Economy #4: The Debt Trap (Our Economic System is not Sustainable)

3058009462_f59cb3ed1aPhoto by: bitzcelt

“[Money] is an odd measure of value. It is so ubiquitous in our culture, so fundamental to how we all live, yet we rarely sit and contemplate what it really “is.” Where it comes from, what it does, and who (in the final analysis) really controls it. Most of us spend most of our waking hours chasing it, without really understanding what it really is we are doing.” ~ Charles Curtis

debt-moneyHave you ever wondered how governments, corporations, small businesses and families can all be in debt….and for such astronomical amounts? How can there be so much money to lend? If you haven’t already read my article on How Money is Created, I encourage you to read that before delving into this one. It will all make so much more sense.

For those of you who are well versed on the subject of how money is created, let’s continue. We know that banks don’t simply lend the money they already have on deposit, they create it out of thin air as debt. Therefore, because the amount of debt is potentially unlimited, so is the supply of money.

Money = Debt

The strange thing is, if I paid off all of my debt I would find I personally have more money to spend because I have no loan repayments, but the same does not hold true for the entire society. If everyone paid off their debt, there would simply be no money.

“That is what our money system is. If there were no debts in our money system, there wouldn’t be any money.” ~ Marriner S. Eccles, Chairperson and Governor of the Federal Reserve Board.

We are totally reliant on continually renewed bank credit for there to be any money in existence. No loans = no money. When credit dried up during the Great Depression, the money supply decreased drastically. It’s for this reason that Governments around the world are so worried about the current crises of credit.

“This is a staggering thought. We are completely dependent on the commercial banks. Someone has to borrow every dollar we have in circulation, cash or credit. If the Banks create enough synthetic money, we are prosperous; if not, we starve. We are, absolutely, without a permanent money system. When one gets a complete grasp of the picture, the tragic absurdity of our hopeless position is almost incredible, but there it is.” ~ Robert H. Hemphill, Credit Manager Federal Reserve Bank, Atlanta, Georgia.

Our money system is not what we have been led to believe. In essence, the creation of money has been privatised. Except for coins, all of our money is now created as loans advanced by private banking institutions. While banks create the principal out of thin air, one very important factor is missing.

Perpetual Debt

PIf the entire economy pays back all the money that was loaned into existence, but still owes the interest, where does the money come from to pay the interest?

The answer is simple but profound: more money has to be loaned into existence to pay back the original interest!

In order to just keep the system running, the total debt in the economy has to grow exponentially until the end of time, and can never be repaid fully. That means the economy has to grow continuously in order to generate the income to pay back the continuously growing debt. And that means more interest must be paid, resulting in an ever-increasing and inescapable spiral of mounting indebtedness. Doesn’t that make your head spin?

Historic Level of Debt

When viewed historically, and compared to gross domestic product, the current levels of debt are without precedent.  This chart (based on U.S. data) shows how my generation has spent their entire lives on the slippery slope of the biggest credit bubble in history.  The last time debts got even remotely close to current levels was back in the 1930’s. The credit bubble that burst at the end of the roaring twenties was followed by years of economic contraction and hardship, now known as the Great Depression.


Source: Crash Course Chapter 12

Our economic model requires that the future be much larger than the present

As today’s huge credit bubble gets bigger and bigger, the need to create more and more debt money becomes increasingly urgent. Our entire economic model is based on a rather substantial assumption about the future….that the future will be larger than today.  

There is an explicit assumption here that the future GDP is going to be larger than today’s. A lot larger. More cars sold, more resources consumed, more money earned, more houses built – all of it – must be larger than today just to offer the chance of paying back the loans we’ve ALREADY taken on. But each quarter we see that new debts are being made at a rate five times to six times faster than growth in the underlying economy. Even with a fairly optimistic assessment of future growth, this trajectory is unsustainable. ~ Chris Martenson, author of the Crash Course

Exponential growth in debt only appears to be sustainable when asset prices (most notably, house prices) rise fast enough to keep the financial system solvent (i.e. able to pay back the continuously growing compounding debt). Once asset prices stop rising in the context of adequate economic growth, the game is over. That game-over moment is what we all know as the Global Financial Crisis.

Without continuous economic growth, the entire monetary system will collapse. Governments, in their quest to maintain the status quo consider the only course of action is to pump more money into the system. This is done through increasing the levels of government deficit spending and consequently increasing the total amount of debt. The risk is, that without a properly growing real economy, this process could ignite another asset price bubble. This may seem to work for a while, until the bubble bursts and we plunge back into another financial crises, this time even bigger than the last.

Can debt continue to grow exponentially in a finite world?

Since the physical world has a finite quantity of resources, the quantity of goods and services produced in the economy cannot always grow fast enough to match the continuously growing debt. The perpetual growth required by our current economic system requires perpetually escalating use of real world resources and energy. More and more ‘stuff’ has to be created from our natural resources and turned into garbage. This must continue every day, of every year…forever…Just to keep the system from collapsing. Given what we know about Peak Oil and other resource limitations, how long do we think this system will last?

” [It’s] our monetary system itself that is out of step with reality.  Everything else we see around us economically is merely a symptom, while the cause of our current and future ills is the dependence of our monetary system on perpetual exponential growth.  A profound and important set of conclusions immediately result from the acceptance of this argument. ~ Exponential Money in a Finite World by Chris Martenson

What can we do about this very scary situation? For starters we need a very different concept of money and wealth. In trying to envisage a sustainable future, it’s very clear that our current system of money is not workable.

Read more from me:

Economy#1: How Money is Created

Economy#2: Is a Housing Bubble looming in Australia?

Economy#3: How the Credit Crises Happened

Energy#1: What is Peak Oil?

Energy#2: The Economy and Oil (The Long Decline)

Learn more about Money as Debt:


  1. Excellent post. Very concise, accurate, and useful. Thanks. I know it’s not easy putting together this much information and have it make sense.

    I just ordered the Fourth Turning and had it sent to my Kindle. I’ll be tearing into it tonight.

  2. I’ve talked about this too much around the web, but here goes one more time: The term you should grasp is “Net Usefulness”. It primarily applies to whether or not a species will continue to exist, based on the amount of future usefulness that species provides to itself and its environment vs. the amount of resources it consumes.
    Money is a tool that represents future usefulness. Debt accelerates the consumption rate of resources to draw future resources into the Now. Banks loan money based on your potential future usefulness. Nobody subtracts out the resource consumption in that equation. Perpetual raw material availability is assumed, based on past economic data. It’s all mathematically correct, and very, very, wrong.
    It’s like that bad riddle about the 3 hotel guests and the refund. The resources just disappear and very few people realize why or even care to find out.
    If our food makes our children stupid and lazy, how will they ever find out?

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