Attempting To Sustain The Unsustainable

The general theme of the 2008 financial rescues engineered by the world's central banks was: Do more of the same.

The same things that got us into trouble — namely too much debt and increasingly expensive energy — simply increased after the 2008 crisis.

By a lot.

Earlier this year (2014), the BIS released research showing that the global debt markets had vaulted past the $100 trillion mark, something we've noted here before.

This is an astounding fact. One that really ought to lead to some serious questioning as well as deep monetary and fiscal soul searching. As we've pointed out many times in the Crash Course and elsewhere, the central assumption behind steadily increasing debt levels is that the future will be exponentially larger than the present.

The reason is simple enough:  the creditors not only expect their principle balances back, but interest, too. Anything that is growing by some percentage over time grows exponentially. Well, if the pile of debt is increasing, and we can (safely) assume that it's not entirely been lent out at 0% interest, then we can say with certainty that there is a generally held assumption in favor of future exponential economic growth.

Collectively, the issuers of this debt are assuming that such growth is on the way. Either that, or they've decided to lose some or all of the money they've lent out. And I don't know of any commercial entities that set about with that intention.

Money is a claim on real wealth, and debt is a claim on future money. $100,000 lent today is a claim on a future series of cash flows that are expected to be an equal repayment of the principle plus whatever interest rate is attached.

Assuming a 5% rate of interest, $100,000 lent today for 30 years at 5% is a claim on $182,408 future dollars.

So $100 trillion lent under the same terms is a claim on $182 trillion future dollars, using these same assumptions. That is, a lot more future than present dollars. Again, the only way this makes any rational sense is if the future is larger than today (bigger revenues, bigger profits, more net energy, etc). Otherwise, these piles of debt represent a very large set of claims against a stagnant — or worse  — a shrinking amount of real stuff.