Courtesy of Mish.
Reader Mike wonders how interest can ever be repaid in a credit-based economy.
Hi Mish,
I wonder if you would be able to comment on this from Bill Gross in For Wonks Only:
"A credit-based financial economy (as opposed to pure cash) depends on an ever-expanding outstanding level of credit for its survival. Without additional credit, interest on previously issued liabilities cannot be paid absent the sale of existing assets, which in turn would lead to a vicious cycle of debt deflation, recession and ultimately depression.
Put simply, if credit needs to expand at 4.5% per year, then the private and public sectors in combination must create approximately $2.5 trillion of additional debt per year to pay for outstanding interest."
This seems to correlate to reality 100% but the implications are stunning. It means that assets must increase in value at the rate of the original loan plus all interest payments ever made. It also means there will be a very major reversal at some point as there will be a moment when the last loan that someone will actually pay gets written and the system will not be able to expand. I always assumed that debt levels would just reach a very high plateau and stay there but Gross is saying that is not possible.
If the system we have requires the interest to be created every year (in the form of new loans) to survive that seems like the very definition of a ponzi scheme.
Do you know the mechanical reason why the interest payments need to be created by issuing new debt? It is possible, of course, that you disagree with Bill Gross but he probably knows more about how debt works than any man alive so my assumption is that you agree with his viewpoint.
I'm sure you get endless requests for articles but this is such a fundamental question I would be extremely grateful (as I'm sure would many other people) if you are able to write a reply as an article.
Mike
Exponential Math
We are in this mess precisely because of fractional reserve lending and never-ending policy of inflation by central banks that do not seem to understand the long-term ramifications of exponential math.
I have covered the exponential math aspect before. For details, please see Money as Communication: A Purposely "Non-Educational" Fallacious Video by the Atlanta Fed….
