World Debt Crisis 
By Doug Casey

This article is from Doug Casey's daily e-mail newsletter.  The article focuses on how the monetary system is creating a monetary crisis for United States and the world.

"Observing the global flow of money, it seems important to consider the implications of a system built around the notion that debt is considered money. To wit, governments the world over fund their operations largely with money created by issuing debt. Even the payments made on great piles of debt are made using this “debt-money.” So, more debt begets more debt-money begetting more debt. Over time the system is  unsupportable.

Which brings us to the case of Greece and other “fringe” countries [ PIIGS ] in the euro-zone. These failing states – and all the nation-states are failing, just at varying rates – need to sell a lot of debt in order to generate the debt-money needed to keep the government’s doors open, but investors, noting just how much debt has piled up, are wary of owning more. 

And that gives rise to what is one of the thorniest problems resulting from a systematic reliance on debt-money – the demand for higher interest rates to offset the actual risks of owning the debt-money of an over-indebted state.  

But it’s even worse than that. To understand why, let’s reduce the situation to more human terms.

Imagine for a moment, being approached by your deadbeat cousin for a $1,000 loan. In exchange, he offers you an IOU that says he will pay you back in specie, with interest, at some point down the road. Now, consider the same situation, but in a world where debt is treated as money. Now, instead of lending him the $1,000 in exchange for an IOU that promises he’ll pay you back your $1,000 plus interest, he promises to pay you back, but only with another IOU.

This is the net result of using debt as money.

Investors are now looking at the mountain of debt looming over Greece and balking, causing that country to raise rates to attract their money – which, in turn, causes losses to existing debt holders and, over time, ratchets up the interest expense on the existing piles of debt. It doesn’t take a genius to see the potential for yet higher and higher interest rates being demanded, and that results in the need to gin up yet more debt-money. This all gets quickly circular.

For the moment, the anxious market believes that the debt-money that trades under the “dollar” brand is of a superior quality to that of the euro (among others), and so the money flows back this way.

But the irony is that whatever brand of the stuff you own, it is still just the same thing: debt-money. Which is to say, an IOU masquerading as money. 

Money should be a reliable store of wealth. It is hard to use that term when talking about an obligation that someone else needs to pay up on – especially when that someone else has proven themselves to be serially unreliable. That makes the debt-money now sloshing around nothing more, really, than a slip of paper representing an untrustworthy promise.

To understand how untrustworthy the issuers are, you need look no further than the steady decline in purchasing power of all of the world’s many variations of debt-money. Case in point, in 1939 the average house cost $3,800.

Do you think that a shortage in real estate and improvements in construction quality explain the one hundred-fold increase in prices over the past 70 years? Not hardly. It’s that the Fed and other central bankers, in close cahoots with the politicians and their cozy buddies in high finance, have used the ludicrous and dishonest debt-money system to flood the nation with more and more of the stuff, debasing the existing stocks of same.

As we now know, because we can see it in the brazen numbers pushed forward by the president and Congress, the debt-money game is heading for a wall. It was one thing when the size of the debt rose at a measured pace that left it largely unnoticed as it grew and grew. But in 2009, the façade fell away, and now the severity of the problem is there for all to see.

While there have been some whiffs of a recovery in the economy, it is important to recognize that what recovery there is, is based on yet more debt-money. A lot more. 

In other words, the roots of the recovery, as tentative as they may be, are exactly the same as the roots of the crisis.

There are good reasons that gold and silver have been used as money through the eons. As Doug Casey often points out, it is because it they are durable, divisible, convenient, consistent, and valuable.

However, the era of debt-money is going to pass in the foreseeable future.

It won’t be a simple or easy transition back to something tangible. When the average man learns that his debt-money is not worth much more than the paper it is printed on, we could even see riots in the streets.

For the time being, though, the money flow is headed back into the U.S., where, unlike the irresponsible Greeks who ran a budget deficit equal to 12.7% last year, our government’s 2011 budget shows deficit spending at “just” 10.6% of GDP. For the record, as recently as 2006, that deficit was only 1.2% of GDP. Even so, for the moment, our debt-money is considered to be better than the euro and, it appears by looking at their prices, gold and silver. It’s all a matter of perspective."

Since this article was posted on the internet, the world economy has been sputtering like an erupting volcano. The world is in an economic crisis that is being escaladed into chaos by the food, water and oil crises.

Reference:

Casey Doug, "Debt money," Casey Research, February 05, 2010: World debt crisis