Our exponential debt system

The word “debt crisis“ has made it into everyone’s vocabulary by now. People are talking about how we were “living beyond our means” and are debating how spending cuts, tax raises or some combination of the two could be used to salvage the situation. However, often times there is a gross misunderstanding about why there is so much debt in the first place and why it seems to constantly grow. Many people fail to see that growth within our current monetary system relies on exponential increases in debt.

To understand the debt crisis, you have to understand that in reality this is a “money crisis”. Let me explain this further.

Today, all money is created in the banking system. It originates from the central bank and is brought into existence by an extension of its balance sheet. This means that there it is a simple booking entry: new money on the liabilities side, and debt on the assets side. Yes that’s right: money is created through credit – which is nothing but a nice word for debt. In contrast to most of human history – where money has been a tangible asset with intrinsic value attached to it, such as gold and silver – today all dollars, euros, pounds and all other currencies are based on debt. This is taken on by governments, companies and private citizens all over the globe. Implicit in this is trust on the part of lenders that this debt will be repaid one day in the future.

So what's the problem? Let’s say you take out a loan for $100. The money you receive will be created from nothing once you sign the paper to take out the loan and you are then obligated to pay back $105 after say one year. Now here is the all-deciding question: Where is the interest coming from that you need to pay back the loan? At the moment the only money in circulation is your $100. The only way to solve this riddle is that somebody somewhere in the economy has to take out another loan to create the money that enables you to pay back the first loan.




To sum up: In a debt based fiat money world there will always be debt for if there was no debt there would be no money. Since debt is not paid off, the compounding interest on it forces us to grow at the same pace. Since this experiment has failed we are now facing the collapse of this debt system. Prepare yourself accordingly by diversifying into tangible assets such as gold and silver, and by educating yourself and your loved ones about the nature of the economic challanges they are likely to face in the years ahead.