The System Fails If Total Debt Cannot Rise

Governments all over the world are running out of currency to service their debts. This is actually not a surprise, as the Keynesian Experiment contains within its structure the seed that guarantees its demise. Recent events in the U.S. may well provide the trigger or tipping point that will greatly accelerate our fiat paper money system failure.

Many people recognize that our currency is backed only by debt. Few understand how that relates to the game-changing events now unfolding before us.

When a new loan is taken out, only the principle is created - and, of course, it is created out of nothing using double-entry accounting. The destructive seed mentioned above, is the fact that the interest required to service this new debt is NOT created. Currency for the interest payments on the loan must come from the principle of other and future loans made within the economy.

This flawed system can only continue to function (past debts continue to be serviced) if and only if the total of all outstanding loans continues to rise at an ever-increasing (exponential) rate. A quick look at a chart of total debt outstanding for the last forty years shows that indeed, this has been the case.

Consumers and businesses are now doing the right thing for their own situations by paying off debt in this time of recession. Those actions make currency disappear from the system, as when a loan is paid off, the principal created out of nothing goes back into the ether from whence it came. Government has been picking up the slack by running $Trillion deficits. If they cut back too, the system will not have enough additional currency to continue servicing past debt.

There is a well known saying that every debt is eventually paid -- if not by the borrower, it is paid by the lender when the borrower defaults. In either event, as loans cannot be serviced, those loans are paid and decrease the currency within the system, accelerating system failure.

Since essentially the whole world is now on a debt-backed fiat paper money system, the whole world is riding in the same leaky boat. That is more than just a little frightening, don't you think?

The recent event that I mentioned is the growing desire and demands of us lowly citizens that the size of government be reduced to its Constitutional powers and that gov't spending be drastically reduced (Tea Party, etc.). Can you see the obvious conflict that will trigger global meltdown if our Constitution is now to be followed? If there is no Federal Reserve Bank, who can keep outstanding debt of the world's reserve currency rising at an exponential rate?

Our Keynesian Experiment is doomed to failure -- even if the status quo is maintained. IMHO, for it to fail sooner rather than later would be a blessing with less pain and suffering for all.

So -- go ahead and pay off those debts. And get prepared. Got gold?

For those skeptics out there, I'd simply like to point out that in contrast to a fiat paper money system, when a bank loan under a full gold standard (no fractional banking) is paid off, the principle amount does NOT disappear. It remains within the system.