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The Elephant In The Room: Debt Grows Exponentially, While Economies Only Grow In An S-Curve
Michael Hudson is a highly-regarded economist. He is a
Distinguished Research Professor at the University of Missouri, Kansas
City, who has advised the U.S., Canadian, Mexican and Latvian
governments as well as the United Nations Institute for Training and
Research. He is a former Wall Street economist at Chase Manhattan Bank
who also helped establish the world’s first sovereign debt fund.
Hudson
says that - in every country and throughout history - debt always grows
exponentially, while the economy always grows as an S-curve.
Moreover,
Hudson says that the ancient Sumerians and Babylonians knew that debts
had to be periodically forgiven, because the amount of debts will always surpass the size of the real economy.
For example, Hudson noted in 2004:
Mesopotamian
economic thought c. 2000 BC rested on a more realistic mathematical
foundation than does today’s orthodoxy. At least the Babylonians appear
to have recognized that over time the debt overhead became more and
more intrusive as it tended to exceed the ability to pay, culminating
in a concentration of property ownership in the hands of creditors.***
Babylonians recognized that while debts grew exponentially, the rest of the economy (what today is called the “real” economy) grows less rapidly.
Today’s economists have not come to terms with this problem with such
clarity. Instead of a conceptual view that calls for a strong ruler or
state to maintain equity and to restore economic balance when it is
disturbed, today’s general equilibrium models reflect the play of
supply and demand in debt-free economies that do not tend to polarize or
to generate other structural problems.
And Hudson wrote last year:
Every
economist who has looked at the mathematics of compound interest has
pointed out that in the end, debts cannot be paid. Every rate of
interest can be viewed in terms of the time that it takes for a debt to
double. At 5%, a debt doubles in 14½ years; at 7 percent, in 10 years;
at 10 percent, in 7 years. As early as 2000 BC in Babylonia, scribal
accountants were trained to calculate how loans principal doubled in
five years at the then-current equivalent of 20% annually (1/60th
per month for 60 months). “How long does it take a debt to multiply 64
times?” a student exercise asked. The answer is, 30 years – 6 doubling
times.
No economy ever has been able to keep
on doubling on a steady basis. Debts grow by purely mathematical
principles, but “real” economies taper off in S-curves. This too was
known in Babylonia, whose economic models calculated the growth of
herds, which normally taper off. A major reason why national economic
growth slows in today’s economies is that more and more income must be
paid to carry the debt burden that mounts up. By leaving less revenue
available for direct investment in capital formation and to fuel rising
living standards, interest payments end up plunging economies into
recession. For the past century or so, it usually has taken 18 years
for the typical real estate cycle to run its course.
Hudson
calls for a debt jubilee, and points out that periodic debt jubilees
were a normal part of the Sumerian, Babylonian and ancient Jewish
cultures. Economist Steve Keen and economic writer Ambrose
Evans-Pritchard also call for a debt jubilee.
If a debt jubilee is not voluntarily granted, people may very well repudiate their debts.
And as I have previously pointed out, our modern fractional reserve banking system is really a debt-creation system, which is guaranteed to create more and more debts. As then-Chairman of the Federal Reserve (Mariner S. Eccles) told the House Committee on Banking and Currency on September 30, 1941:
That is what our money system is. If there were no debts in our money system, there wouldn’t be any money.
The modern banking system is therefore really a debt-creation system. See this for details.
One thing is for sure. The exponential growth of debt is a structural problem which - unless directly addressed - will swallow all economies which try to ignore it.
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I'm betting they had a serious credit crunch the few years before each hallow 50th year...
I'm announcing a debt Jubilee on my mortgage with JP Morgan Chase. I'll send it to them this Monday.
Have a fun year tooting your ram's horn (until your eviction).
Want to break all the big banks up? Stop paying your CC and Mortgage debts. Sounds insane, but if enough do it - the people will re-take the nation and close the Federal Reserve.
What CC and mortgage debts, Kemo Sabe?
USA spend and print more....
spend and print more ,.....
The Fed will Ruin the USA...
Too late to stop it...
From Manal Mehta of Branch Hill Capital, Congressional Oversight Panel:
>
MR. SILVERS: Ms. Caldwell, I would like to continue to pursue Mr. McWatters’ train of thought.
I’m concerned about Treasury making representations categorically that you don’t see a systemic risk. And let me walk you through exactly why.
Mr. McWatters referred to a demand letter sent by a number of bond holders, including the Federal Reserve Bank of New York, one of the institutions I believe that is encompassed by your list of regulators and the like that Treasury coordinates with.
You’re familiar with that letter?
MS. CALDWELL: Yes, I am.
MR. SILVERS: All right. That letter asks for $47 billion of mortgage-backed securities to be repurchased at par. Do you know what those mortgages are currently carried — what those bonds — the market value of those bonds today?
MS. CALDWELL: You know, at this point, I’m not prepared to comment on ping litigation but just to, again –
MR. SILVERS: Okay. Fine.
MS. CALDWELL: — earlier that we’re –
MR. SILVERS: Let me tell you what the Fed says they’re worth.
All right? The Fed tells us they’re worth $0.50 on the dollar.
So if the Fed’s request to Bank of America is honored, Bank of America, assuming they are carrying these bonds — assuming, when they buy them back, they mark them to market, Bank of America will take a $23 billion loss.
The Federal Reserve further informs us that there is nothing particularly unique about that particular set of mortgage-backed securities. Meaning, they have not been chosen, okay, because they’re particularly bad. They believe they are of a common quality with the rest of Bank of America’s underwritten mortgage-backed securities.
There are $2 trillion of Bank of America’s underwritten mortgage- backed securities. Five such deals — five such requests — if honored, to Bank of America will amount to more than the current market capitalization of Bank of America, which is $115 billion.
Now, do you wish to retract your statement that there is no systemic risk in this situation? And the word is “risk,” not “certainty” but “risk.” And I would urge you to do so because these things can be embarrassing later.
MS. CALDWELL: I think my statement, as I said earlier, is that it is still early. We’re working very closely with 11 regulatory and federal agencies. We are watching this every day. And at this stage, there appears to be no evidence of a systemic risk but, again, it is early, and it is something we’re monitoring daily.
MR. SILVERS: Let me suggest to you that it is still early is a perfectly acceptable position. The notion that there is no – is it your position that Bank of America, honoring five of these things, would not present a systemic risk? Five of these requests by the — the first of which has been made by the Federal Reserve.
Is Bank of America not systemically significant?
MS. CALDWELL: You know, at this point, I’m not prepared to comment on a particular institution. But I think, as we look at the put-back risk, the litigation involved, the severity and the probability and the time that it would take to go through these, those are all important factors to be considered in looking at the risk.
And again, just to reaffirm, we didn’t say there was no risk.
We said there didn’t appear to be evidence of a major systemic risk.
This is misleading. The government debt that the Federal Reserve buys its not really debt, because the benefit from the Fed go back to the government.
If 100% of the money was really debt and interest had to be paid it would have collapsed years ago. Seriously, make a mathematical model, its easy, and test it. Since it has not collapse, its because saying that all the money is debt is nonsense.
The banking system is broke, but explaining half trues wont help solving the issues.
90%+ of our money is debt-based, so the article is not misleading at all.
Hudson's point is more than relevant. It explains why the banking system wants fiat currency, rather than precious metals. Fiat currency requires a debt-based currency. The bankers don't have to do anything and they will eventually own everything.
Double post
Even so most debt is private in nature.
This crowds out equity / capital and Labour until all the surplus is expressed in interest income.
In fairness Hudson is not stating that the surplus disappears but rather compound debt dynamics creates disequilibrium in the market and if allowed to continue it will drown investment in capital and not reward Labour - crashing the system.
Debt went nuclear when Volcker decided to create huge interest rate hikes to kill Gold.
Even though the monetory aggregates or credit increased which is really a expression of the extraction rate ,Gold declined over the next 20 years as Americas accumulated capital base was run down to service the bond market.
Now no new capital has been created for at least 30 years the system is having trouble extracting surplus from both Labour and Capital.
This is the nexus of the instability withen the capital markets as the Volcker solution can only work now if you kill people rather then reduce their wealth.
It depends in what you mean. If you are saying that the debt is mainly in private hands you are right. But all this debt is only possible because the government imposes the monopoly on money. Without the government grating the monopoly on credit to the banks under the Federal Reserve system its impossible for them to create so much debt.
As for the rest of your post, there is no relation between the amounf of debt and the productivity. There is data of times were the amount of debt was higher and there was no bubbles, and times when the debt was lower but there were bubbles. I like Hudson, I think he is honest, but his adherence to Keynesian and Marxist economics just fools him into wrong conclussions.
The productivity rates in America has been skewed by cheap imported goods - the capital base has not been developed for 40 years.
Coal fired power plants have not been replaced for 50 years ! , no effort has been made to reduce oil intensity such as a new rail system to transport consumer goods instead of transcontinental trucks etc.
Any efforts towards productivity in manufacturing has been geared toward effeciencey rather then capital as Banks can increase their profitability if they do not have to provide capital - this was the basis for the equity boom of the 80s and 90s - it was a illusion when you factor in total wealth creation and merely reduced redundencey to express false profits.
I am sorry but you need to examine the data that you are reading - it is giving skewed information - America is now a Hollow shell as a result of nearly all income servicing debt especially since the credit engine replaced wages for consumption growth.
If you are going to use debt productively you use it to develop your capital base, not your consumption.
Anyhow I know Hudson's lineage but his lodgic in this regard is obvious to me wether he is a adherent of Karl or Groucho.
You are not reading what I write. I did not say that the USA capital allocation is working or its not distorted.
What I said is that there is no relation from the amount of debt and the productivity.
This is actually good. I had read other things by Hudson and assumed he had still the same ideas. M fault. De-centralization of credit would be an amazing step in the right direction. But its easier to propose than to achieve.