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Strategies & Market Trends : Mish's Global Economic Trend Analysis
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To: regli who wrote (42663)12/13/2005 2:21:36 AM
From: mishedlo  Read Replies (1) of 116555
 
A debt-based monetary system has a lifespan-limiting Achilles heel: as debt is created through loan origination, an obligation above and beyond this sum is also created in the form of interest. As a result, there can never be enough money to repay principal and pay interest unless debt is continually expanded. Debt-based monetary systems do not work in reverse, nor can they stand still without a liquidity buffer in the form of savings or a current account surplus.

When debt grows faster than the economy, the burden of interest is bearable only so long as the rate of interest is falling. When the rate of interest reverses course, interest charges start rising faster than debt growth. This point was reached on 16 June 2003, the day the yield on the benchmark 10-year Treasury bottomed at 3.09%. Since then, debt grew from $32 trillion to $40 trillion, an increase of 25%. During the same period, annual interest charges rose by over 50%, from $1.28 trillion ($32 trillion at the prevailing average interest rate for debtors of 4%) to $2.0 trillion ($40 trillion at 5%). When interest charges exceed debt growth, debtors at the margin are unable to service their debt. They must begin liquidating.

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