[This article first appeared in the October 2nd edition of the International Forecaster.]
In A.D. 2008, speaking of the enormous US debt, I advanced the simple proposition that “What can’t be paid, won’t be paid.” I was so proud of myself for making that seemingly simple observation that I’ve been jabbering about it ever since. Today, I’ll present another illustration of that principle’s importance in order to illuminate the underlying madness on which our monetary system is based and the inevitable consequences of that madness.
First, the “what can’t be paid, won’t be paid” principle illustrates a profound point: In a fiat-currency, debt-based monetary system (like ours), one man’s debt is another man’s asset.
I.e., suppose you were a banker and I borrowed $100,000 cash from you. I’d have (your) $100,000 cash to spend and you’d have a piece of paper (promissory note) with my signature on it that promised to pay you $100,000 (plus interest). I’d have the $100,000 cash as an “asset” but you would also have the $100,000 Note which would also be deemed an “asset” suitable as collateral for you to lend even more money from your bank.
In fact, under fractional reserve banking, by placing my $100,000 promissory in your bank vault as collateral, your bank might be able to lend another $1 million to others in the form of consumer loans.
What alchemy, hmm? By means our loan agreement, your $100,000 loan to me might be turned into another $1 million in loans to others to make more purchases and consume more products and services, stimulate the economy, and make everyone prosperous without actually producing anything.
This ability to multiply debt and effectively “spin” more currency out of “thin air,” laid the foundation for the “consumer economy”. We could consume more than we produced—but only so long as we were willing and able to go deeper and deeper into debt.
When you stop to think about it, what else could a “consumer economy” be based on besides the capacity to go deeply into debt? The “consumer” is, by definition, one who consumes more than he produces. How is “consumerism” possible without “consumers” either going into debt or resorting to violence to steal whatever they want to consume from others who are producers?
Extraordinary debt (or violence) is the necessary foundation of the “consumer economy” and “post-industrial society” that we supposedly enjoy right now. See, American “consumers” don’t need to actually work to make “things” like automobiles, computers or dishwashers. All we need is a robust “financial services” sector of the economy that lets us create more currency by simply borrowing. The more we borrow (the more we consume), the wealthier we become! The geniuses in the cathouse on the Potomac had seemingly discovered the proverbial “money tree” and the faster we plucked and spent its leaves, the faster the money tree grew more green dollar bills.
In retrospect, it is astonishing that the American people—and even the people of the world—were dumb enough to believe that a “consumer economy” was not only possible and sustainable—but even desirable. The whole concept of “consumerism” is madness. And yet, the entire world has been beguiled by that madness for half a century.
• In fact, this madness has driven some people to claim that in our “modern,” debt-based monetary system, “debt is wealth”. I.e., the more debt you have, the wealthier you are.
The idea that “debt is wealth” sounds absurd, but it is the logical and inevitable consequence of adopting a debt-based monetary system.
Everyone understands that the wealthier you are (or appear to be), the greater your credit rating. Greater wealth leads to a greater credit (capacity to go into debt). But few really grasp the notion that saying that “wealth leads to credit” is tantamount to saying “wealth = credit”—and, conversely, “credit is (or at least appears to be) equal to wealth”. The more credit you have, the wealthier you are—or at least the wealthier you appear to be.
• Today, your credit rating measures your capacity to assume debt. High credit ratings seemingly correspond to significant wealth. In a debt-based monetary system, we can very nearly say that credit = debt = wealth. If we like, we can even shorten that equation to “debt = wealth”. (And some people do say just that.)
The equation “debt = wealth” is very much the same as saying “one man’s debt is (=) another man’s asset (wealth)”.
The idea that “debt = wealth” is beguiling. It implies that the more debt you assume, the wealthier you become. It sounds crazy, but imagine that we lived in a world where the more you spent, the more you had. Imagine living in an economy where the deeper you went into debt, the wealthier you became.
Ordinary people will tell you that such a world is impossible and they’d be right—it is impossible—for ordinary people.
But the governments, central bankers and elitists of the world will assure you that such a world is not only possible, but already exists—at least for governments, central bankers and elitists.
• Consider the $800 billion “bail-out” program initiated by our gov-co in A.D. 2008-2009. Faced with an incipient economic collapse, our gov-co gave hundreds of billions of fiat dollars to Wall Street entities that were deemed to be fabulously wealthy. Gov-co didn’t help the ordinary people who were desperate for help—they helped the super-wealthy. And how did gov-co know Wall Street was super-wealthy? Because Wall Street was up to their ears in debt. The American people complained about helping the “super-rich,” but the government was actually helping the “super-indebted”.
Wall Street’s debt became a measure of Wall Street’s wealth/worth. Because Wall Street was so deeply indebted, they were worth more than those of us who were only slightly indebted. The more debt Wall Street had, the more services they could command from gov-co and the taxpayers. Their debt had become evidence of their wealth.
Those without debt/credit received nothing; those with great debt/credit received everything. Wall Street’s enormous debt had become a source of enormous wealth (access to gov-co coffers). In a debt-based, fiat monetary system, the Wall Street giants weren’t truly “too big to fail,” or even “too wealthy (in a conventional sense) to fail,” they were “too indebted to fail” and thus entitled to special considerations.
• Today, the Government of the United States insists that the national debt is only $13 trillion. However, in A.D. 2008 former US Comptroller General David Walker said the debt was actually $55 trillion. One economist has recently calculated the total national debt to be roughly $100 trillion. Ordinary people find these numbers incomprehensible. How is such a debt even possible? Can such debt ever be repaid? Is the economic world coming to an end because the national debt can’t be paid?
The ordinary people’s inability to comprehend our $55-100 trillion national debt would make perfect sense if the world’s economies operated on gold or silver. If we had a constitutional (Article 1.10.1) monetary system, the national debt would truly be too big to ever be repaid.
But—insofar as the US (and the world) currently operate on an unconstitutional, fiat, debt-based, monetary system—the federal gov-co’s enormous, unpayable debt is not evidence of incipient poverty and ruin. Instead (much like the Wall Street financial entities) the enormous US debt is deemed to be evidence of fabulous US wealth. The world must lend to our government (just as our government had to lend to Wall Street) because we’re so fabulously indebted that if we’re forced to default on our loans, the global economy will collapse.
Why? Because one nation’s debt is another nation’s asset. If we default, they go broke.
• If ordinary people recognized the “debt = wealth” notion as hokum, the upper-middle class did not. The wealthy and the wealthy wannabe’s of the 1990s and early 2000s all understood or sensed that the government, bankers and elite seemed to operate on the “debt = wealth” principle. Thinking themselves wise, these wealth wannabe’s embraced that madness. The subprime mortgage debacle is a perfect illustration of the mentality and consequences of believing in “consumerism” and the notion that “debt (somehow) = wealth”.
How many people do you know who spent the 1990s and early 2000’s going deeper and deeper into debt to buy homes, cars, clothes and vacations to maintain the illusion that they were wealthy? These people used their Master Cards to pay off their Visa’s to pay off their American Express cards. They “shopped ‘til they dropped” believing that the illusion of wealth (debt) would ultimately cause them to become truly wealthy.
Where are these “consumers” today? In foreclosure and bankruptcy courts.
Why? Because they were fool enough to actually believe that wealth can be achieved through consumption (debt) rather than production (creation of tangible assets). The consumers who once believed they could “shop ‘til they dropped” are now “dropping”. That is, they assumed as much debt as they could carry in order to “shop” (consume). Now, they are “dropping”—defaulting on their debt—exactly as must happen in a rational and just world.
You can’t consume more than you produce. When you do, you necessarily lose the ability to pay your debts. When you can no longer pay your debts, those debts won’t be paid. It’s obvious.
• In the debt-based monetary system, we create (multiply) currency (debt instruments; the appearance of wealth) by entering into loan agreements. But, we vaporize that appearance of wealth by defaulting on those same loans. It’s true for subprime mortgage borrowers. It’s true for nations.
Whenever any debtor becomes “fabulously” indebted, his creditors will first treat him with profound respect and courtesy because—if they don’t—the debtor might default and thereby destroy all those paper assets (promissory notes) on which the creditor relies to maintain his illusion of his wealth.
For example, the US gov-co currently owes China roughly $2 trillion. As a result, the US gov-co has China by the short hairs. If China dared to demand payment, it would push the US gov-co into default and bankruptcy, and China would lose over $2 trillion in US promissory notes (bonds) that support the illusion of China’s fiat “wealth”. Our gov-co’s massive debt has made the gov-co so seemingly “wealthy” that its creditors are not only inhibited from trying to collect on the existing debt—those creditors must even lend more to the US, or the gov-co might default and wipe out the $2 trillion of China’s illusory “assets”.
This is not to say that China can’t or won’t “pull the plug” and demand to be paid. In fact, it’s inevitable that reality will force China to eventually demand payment. But when they do, they know 1) the US can’t pay; 2) what can’t be paid, won’t be paid; 3) one man’s debt is another man’s asset; and therefore, 4) if China tries to collect on the unpayable debt and the US inevitably defaults, much of China’s $2 trillion paper “asset” will be instantly “disappeared”.
There are only two ways China can hang onto its $2 trillion paper “asset”: 1) decline to collect the debt from the US gov-co (and thereby sustain the illusion that the $2 trillion debt-instruments are still worth $2 trillion); or 2) sell that $2 trillion “asset” (denominated in US fiat dollars, treasury notes, bonds, etc.) to some other sucker and thereby get out from under the US default. Of course, if China finds a “sucker” to take all those US bonds and Federal Reserve Notes (debt-instruments), that “sucker” will ultimately suffer the loss of seeming “assets” when the US defaults.
And the US debtor will default on its debts. It may default by hyperinflation, or by war (killing the creditors), or by an overt bankruptcy. But it will default.
Why? Because the US has become a net consumer rather than a net producer. Because “consumers,” by definition, lack the capacity to pay their debts since they have no excess production. And therefore, what can’t be paid, won’t be paid.
• Consequences? Hard to say. Hyperinflation is a virtual certainty. National bankruptcy is less likely but possible—especially if all the western nations declared bankruptcy at the same time and agreed to cancel all of each other’s debts. War is least likely, but it will be considered.
But one way or another, the US will default on most of its debt and thereby wipe out the apparent value of most of the paper debt-instruments (like stocks, bonds and pension funds) that are currently deemed to be “assets”. When all of those paper debt-instruments become substantially depreciated, the world in general and the US in particular will plunge into poverty and chaos.
When this calamity will take place is unknown, but the calamity is inevitable. Government may be able to postpone the problem, but there’s no way to actually pay our debts other than restoring our national productive capacity. There’s no way to restore our status as producers (rather than consumers) without abandoning the idea of global free trade, raising tariffs and forcing factories and productive jobs to relocate back into the USA. But, even if our gov-co agreed to restore high tariffs today, it would probably take most of a decade for the US to restore its status as a net “producer” (creditor) rather than a net “consumer” (debtor).
I don’t believe that the consequence of our massive, unpayable debt can be postponed long enough for America to regain its status as a producer. I don’t believe our gov-co is willing to abandon globalism and restore high tariffs.
It therefore seems inevitable that we will see a “Greater Depression” in the near future. If so, most Americans will be impoverished and suffer considerable anguish, pain and even mortality.
Very few Americans will be guaranteed a “free ride” through the next depression. Those who do survive with the least discomfort will be those who are prepared with an adequate supply of food, water, guns, ammunition and gold and silver coins.
If you would survive the coming depression, perhaps your most important preparation will be to abandon any inclination to be a net “consumer” (debtor) and instead predispose yourself to become a net “producer” (creditor).
Written at arm’s length and without the singular “United States” (“this state”) by Alfred Adask