Daily Archives: March 30, 2014

The world owes $57 trillion. Who the F*** to? Mars? Jupiter? #2

{Note: I am making a start towards getting everything written down in some sort of logical order. So apologies if I’m not saying anything new !}

It’s high time for some clear thinking on the subject of debt.

Take a look at any financial newspaper, any mainstream TV business program, most economics and political websites and the subject of debt looms large in most, if not all, discussions. We are constantly told how that debt is a huge problem for us all. We might know from our personal experience just how bad it is to be in so much debt that we can’t afford to repay the interest, let alone the capital repayments to reduce the loan itself.

The take-home message everyone is given is that the world is in deep financial trouble and that if we don’t knuckle down and fix the debt problem, the debt problem will fix us. It seems we are due to fall over the edge of that fiscal cliff in the very near future if we don’t get our act together.

Certainly the world does face future problems of resource depletion and possible climate change. But these are quite different from the problems we see regularly reported in the mainstream press. In America, the concern is that their National Debt is now over $17 trillion

Image There is story after story in the US media about how this isn’t sustainable. How its just not realistic to keep borrowing from China and Japan. In the UK the situation looks bad too!

Image

Lets take a look at just how much of a surplus the Chinese and Japanese have managed to build up over the past few years.

Image

This looks odd.  but it looks like Japan is broke too! What about China? Surely they must be in the black!

Image   No. They don’t look to be doing too well at all. This is not what we were told. What about all those exports? So what about the world as whole? Surely that must net to zero. The creditors and the debtors must be equal.

World

No, it obviously doesn’t. So just what’s going on? All the wonder economies are in debt too. Germany is in debt ($3 trillion) Singapore is in debt ($400 billion) Do we owe all this money to the extra-terrestrials?

There is no need for anyone to worry, at least in my opinion, that we have to keep our extra galactic creditors happy. They are not going to send in the bailiffs and repossess our planet. If I am ever proved wrong about that, they will not be at all interested by the digits in our computers , or the printed pieces of paper we call money. It will the resources of our planet which might interest them and I would expect they, unlike many of us Earthlings, would be smart enough to appreciate the difference between money and resources.

They should also be smart enough to know that all money is created by crediting and debiting accounts, and that money functions as a unit of account, medium of exchange, store of value, and record of debt. Every debt has a corresponding credit denominated in the unit of account of that jurisdiction, so that all debt as someone’s liability is someone else’s asset, which nets to zero. Since money is not only someone’s debt (a payable) but also someone else’s credit (a receivable), it is just as true to say that the world owns over 57 trillion in financial assets, expressed in USD, as it is to say that the world owes 57 trillion in financial liabilities.

If there were no credit-debt relationships, that is, if all financial liabilities were extinguished, then there would be no money, and exchange of goods and services would be reduced to barter. (Acknowledgements to Mike Norman).

Do politicians not understand all this themselves?  Don’t they understand that all governments have to be in debt? That would be stupidity. Or do they understand all this very well but just like to scare us all with these huge numbers? Do they deliberately lie to the very people who pay their salaries? At least under their own understanding of economics they do 🙂    That would be criminality! Which is worse?

To understand why this is the case, that debts are just another way of expressing assets,  we need to start right at the beginning and take a look at what money is and why it has a value.

Advertisements