Food for thought/Nahrung gegen Gedanken

Interesting article on the oil drum here.

Our financial system is debt based. Since 1971, the financial system has no tie to gold or any other physical standard. Instead, in our fractional reserve banking system, money is formed through the issuance of debt. The more debt that is issued, the more money there is, and the more demand there is for goods and services. As long as the system is growing, the system works well, because paying back debts with interest does not put too great a strain on the system.

When the economy hits limits, such as an oil supply that cannot grow fast enough to support the growth needed to keep the treadmill going, repaying the debt with interest becomes a huge burden. We have been reaching that point in the last few years, as oil production remained approximately flat and oil prices rose. Food prices rose as well, but real wages did not rise fast enough to keep the treadmill going. Soon defaults on debts started.

At this time, there is vastly more debt than there are assets to pay back the debts. Many times, two or three or four people or organizations think they have claims on the same assets. Think of a house. An investor buys the house, and rents it out. The renter pays his rent, and has a claim on the house. The investor is the “owner”, so he has a claim on the place. The mortgage on the property is likely added to a package of other mortgages, and sliced and diced and resold to other investors. Each of them indirectly believes that they have some sort of claim to the property. There also may be an insurer guaranteeing the debt that also has some type of claim. The Federal government, through one of its loan or debt guarantee programs may also depend on the underlying assets. In addition, if the owner doesn’t pay his taxes, the local government may also feel it has a claim to the property.

And from the american energy crisis blog..

Where does the administration, Wall Street, the Media, WHOEVER propose to GET the nearly $3 TRILLION in financing we are going to need over the next 2 years?  The entire f***ing world has less than $7.4 TRILLION in reserves, and that was last year’s data.  Since that time world trade has contracted briskly, and other governments have had need of their reserves to finance their OWN deficit and stimulus spending, (China alone has budgeted over $500 BILLION), so that number is surely less than $6 Trillion as i write this.

Did I mention that the U.S. will not see a budget deficit of less than $1 TRILLION at any point in the next decade or 2 (or 3)?  Or that just to get to the $1.2 TRILLION deficit in 2010, the Obama budget claims the U.S. will grow by 3.2 % in 2010, 4% in 2011, and 4.6 % in 2012?  If not, then what?  What’s “Plan B”?  Look, I don’t make this stuff up.  I am a career analyst and when somebody tells me a + b + c = d, I check their math.  If it does not add up, it does not add up.


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