures for both neither are likely.

well, if the private sector isn't getting into debt and the government isn't getting into debt simultaneously, then deflation is inevitable.

if the US or UK government had trouble financing its existing debt and new debt at the same rates or less than now (very likely), then we will experience a deflationary collapse.

the problem is simply too much debt. nothing else. but because all money is debt there is no way of solving the problem without a new system.

lvader wrote: »

The US Government is able to raise as much money as it wants at the moment so I'm not sure how that makes credit growth negative.

because banks aren't lending to the private sector enough. almost all money comes from bank credit. if the us govt was prepared to run a larger deficit, then there would be no risk of deflation. but that isn't really possible because the outstanding stock of debt is so huge.

PrivatisetheNHSnow

CLAPTON wrote: »

are there consequences?

so far things have got pretty good for most people

in the long run of course the hydogen will run out and the sun will start to burn helium and turn into a red giant
sadly this means it will expand to include the earth... the money supply will no longer matter

obviously if you take that long view.

but we're reaching the natural limits of this debt based money system now, not in a billion years. what i'm saying is that the outstanding amount of debt and attached interest payments is so large that it is not possible in the medium term to continue expanding the money supply (i.e. take on more debt)

once the money supply starts to contract, you enter into a deflationary spiral, the economy goes into reverse and production/employment collapses

if governments, corporations and individuals stop taking on more debt net, then the economy goes into reverse. simply logic.

that's the reason that some religions have laws against charging interest (usury), especially compounding interest. not just because of morality, because the system is based on infinite debt growth and therefore mathematically impossible in the long run.

poppingjay

Fractional reserve banking doesn't help either.

Nosht

Sounds just like a Ponzi Scheme to me.

N.