Since the wide array of economic illusions created by the fiat currency systems discussed in the previous two pages (1, 2) have so badly skewed the production/consumption ratio of our example economy, this nation has now become a true leech on the world. It keeps unemployment down by paying public workers to do meaningless jobs and by “stimulating” the economy though direct bailouts, it incentivises more and more people to exploit the welfare system to get a free ride and contribute nothing to the national economy, and it creates a system where massive unearned riches can be gained through massively disruptive speculative bubbles. And yes, all of this corruption and rank inefficiency is sustained using borrowed/printed money. In addition, because the nation produces much less than it consumes, they run a large trade deficit, importing many more valuable goods and services than they export.
Because of this nation’s rich history, other countries initially turn a blind eye to the terrible devolution of the economic system and the people working inside of it and continue to lend money and provide valuable goods and services in exchange for printed money. However, even the best of reputations can eventually be pushed too far. Over a period of many years, market perceptions of this nation become increasingly negative and investors begin worrying about the risks of investing in this country. After all, its economy has become such a terrible mess and its citizens have become so terribly unproductive that real returns on investments now become increasingly doubtful.
As more and more risk is associated with our example country, investors start asking greater interest rates on the money they loan to this country and even start moving their investments to other much more industrious countries. As a result, the cheap money that kept the economy going begins drying up. As interest rates on government bonds increase, government deficits increase with it.
In order to address this, the government first tries to stimulate the economy even more by borrowing and printing even greater amounts, but, as always, this only creates a speculative bubble and leaves the economy even worse for wear. Next, the government tries the opposite: reduce spending and increase taxes, but this also backfires because the population has become so spoilt on all of this cheap money that they have completely lost touch with reality. Massive protests spark even greater instability and further reduces the country’s productive output.
After all of these failed attempts, the country is now truly in free-fall. Investors have lost all confidence in the country and are asking impossibly high rates on loans and rapidly withdrawing all of their money from the economy. The only option left to the government in this situation is printing more and more money so that it can keep on paying public sector workers and keep on importing goods and services. As the amount of money increases and exporting nations lose all trust in this country’s currency, regular inflation eventually morphs into hyperinflation. As the currency devalues at ever increasing rates, prices begin rocketing upwards until the point where it becomes completely useless and people start bartering goods and services directly or using foreign currencies.
Life savings are wiped out by the hyperinflation together with pension funds and insurance schemes. The welfare state collapses, leaving all of the childishly dependent beneficiaries with no income. A terrible depression settles over the country with millions of people literally fighting for their very survival.
Decades of hardship lie ahead on the next page.