The previous two installments in this little series looked at the sheer madness that is our fiat currency system and the twisted international economic relationships it has created. Today, we will take a closer look at the primary mechanism through which this lopsided relationship was facilitated: debt.
Problems begin with the way in which we measure progress within our fiat currency system: gross domestic product (GDP). GDP simply indicates the amount of money that changed hands in an economy and can be a very poor indicator of how much a country has actually produced. GDP also says nothing about the ecological, economic and social sustainability of this society. Really, the longer you think about GDP, the worse it becomes as a measure of progress.
The primary problem with GDP over the past couple of decades has been that it gave the impression that everything was fine even though a child could see that we were inflating the greatest credit bubble in human history. The proudly American graph shown below clearly illustrates this totally unsustainable debt binge.
I took some time to recast this data into a slightly different form which might communicate the madness of this situation a little more clearly. What is plotted below is the ratio between the year-on-year percentage increase in total credit market debt and the year-on-year percentage increase in GDP. In other words, it is an indication of the degree by which debt increased faster than GDP. And yes, you can easily imagine that, if your total debt increases faster than your total income over an extended period of time, bankruptcy is the only viable outcome.
The trend is pretty obvious. At the start of the 90’s total credit market debt increased just a little more than GDP, but by 2008 (at the height of the housing bubble), Americans went $7 deeper into debt for every $1 of GDP growth. And yes, we all know what happened to the USA (and the entire global economy) since then.
But yes, this is the problem with the way in which we measure progress. Despite the ballooning debt levels, almost all the highly decorated economists of the world thought that the global economy was in fantastic shape in the buildup to the 2008 financial crisis. Take a look at the video below where poor old Peter Schiff tries to explain the obvious fundamentals to yet another Harvard grad living in fantasy land. And yes, you can find many more such videos on Youtube.
But this is the madness of our global economy. Americans can use debt to buy the same old houses from each other over and over again at progressively higher prices, see their GDP and incomes rise and call that progress. They can use debt to spend more and more on probably the worlds least cost-effective healthcare system, see GDP and incomes rise and call that progress. They can borrow even more money to fight two unnecessary wars simultaneously, see GDP and incomes rise and call that progress. In general, they can borrow trillions of dollars to go on the greatest consumption binge in the history of the world while simultaneously exporting all of their productive industry to China and call that progress. Wow…
Oh, and just one more point: Incomes may have risen temporarily for some, but after adjusting for inflation, all of this amazing “progress” in terms of GDP growth has left the average American worse off financially than two decades ago. And yes, the real kicker is that, even after all of this painful real-world evidence, the West with all of its Harvard economists is still trying to borrow and spend its way back to solid GDP growth.
After all this, it is probably time to look at some solutions.