The world of fiat money is a dangerous failure in installments; the burden of interest is no longer “seriously” bearable. In the past, rulers also used money to maintain and expand their power. What followed? Over-indebtedness, war, expropriation of the common population.
We live in a world that is mercilessly over-indebted. It is very likely that we are currently dealing with the biggest debt bomb of all time. The reason can be found in the unfunded debt money system.
The so-called fiat money has now found its way around the world. The political incentive structures are not in place for austerity. Power is fundamentally based on the accumulation of new debts – on the one hand, in order to attract votes within the framework of the so-called welfare state, and on the other hand, unfortunately, in order to maintain or even expand power through wars. In this context, money is a kind of means of empowerment.
Global debt has been rising rapidly since 1971
In 1970, before the USA moved away from formal gold backing, the global debt ratio was given by the International Monetary Fund (IMF) as 100 percent. The global annual economic output corresponded exactly to the sum of global debt.
In 2020, the International Monetary Fund published a debt ratio of 256 percent. Before 2000, the rate was well below the 200 percent mark.
Let’s look at the interest burden
To do a trivial calculation, we assume a medium and rather low interest burden of five percent. In 1970, based on the 100 percent global debt ratio, five percent had to be spent on interest servicing. From a purely theoretical point of view, 100 US dollars in sales had an interest rate of five percent, which corresponds to one twentieth.
By 2020, debt had increased by a factor of more than 2.5. The interest burden is therefore over 12.5 percent of global economic output. We are now talking about one in every eight US dollars (or euros) of sales that is formally attributable to the interest burden.
Of course, it should be noted that no debts have been repaid in the calculation presented. The total debt service, consisting of interest and repayment, would therefore be significantly higher. However, it is also clear that the dynamically increasing debt burden is creating a certain cost pressure.
Companies are therefore inclined to reduce costs. For example, they save on the cost of goods, so they use inferior quality and use cheaper labor. The quality of the products on offer is decreasing, product life cycles are shortening, which wastes valuable resources and harms the environment.
Old debts and interest are “paid” with new debts
The states themselves tend to pay old debts and interest with new debts and thus benefit from the constant deterioration of money to the detriment of savers and those receiving nominal value. This creates a situation of constant debt accumulation and creates a kind of pyramid or pyramid scheme.
Due to the pressure of new borrowing, government funds are expanded in quantity (inflation). The quantitative expansion is accompanied by a loss of quality because the exchange value of money gradually decreases. Over a longer period of time this can be very drastic.
While the exchange value for an ounce of gold was 35 US dollars in 1971, today it costs between 1,900 and 2,000 US dollars, depending on the exchange rate. The purchasing power of the US dollar – calculated in gold terms – was reduced by more than 98 percent from 1971 to 2022. The U.S. government’s borrowing has created vast amounts of U.S. dollars over the years.
The monetary deterioration comes at the expense of those who have saved in U.S. dollars or receive payments denominated in U.S. dollars. The price for the expansion of the money supply is paid by the gullible people who still believe in the value of fiat money (US dollars, euros, yen and so on).
Last week I illustrated the redistributive effect and described how the purchasing power of average US labor income – calculated in shares of the Dow Jones index – has deteriorated by 83.33 percent since 1971. At this point it becomes clear who pays the bill and who benefits from the deterioration in money as part of the Cantillon effect.
“Money-printed illusionary world has already failed”
Many critics of today’s monetary system have been very wrong when it comes to predicting when the world of fiat money will fail.
If you apply conservative or serious standards, then this money-printed illusionary world has already failed. At least for the broad masses of the population. However, it doesn’t necessarily have to be a major crash that manifests failure.
It is probably more likely that crisis will follow crisis and the redistributive/expropriating effect will further accelerate due to dynamic inflation rates and/or financial repression.
Human actions are difficult or impossible to predict. At best, scenarios with certain probabilities of occurrence can be sketched out. Unfortunately, it is also clear from human history that things became quite uncomfortable for people in the final phases of monetary deterioration. The remaining parts of the market economy were abolished, there were price fixing, allocation of goods, currency reforms, war and, not infrequently, entire societies were brought into tyranny.
It took Rome about 200 years to reduce the silver content of the Roman denarius to almost zero. The USA achieved this questionable feat within about 50 years. In the end, the barbarians ruled Rome. There was war, hardship, suffering, misery and the population of Rome dwindled from 1.5 million people to 20,000.
So, given historical facts, it is not surprising that the world seems to be upside down these days. And it is always the problem of power that leads people to disaster.
Rulers degrade money to maintain and expand their power. Then there is excessive indebtedness, war and the expropriation of the ordinary population. In a situation of over-indebtedness, the balances are gradually or suddenly offset against the debts.
If we as humanity want to escape this endless cycle of misery, then we should abandon any form of domination. It is definitely not a solution to replace old power structures with new ones and then usher in the next cycle of misery in a different guise. In my opinion, money is the ultimate means of empowerment and can therefore be classified as the key cause of the devastating developments in today’s state-monopoly form.
To the author
Benjamin Mudlack is a trained banker and has a degree in business information technology. He is a board member of the Atlas Initiative, a member of the Friedrich August von Hayek Society and actively supports several other liberal projects like this Free Economic Forum and the YouTube channel “The Economic IQ”. He published the book in November 2021 “Money era turnaround: From expropriation money back to covered money”.
The article first appeared on Freiheitsfunken.info under the title Interest burden can no longer be “seriously” borne.
This article represents solely the opinion of the author. It does not necessarily have to reflect the perspective of Epoch Times Germany.