We used to talk of billions, now trillions are the new billions. That’s inflation for you and debt is a big part of it.
According to the Economist’s debt clock, governments of the world owe $60 trillion, up from around $25 trillion in 2005.
The stats, moreover, show something quite peculiar: the richer the nation, the more their government is in debt.
Government debt is of course an oxymoron. A more illuminating description for it would be deferred taxes because all taxpayers will have to pay back that debt through taxes, with interest on top of it.
Instead of taxing the people now, the government borrows from rich investors and banks, then pays them back with interest through tax collection.
The interest rate might be low on all this debt, but the sums are so huge it still amounts to a substantial amount of money paid by taxpayers in interest.
That effectively translates to wealth distribution from the many to the rich who can afford to lend the government money and receive interest for it through taxes that everyone has to pay including some of the very poor.
Yet it can be a risky affair for debt investors as governments tend to like printing their way out of debt, something they have been doing since 2008 through the quantitative easing of money printing.
One way that works is by the Central Bank buying government debt through money out of thin air with the base money supply in US and EU tripling since 2008.
All this money lent by the Central Bank is then destroyed once it is paid back, but technically that is effectively impossible as interest has to also be paid back, interest which is not destroyed and becomes permanent money.
As all debt owned is necessarily more than all money that has been created due to the requirement that it is paid back with interest, governments effectively can not pay back the debt in full.
If not well managed this debt situation can lead to a cascade where eventually the borrower is primarily borrowing to pay back debt.
At that point they’re effectively bankrupt and will have to print their way out like Argentina which is seeing inflation fo 20% or more.
All of this is a consequence of the money creation system whereby the public benefits little, if at all, from all that interest dividend, with most of it going by far to commercial banks.
Commercial banks account for some 85% of money creation in Switzerland. The rest probably share the same story.
All of that money is created through debt when banks lend, with much of it being home mortgages. The problem is that if you borrow say $100,000 for a home, over the mortgage’s 25 years you’ll have to pay back $200,000, with $100,000 of it being interest.
That is a lot of new money that is printed out daily, and the printing press can not stop because new money has to be constantly created for interest.
Every 10 or 20 years this all goes wrong. Too much money gets created with it all cascading up too quickly, so banks effectively go bankrupt, and since banks are effectively the fiat money, that means trade falls and you get a severe recession as in 2008, or a depression as in the 30s when banks went under.
At that point governments effectively raise taxes in a stealth manner by borrowing and borrowing with much of that borrowed money going straight to banks.
So they can never lose, the banks, with just four of them in America responsible for some 90% of $200 trillion in derivative holdings.
That may sound like a lot now but as the printing press rolls on the trillion might become what today is a billion, as the billion itself became what was once a million for our parents.