One way to think of debt is as an ever-growing mountain of interconnected paper, largely created out of nothing, and piling up against the gravity of finite income and ability to repay. The 2008 crisis was an avalanche of default in such a metaphorical mountain – initially triggered by defaults in US sub-prime mortgages. Today the mountain is much, much bigger, and the ability to repay is more limited. And, of course, the mountain continues to grow – both in absolute terms and, in many cases, as a percentage of income (i.e. the ability to repay).
So the question is not if there’ll be another financial crisis, but when it will start. It might begin with Italian bank debt, or Greek sovereign debt, or a collapse of a residential or commercial real estate market in China, or London, or Canada, or Australia. Or maybe it will be triggered somewhere else, by some other over-leveraged, unrealistic, boom-and-bust collection of debtors and creditors. And when the defaults get big enough they will cause other defaults, and on and on the contagion will go. Just like the last time.
Except the next financial crisis will probably be worse than the last one, because the vast effects of the last one are still with us. Some individuals, companies and countries will come out if it better than others, depending on their exposure, just like last time. And the sheer and utter stupidity of relying on consumption debt and speculative debt for the creation of our money supply will become even more farcical.
One of the most surreal aspects to this farce is that central bankers and government are and will be essentially taxing hardworking people and cutting desperately needed services, and then burning the some of the proceeds. For years central banks bought up vast quantities of government debt using directly created QE money fresh off the presses. In order to make the books balance in traditional economic theory, what came from nothing has to go back to nothing, and so QE has to be paid back in order to be destroyed. And who’s going to pay those $€£trillions back so that it can all be destroyed? That’s right – you are!
You could sort of understand this if the economy was overheating and if inflation was raging out of control, but our current predicament is far from that. So why are they doing it?
They’re doing it because establishment economists can’t face the fact that the old equilibrium models in which money is just another traded good (models to which many have devoted much of their careers) are at best seriously flawed, and at worst a load of nonsense.
In other words, hundreds of millions of people are suffering, and will be on the hook for $€£trillions, just because a bunch of established economic ‘experts’ can’t admit they’re wrong. And because government and central bank economists can’t admit they’re wrong, they’re not even seriously looking at the solutions right in front of their noses.
They can’t even see the need for deep, structural and systemic change. They can’t even think about being honest about the money they’ve already directly created. They can’t even see the need for reform of our monetary system.
They have to keep pretending.