Ponzi's World of Debt

All I want is to be left alone
In my average home
But why do I always feel
Like I'm in the twilight zone
--Rockwell

My brother asked me the other day how the entire world could be in debt. Isn't it a zero sum game, he asked, where someone lends and someone borrows? Shouldn't there always be a creditor and a debtor?

This would be true if the borrowing process directly involved lending the underlying economic resources that serve as the basis for exchange. If I chop wood for a living, then cords of wood are my income. I could loan some of my saved income to someone else--say, a baker. The baker would owe me cords of wood in return, or the some agreed upon substitute, perhaps loaves of bread, based on the terms of the contract.

When borrowing involves real economic resources, then there is truly a creditor and a debtor.

Things are different, however, when borrowing involves money in the form of paper currency. The economic purpose for money is to facilitate exchange. Instead of the awkward process of bartering cords of wood for loaves of bread, money makes the exchange more efficient.

When money supply is held constant so that it accurately and consistently reflects quantities of underlying economic resources, then the borrowing process is still a zero sum game--there are creditors and debtors.

Unfortunately, money serves political purposes as well as economic purposes. Bureaucrats can print money to pursue political objectives. When bureaucrats can print money, they certainly will. Thus, the money supply is not stable. Instead, it grows over time (a.k.a. inflation). As money supply grows, it loses its relationship to underlying economic resources.

As money's relationship to underlying economic resources becomes obscured, then precisely who the creditors and debtors are in the borrowing process becomes difficult to determine. It is possible to lend money while consuming all underlying economic income. The primary restraint in this process is the extent to which political will motivates further money printing.

Over time, it is likely that the borrowing process is likely to morph into a ponzi where people lend and borrow printed money from each other. All the while underlying economic resources are consumed rather than saved.

This lasts until all economic resources are depleted.