Guest Post: Debt Is Not Wealth

Tyler Durden's picture

Via John Aziz of Azizonomics,

Here’s the status quo:


These figures are staggering; the advanced nations typically have between three and ten times as much total debt as they have economic activity. In the United Kingdom — the worst example — if one year’s economic activity was devoted entirely to paying down debt (impossible — people need to eat and drink and pay rent, and of course the United Kingdom continues to add debt) it would take ten years for the debt to be wiped clean.

But the real question is why? Why are both debtors and creditors willing to build a status quo of massive unprecedented debt?


From the side of the creditors, I think the answer is the misconception that debt is wealth. Debt can be used as collateral, or can be securitised and traded on exchanges (which itself can become a form of shadow intermediation, allowing for a form banking outside the accepted regulatory norms). To keep the value of debt high, and thus keep the debt illusion rolling along (treasury yields keep falling) central banks have been willing to swap out bad debt for good money. But debt is not wealth; it is just a promise, and in today’s world carries huge counter-party risk. Until you convert your debt-based promissory assets into real-world tangible assets they are not wealth.

From the side of the debtors, I think the answer is that debt is easy. Why work for your consumption when instead you can take out a home equity loan or get a credit card? Why buy the one car that you can afford when instead you can buy two with debt?

But there is another side in this world: the side of the central planners. Since the time of Keynes and Fisher there has been an economic revolution:



Deflation has effectively been abolished by central banking.  And so we get to where we are today: the huge and historically unprecedented outgrowth of debt. Deleveraging necessitates economic contraction, which produces the old Keynesian-Fisherian bugbear of debt-deflation, which the central planners abhor. So they print. Where once deflation often made debts unrepayable, and resulted in mass defaults, liquidation and structural transformation, today — thanks to money printing — debtors get their easy lunch of cheap debt, and creditors get their pound of flesh, albeit devalued by the inflation of the monetary base. It has been a superficially good compromise for both creditors and debtors. Everyone has got some of what they want. But is it sustainable?

The endless post-Keynesian outgrowth of debt suggests not. In fact, what is ultimately suggested is that the abolition of small-scale deflationary liquidations has just primed the system for a much, much larger liquidation later on. Bad companies, business models and practices that might otherwise not have survived under previous economic systems today live thanks to bailouts and money-printing. This moral hazard has grown legs and evolved into a kind of systemic hazard. Unhealthy levels of leverage and interconnection that once might have necessitated failure (e.g. Martingale trading strategies) flourish today under this new regime and its role as counter-party-of-last-resort. With every rogue-trader, every derivatives or shadow banking blowup, every Corzine, every Adoboli, every Iksil, comes more confirmation that the entire financial system is being zombified as foolish and dangerous practices are saved and sanctified by bailouts.

With every zombie blowup comes the necessity of more money-printing, and with more money-printing to save broken industries seems to come more moral hazard and zombification. Is that sustainable?

Already, central bankers are having to be clever with their money printing, colluding with financiers and sovereign governments to hide newly-printed money in excess reserves and FX reserves, and colluding with government statisticians to hide inflation beneath a forest of statistical manipulation. It is no surprise that by the BLS’ previous inflation-measuring methodology inflation is running at a much higher rate than the new:



Worse, in the modern financial world, we see an unprecedented level of interconnection. The impending Euro-implosion will have ramifications to everyone with exposure to it, and everyone with exposure to those with exposure to it. Not only will the inflation-averse Europeans have to print up a huge quantity of new money to bail out their financial system (the European financial system is roughly three times the size of the American one bailed out in 2008), but should they fail to do so central banks around the globe will have to print huge quantities of money to bail out systemically-important financial institutions with exposure to falling masonry. This is shaping up to be a true test of their prowess in hiding monetary inflation, and a true test of the “wisdom” behind endless-monetary-growth fiat economics.

Central bankers have shirked the historical growth cycle consisting both of periods of growth and expansion, as well as periods of contraction and liquidation. They have certainly had a good run. Those warning of impending hyperinflation following 2008 were proven wrong; deflationary forces offset the inflationary impact of bailouts and monetary expansion, even as food prices hit records, and revolutions spread throughout emerging markets. And Japan — the prototypical unliquidated zombie economy — has been stuck in a depressive rut for most of the last twenty years. These interventions, it seems, have pernicious negative side-effects.

Those twin delusions central bankers have sought to cater to — for creditors, that debt is wealth and should never be liquidated, and for debtors that debt is an easy or free lunch — have been smashed by the juggernaut of history many times before. While we cannot know exactly when, or exactly how — and in spite of the best efforts of central bankers — I think they will soon be smashed again.

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Colombian Gringo's picture

The Juggernauts that need to be liquidated are not just bad loans but the banksters behind them.

Goldilocks's picture

...& the horses they rode in on !!!

q99x2's picture

And the flys that chased after them.

daveeemc2's picture

I seem to recall that banks would value a customer's overall net worth by taking absolute value of assets and liablities and simply adding them up to a total. 

If Jack had $5MM in liabilities and $2MM in assets, his overall segmentation tier was $7MM.  This put him into the same category as Jill who has $7MM in assets and $0 liabilities.

I am Jack's complete lack of surprise.

philipat's picture

It is, however, (literally) correct to state that for the Banks, Debt is an asset.

samwell's picture

debt is an asset to these talmudic jew bankers because of the way the have been allowed via treachery and conspiracy in 1913 to construct our monetary system.  debt is a cash flow to these criminal psychopaths because the more debt they issue into circulation eg FRN, the richer they get off us via the recurring interest payment.  money in the jews sick manipulated psychopathic view only comes into existance as a debt to them.


End the fed


BankruptBanker's picture

Of course it isn't! If you had wealth, why the fuck would you need to borrow and go into debt?
But the algorithms that the "geniuses" have put in beg to differ.

Sabibaby's picture

That's because anything negative is multiplied by -1 and if you don't want to do the math you can just make something up :)

RichardP's picture

... why the fuck would you need to borrow and go into debt?

Because a cardinal rule in the world of finance is to always use other people's money, never your own.  If you lose other people's money, it doesn't matter.  If you lose your own money, it matters a great deal.

dolph9's picture

U.S. Treasury debt, upon which the financial system of the world operates, is the biggest bubble of them all.

Protect yourself from the inevitable conclusion of the Treasury bubble, which is dollar hyperinflation, or debt repudiation, which for all intents and purposes are the same thing, because there won't be any good cash left in the U.S.

Buy physical precious metals, the currency that will outlast American Ponzi Empire.

LawsofPhysics's picture

Ben can "fix it in 15 minutes" by increasing interest rates, wiping out the bond holders and making the U.S. government insolvent.

No worries.  How come no one mentions the bit about private debt being loaded onto the government balance sheet.  Ah the smell of fascism and crony capitalism, now where is the napalm?

rufusbird's picture

Isn't it getting close the the Time when Ben will need to "Fix it", and if so, should not someone be discussing the steps that he will take to "fix it" and be anticipating those steps in the market?

Seems like we should have been hearing lots of discussion about this topic considering the level anxiety in financial markets.


LawsofPhysics's picture

You mean like know what the dollar-SDR exchange rate will be ahead of time?  That would certainly be useful information.  I wonder if it will vary from state to state after the treasury market collapses?  Someone call a bilderberg.

The anxiety has less to do with "markets" and more to do with wages and paper as in will any of us have incoming wages or paper that is worth a shit.

If you have some PMs and know the real value of your labor, you will be fine.  Unfortunately, the law of averages in not in anyones favor. As in most people are lazy morons.  Good time to know you are in a good community with like minded neighbors.

A Lunatic's picture

Nor is money wealth.

sitenine's picture

Try telling that to a central banker.

Miss anthrope's picture

i loved the charts here.............. good chart PORN.... thank you


CommunityStandard's picture

Stuff we all know, but always a good read from Aziz.  Of course, the big question is when.  I'm not bold enough to make a prediction, but the more time I have to stock up, the happier I'll be.

LawsofPhysics's picture

I will make some predictions.  Considering that much of what is left of the "stimulus" will run out in September of 2013 for most government, financial and venture capital funds that recieved it, the automatic cuts (from the failed "super" committe) will kick in January 2013 which will cut the entilment funding, the war complex, and a large majority of the discretionary spending (the only productive government spending that actually delivers) and none of this counts the loss of unemployment by many I would say that at least 50% of America can expect to see a major decrease in their income and all the consequences that comes along with it.  If you think unemployment and the real estate market is bad now, just wait.  I see a deflationary period for 18 months to a couple years with all the stupid games that TPTB can play (many more capital controls and price "fixes" to come).  After that, without clearing any bad debt, it's on like donkey kong with most likely a very inflationary period and lots of barter and trade going on.  I suspect agriculture will have a lot of produce "fall off the truck" and black markets will do exceptionaly well after that. 

CommunityStandard's picture

Do you think it's possible the US could pull off turning into Japan?  Debt ceiling will be raised and Congress could pull a last minute panic vote to extend the tax cuts and continue the stimulus.  2013 could be 2012 all over again, just with 20+ trillion in debt.

LawsofPhysics's picture

Yes, but at the expense of the reserve currency. The world is now Japan and they simply will never be able to create enough capital to sustain growth form now on. At least not without crushing everyone's standard of living.

Tirpitz's picture

From the side of the debtors, I think the answer is that debt is easy. Why work for your consumption when there are no paying jobs available.

Fixed that for you.

It has been a superficially good compromise for both creditors and debtors.

Or rather debtors get foreclosed upon, while creditors take over, backed by a government deeply in their pockets. Wasn't that the well concealed goal all along the way?

With every zombie blowup comes the necessity of more money-printing, and with more money-printing to save broken industries seems to come more moral hazard and zombification. Is that sustainable?

Monopoly - what a game. Too bad we have to use the same printed confetti they play with.

DormRoom's picture

The problem with the Fed position is how it provides New Deal stimulus, but can't deliver New Deal reforms (neither party will do this), which is why there isn't any organic, sustainable growth, and the need for perpetual QE.

LetThemEatRand's picture

If you realize it is intentional, it all makes sense.  These guys are not dumb.   The New Deal money is going straight to the bankers who are using it to secure their place as Lords in the coming neo-feudal economy.  They get the cash today that shows up as debt on the charts above.  They buy shit with it.  The bankers and other oligarchs directing Ben have no interest and no intention of saving anything but themselves.  I used to think stuff like this was science fiction conspiracy crap, but the writing is on the wall.  They are preparing for a giant melt-down:  FEMA camps, surveillance cameras everywhere, massive expenditure on "homeland security" weapondry (think they are worried about an invading army?), massive expenditure on crowd control devices like sound and heat cannons, etc.  The soldiers and their commanders are being trained in Iraq and Afghanistan how to occupy and subdue armed populations.   Think your gun is any match to an armored Humvee with bullet tracking technology that fires a thousand rounds in the direction of the last shot?    And don't forget the 30000 drones ordered already for domestic use. 

LawsofPhysics's picture

I don't see the reservists and active duty people I served with firing a single shot on their neighbors.  maybe that is different in other parts of the country.  Why people in the U.S.S.A. write off a military style takeover where this volunteer army turns its weapons on the politicians and bankers is beyond me.  unless of course you are suggesting that people of another nationality will be driving those humvees and drones.  Certainly that is not what you are suggesting.  i know several men from delta force who are very patriotic and are now in the weapons manufacturing business.  Much of what they are building goes way above what your average weekend warrior has access to.  many are training in the western deserts right now.  many still serve in Afghanistan. I have been approached about teaching them "tactics".  Hell, these guys are already capable of taking out targets from miles away.  There are no "tactics" with that kind of capability (especially in gorilla stye fighting), just the need for good intelligence so you know that you are engaging a situation you will win.  After that it is all about no evidence and plausible deniability, heck didn't these guys learn anything from their service?  I can completely see these guys taking control and thanking the bankers for funding it all right before they execute them.  Could get interesting I guess.

LetThemEatRand's picture

I think you are correct about most military people not being willing to engage their neighbors per se, but I envision a much more complicated scenario.  It would not happen all at once.  In the event of a collapse, you would have the poor who would be most vulnerable and the first to start to act out.  Many police and Reservists would deal with them easily enough and view them not as neighbors, but as angry hords threatening their own security and that of their families.  Then, there would be reports of internal terrorists.   They are already teaching police to be suspicious of Ron Paul supporters and anyone who identifies as Tea Party.  In the event of widespread unrest, they would start taking guns.  The authorities would paint those who resist as terrorists.  And it's not like they are going to send soldiers to patrol their own neighborhoods.  Then there are the young, who would follow shortly after the poor/minorities in terms of rising up.   Many of the same guys who sign up for Blackwater (Xe) would love to kill them some commie libs and hippies, or at least round 'em up.  There is already a huge private army under the control of the oligarchs.  They call it privitization.  I see it as being precisely to get around the problem you identify with regular military guys.  The U.S. military itself would be a very small part of it.  And keep in mind that TPTB are expert at demonizing whomever needs to be taken out to achieve their agenda.   

P.S. I prefer your outlook and I hope you are correct.  I suspect we are going to find out in our lifetimes.

LawsofPhysics's picture

I don't think you understand what a profession soldier does.  None of these guys (especially from blackwater) would be at a "rally".  These are the guys that knock out communications while you sleep, and take you out quietly from 500 yards or miles away.  In many cases, any evidence of the act or your existence is also destroyed.  My point is that we live in neighborhoods around the country and while you are probably right about what may happen at local protests etc. we still have a sense of community.  The guys that put on the riot sheilds to crack skulls and beat up liberals will not be professional but I would rather suspect they will be desparate people who "know someone" and were deputized and trained on short notice.

LetThemEatRand's picture

I have no reason to disagree with you as it relates to the military specifically as I do not have personal military experience.  So I will defer to your outlook.  But I think your comment about the deputized thugs probably sums up my fears better than I had expressed.  If the situation gets desperate, there will be a whole lot of "brown shirt" wanna be's who would do whatever they are told for a paycheck and a feeling of power.  And Homeland Security who would do the hiring (itself and through local law enforcement) has all the high tech stuff it needs to maintain order with a few warm bodies at the controls.   The wild card as you posit is whether the regular military would allow a wide-spread crackdown by such thugs on civilian populations.  You have confidence that they would not and that gives me hope.

LetThemEatRand's picture

From poster Michael on another thread.  Gives credence to your theory.  Police change sides during protest n Germany....

macholatte's picture


Watch the first 15 minutes of "Saving Private Ryan" and tell me you cannot get soldiers (or cops) to rush into oncoming fire and risk certain death. Now take those same troops from Georgia and send them to a base in NoCal or Oregon or Seattle or anywhere else and tell them to put down the rebellion. Of course they will follow orders and do as they are told weather it's from 5 feet or 500 yards. They will do it. Think Kent State.

LetThemEatRand's picture

Good counterpoint.  LOP is thinking of guys like this (introduced to me by someone here on ZH, I wish I could recall who).

This guy Stan actually describes during his video the people who I worry about, e.g., the ones who sign up to kill people.  Hopefully these competing factions will never need to come to blows.

macholatte's picture


I would conclude that those German cops are the exception and not the rule. Also, there is a big difference in the training of cops and soldiers. Cops have a local mindset. There are lots of stories that during Katrina many cops  abandoned their posts to check on their own families. Soldiers pretty much expect to be working on foreign soil and would not necessarily have any ties to the area of operations. But the real punchline is that TPTB are way ahead of the curve and have a psychological profile already in place and understand how to train the dogs to obey weather they are psychos or just good 'ol farm boys looking for adventure or just a job & some food. 

A Lunatic's picture

Here's a tidbit of info..........The Posse Comitatus Act forbids only the Army and Air Force troops from domestic law enforcement. Navy, Marines, Coast Guard are exempt.............Brown-shirts too I'd imagine.

LetThemEatRand's picture

There are a number of situations in which the Act does not apply. These include:

macholatte's picture

If you realize it is intentional, it all makes sense.  These guys are not dumb.


I believe people get confused when they forget that there are humans at the head of these huge banks who benefit greatly when their companies go into debt and then get bailed out. In that regard, debt IS wealth.

LetThemEatRand's picture

I agree.  A better title would be "Debt is not wealth to anyone except the oligarchs, for whom it is most certainly wealth."

JustObserving's picture

If the 1990-based CPI is true then the US GDP has been overstated by about 30% in the last 10 years alone and the current US GDP is about $10.5 trillion instead of the $15 trillion commonly cited.

Dagong, the Chinese rating agency, has estimated US GDP to be about $6 trillion. 

Besides, everybody ignores the $119.1 trillion in US unfunded liabilities (Social Security and Medicare) which will be politically impossible to cut.


LawsofPhysics's picture

Correct.  Of course, the chinese simply make their GDP whatever they want it to be.  Pretty sure that the U.S. is trying to adopt several aspects of the chinese system.

Conrad Murray's picture

Yep yep yep. The article is good effort, but it's meaningless since it's founded on false and manipulated numbers.

franzpick's picture

Our household debt is half our annual 'gdp' income: G10 tigers, take note.

Bad as our situation is, the big sovereign spenders make make me feel like I went down to the ocean with a spoon.

Bob's picture

I've been waiting to say this all day:

Luv to the ZH staff who literally make this shit happen. 

ZH Rocks. 

XtraBullish's picture

Occupy Wall Street was the shot across the bough - U.S. is Greece times a thousand and it is going to see $10,000 gold prices before it ends. Do a google search of the top 10 central banks holding gold - it is the last piece of collateral standing. U.S., Germany, IMF, Italy, France....

Bob's picture

I like gold for the difficulty in dilluting it, esxpecially if goldbugs are watching it.  It potentially sets the concept of inflation on its head.  If shit didn't get cheaper, somebody has something to explain.

Perhaps it's the rentier.

blindman's picture

recently i noticed the price of gasoline
was $3.89 for cash customers and $4.89 for
card customers. hmmm. the point is that
cash is cash in your pocket and needs to be
thought of as something different from
the "money" you lend to a bank or credit union
with zero duration, aka in an account that
is the banks account and your claim in the case
of a bankruptcy on the part of the bank or union.
and it is not entirely clear that the derivative
losses that may be on the book of the bank will
not see fdic protection before you make your claim.
this could be the qe^, to end all qe.

Alex Kintner's picture

What?!!  "Debt Is Not Wealth"?!

Holy Crap!! Why isn't this post marked BREAKING!

midgetrannyporn's picture

the bernank is a pig.

monopoly's picture

Never in the history of man has a country prospered by creating more and more debt....Never!

Be patient for the end game. It will come.

slewie the pi-rat's picture

it's not about defintions, but function

function = fungiblitiy

whatevah slewie thinks wealth is, he can  buy and hold:  physs bikes and food and a bunker down 2 storeys underground cuz he ran outa money and couldn't go 3

if you can liquidate or earn or win and buy apple cider, ice cream, and lo-bequeral lobster-tails, who cares what you call it? 

sustainable?  yeah!  trust me!  [debt = money] and both sides of that master equation are fungible and bookkeeping entries in a ponzi + print scheme

the fuktard criminals in charge of which market their products to us here on zH, while stealing our ideas and... 

...>-->while my guitar gently weepsL0L!!!

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