The Crash Course - Chris Martenson [42]
Debt’s Big Assumption
As troubling as all that is, the story of debt extends well beyond the idea that there is too much of it. To understand why, let’s look at the role of debt and how it relates to the future.
Consumptive debt, or debt that’s not self-liquidating, provides us with money to spend today. Perhaps we buy a nicer car, and we enjoy that car today. But future auto loan payments will represent money that we’ve already spent in the past and won’t be able to spend in the future. Put simply, debt enables future consumption to be taken today, not tomorrow. In this sense, debt is a claim on future money, and therefore debt is really just a fancy way of pulling money from the future so that we can spend it today.
We learned in Chapter 7 (Our Money System) that money can be viewed as a claim on wealth, and we just learned that debt is just a claim on future money. We can put these statements together and arrive at this important conclusion: Debt is a claim on future wealth. This implies that a constantly growing level of debt, like the one we have collectively experienced (and participated in) in the decades since 1980, has an enormous and unavoidably gigantic assumption baked right into it.
Ever-Growing Debt’s Massive Assumption
Go back and take one more look at the upwardly sloping line that represents debt-to-GDP in Figure 10.2. The critical assumption inherent in that slope is this: The economic future will be—must be—exponentially larger than the present.
Logically, if debt represents a claim on the future, then ever-larger amounts of debt represent ever-larger claims on the future. Okay, that sounds easy enough. But let’s recall that debt carries with it the expectation of repayment of both the principal and the interest components. If the debt has a principal balance of “X,” we must not forget that the interest component is a percentage increase based on “X.” How do we describe something that grows by some percentage over time? That’s right—we say it’s growing exponentially.
Therefore, each incremental expansion of the level of debt is an explicit assumption that the future will be larger than the present. And not just a little bit larger—the future will need to be exponentially larger than the present for debts to be fully paid back and not defaulted upon.
Given that U.S. debts now represent over 360 percent of GDP and total liabilities over 1000 percent of GDP, there’s an explicit assumption being made by the debt markets that the future GDP of the United States is going to be larger than today’s GDP. A lot larger. More cars must be sold, more resources consumed, more money earned, more houses built—every facet of economic growth and complexity must increase simply to pay back the loans that are already booked. Any continuation of debt expansion will compound these claims on the future. Now think back to that Stage Two line on the Debt-to-GDP chart in Figure 10.2 and ask yourself how likely it seems that the United States will be able to engineer another 20 years of faster-than-income (GDP) debt expansion.
Banks, pension funds, and government solvency, whose futures are intimately tied to the continued exponential expansion of debt, all have an enormous stake in its perpetual growth. This defines the pressure to continue the expansion and explains why our fiscal and monetary authorities seem to talk of nothing but economic