With the current interest rate base economic system, where an amount of interest is applied to any kind of debt, economic crisis is Inevitable.
No, it is Inevitable. Growth cannot help countries escape debt, it is wrong to assume that growth can outpace interest. Impossible, for the banks will always charge an interest rate that is higher than the economic growth rate.
It is the side effect of growth that allows debt to be repaid, inflation.
Inflation allows government, individuals, and corporations to pay debt that is growing faster than the economy.
So in effect, by allowing inflation to take place, government is saying “go f yourself” to the banks who disburse debts in the government’s currency.
But what happens when the rate of inflation is less than the interest rate the bank is giving to the government, individuals, and corporations?
Again, it is literally impossible for all, and truly all, of these debts to be paid in full, since the interest rate being charged is almost always higher than the economic growth rate.
It’s like asking a runner to wound a rope that is being unfurled by a horse drawn carriage. The carriage will almost always unfurl rope faster than the runner can wound them.
So, what happens?
It starts with credit crisis. Mortgage crisis is the main culprit. Why? Because there are always less than smart bankers who dare to assume that property can only perpetually increase in value, then when that assumption is proven as what it truly are, the less than smart bankers got burned, starting a credit crisis.
A slight detour. Actually, all smart bankers know that the interest rate base economy is unsustainable, but as long as everybody (the central banks, the governments, the corporation) are willing to play this charade, then smart bankers are more than happy to facilitate this musical chair game. For it is a musical chair, for when the music ends (everyone ask for the get paid) there really aren’t enough chairs for all the players to sit on (interest is almost always higher than economic growth). So, if you are banker, and you are reading this, let us understand that the industry we are in, at it current state is always a game of musical chair, always be ready to hear those telltale signals of when the music is about to end (hint, the music ends when the ratio of players to chairs become to high).
But wait, why do everybody willing to play the musical chair game? Greed. Greed in the form of wanting profit with zero risk. Interest rates are basically that, guaranteed profit with zero risk. Since depositors themselves want profit without risk, the banks’ charge profit without risk to borrowers. Where the accumulated burden of interest going faster than the economy can no longer be sustained, the music stops, crisis happens, and everybody ended up losing money that is not supposed there to begin with.
So, in “real” economy, crisis is inevitable since the interest rate being charged by banks is almost always higher than the economic growth.
How about in the “virtual” economy, the world of Wall Street where money can magically appear from money. No goods are made, no labor are paid (not that much to justify all the money being made), no real services are rendered, yet there are numbers being added to other numbers in a computer screen.
And the silliest thing is, these numbers in computer screen can then be redeemed at full value with real goods and services. So as a result of me doing a leverage bet on the soybean index, I can then take the proceeds of that bet to a car dealership and buy a real physical space occupying car.
It’s like me playing video games, getting all these video game money, then my bank agree to give me hard currency in exchange of the video game money, then I buy real goods and services.
Imagine if there’s tens or hundreds of thousands of video game players, all making these video game money, all sitting there pretty believing the video game money can be exchange at face value to hard currency.
How can the world not face a problem when all these video game money is fully convertible to hard currency?
Imagine the vast ness of wealth that can be made in videogame land, it’s a virtual land, there’s no limit to the wealth that can be made in videogame land, no labor that needs to sleep, no steel that is finite in amount, no oil that is also finite. Videogame land, Wall Street land, is boundless for it is virtual.
Thus when governments allow videogame money to be fully convertible to real money, big problem happens. Investment banking holding more oil reserves than the US Government. Naturally it can, for the investment banking firm lives in videogame land.
Let’s try to imagine, if tomorrow, all the investment bankers decide to liquidate their portfolio , exchange it with hard currency, and then buy real property, goods, and services with the money earned from video game land. There could be not enough real property, goods, and services to trade all this money with. And yet all this money is created without producing real goods and services.
So when in “real” economy, greed prompts people to make profit without risks, yet still producing some goods and services. In video game land, greed squared prompts people to make profits without producing goods and services.
In video game land, as greed squared, the game of musical chair is also squared. If we believe that it’s impossible for all debt to be paid since interest rate is higher than economic growth, what would happen to money made in video game land, where money grows faster than, nothing, it’s based on static money in computer screens.
So in video game land, crisis is both more Inevitable and stronger when it hits, since the amount of silliness that needs to be cleansed is also squared.
So, we can conclude that economic crisis is a purging system, both for silliness that is being made in the real economy, and the silliness being made in videogame land.
The silliness is illusion money, money that is not represented by real production of goods and services, money that is being made through interest that is higher than economic growth and being made on bets at videogame land, money that really isn’t there in the first place.
But wait, doesn’t government always step in crisis?
Yes they do, and by doing that, they prevent the purging process that was supposed to happen and allow past silliness to remain in the system, whereupon this past silliness will be given compounded interest to become even more silliness.
What then will happen? Then the mother of all reckoning will come forth. Bankruptcy.
When a government closed it’s eyes for too long, it will find itself simply unable to pay the debt that has been growing faster than it’s economy.
Witness this quote from the New York Times ““Portugal’s debt is just not sustainable,” said David Bencek, an analyst at the Kiel Institute for the World Economy, a research organization in Germany. “The real economy does not have the structure to grow in the future and thus will not be able to pay back its debt in the long run.”
In this example, it is Portugal that is meeting the mother of all reckoning, actually, no, it is Portugal’s debtors that is meeting the mother of all reckoning. The banks and institutions that has been lending to Portugal has been claiming this revenue that simply doesn’t exist, and now, the banks and institutions are going to be force to wipe off this doesn’t-exist-from-the-first-place revenue from their books.
The question is, with IMF playing firefighters in the last 3 decades, will the same fate meet all world governments?
Save for maybe Germany and the Scandinavians.
Ponder and identify the market opportunities that unfolds as chaos furls upon the known economic system.