$300 Trillion in Debt
DUBLIN – After our trip to Las Vegas, we spent one night in Baltimore and then got on another airplane. Standing in line, unpacking bags, getting zapped by X-ray machines – it has all become so routine we almost forget how absurd it is.
Get ready to be invaded, citizen…
Photo by David McNew / Getty Images
While armies of TSA agents pat down grandmothers and Girl Scouts, ex-soldiers take aim at the police… nutcases run down tourists with delivery trucks… and a fellow with a grudge against gays nearly wipes out an entire nightclub.
We feel so lucky. It is not every generation that gets to witness so many grotesque things at once. Stocks are at an all-time high. Bond yields are at an all-time low. And never have so many people owed so much to so few.
Dear readers may accuse us of “belaboring the subject.” Or of “beating a dead horse.” But in today’s Diary, we’re going to lay on the whip again. This horse isn’t dead at all. He’s got the bit in his teeth – and is running wild. Stick with us here…
According to our friend Richard Duncan’s latest estimate over at Macro Watch, world debt has climbed to $300 trillion. That’s up from roughly $200 trillion before the 2008 financial crisis. In the world’s five major economies, it has doubled since 2002.
Now, the whole shebang depends on debt. All of this debt is calibrated in “money,” which is the most extraordinary thing of all. The key to understanding today’s economy is to realize that money isn’t wealth and today’s dollar isn’t even money.
G-10 distribution of debt as a percentage of GDP (note that a lot of UK debt is financial debt, which is partly a result of London’s importance as a global financial center) – click to enlarge.
Real Limits
Normally, money is just a way of keeping track of wealth. It’s like a clock. A clock isn’t the same as time; it just measures it. The Parasitocracy – led by central banks – pretends that adding more money to the system will make people richer.
That’s why they have lowered interest rates to zero and below: to make it easy for people to borrow money. But adding money is a scam. It’s like slowing down the clock to make the day seem longer.
“There are real limits… real laws, that cannot be modified,” said economist and author George Gilder in Las Vegas over the weekend. “The most important is time.”
Say hello to time… its passage is an extremely important element in human action. As Mises notes: “The concepts of change and of time are inseparably linked together. Action aims at change and is therefore in the temporal order. Human reason is even incapable of conceiving the ideas of timeless existence and of timeless action. He who acts distinguishes between the time before the action, the time absorbed by the action, and the time after the action has been finished. He cannot be neutral with regard to the lapse of time.”
Photo credit: fmh
At least, the old, pre-1971 dollar was real money; it was anchored in the reality of time. It takes time to build real wealth. You have to work. Save. Invest. And most important, learn. And it takes time to dig gold out of the ground, too. And gold – like digital currency bitcoin – becomes harder and harder to get as time goes on.
The easy surface deposits are mined first. Then, if you want more gold, you have to go farther and farther, deeper and deeper, at ever greater expense in resources and time. The only real wealth is knowledge, says Gilder. And the only real growth is learning. Anything else is a fraud.
Real Money
In 1971, President Nixon – aided and abetted by economist Milton Friedman – cut the dollar off from its natural limits. No longer tethered to gold, the gate was flung open… and the horse ran off.
“Gold is part of the real world – limited by time,” Gilder explained. Gold is real money. But this new money was different. It was “unmetered,” says Gilder. And it was very popular with the feds, the Deep State, and the world improvers.
Unlike the old money, the feds could control it and decide who gets it. And they could use their cronies in the financial industry to distribute around the economy – as they wanted.
Before 1971, the feds had their hands tied – by real money. They couldn’t create gold. And they couldn’t print too many of their gold-backed dollars. They had promised to redeem foreign central banks every $35 they created with an ounce of gold. They didn’t have an infinite amount of gold. So, they had to be careful.
The former anchor of the monetary system: an image from the Bank of England’s gold vaults.
Photo via express.co.uk
The system was self-correcting. If Americans spent too much money on foreign goods, too many dollars would travel abroad. This put our gold stock at risk if foreign governments decided they preferred U.S. gold to U.S. paper money.
Gold was the base of the world monetary system, so a reduction in the gold stock was also a reduction in the money supply. Money responds to the law of supply and demand like everything else. As the money supply fell, the price of money (interest rates) rose. Higher interest rates then reduced spending, bringing the economy back in balance.
In the pre-1971 economy, it was Main Street – productive U.S. industry – that produced wealth and accumulated real dollars. After 1971, it was Wall Street that controlled access to the new counterfeit money – and made sure it captured much of it.
The new system gave the feds the “flexibility” they were looking for. But it completely changed the nature of our money and our economy. Instead of rewarding the people who produced wealth, the new economy gave its hugs and kisses to the people who mongered debt and shuffled financial claims.
More to come…
Chart by: Haver Analytics/ Morgan Stanley
Chart and image captions by PT
The above article originally appeared at the Diary of a Rogue Economist, written for Bonner & Partners. Bill Bonner founded Agora, Inc in 1978. It has since grown into one of the largest independent newsletter publishing companies in the world. He has also written three New York Times bestselling books, Financial Reckoning Day, Empire of Debt and Mobs, Messiahs and Markets.