If we separate the economy into two consolidated balance sheets - A, the balance sheet of the government and the banking industry; B, the balance sheet of all other industries and households - we feel it is perfectly normal for B to borrow more and more money, every year, from A. But is it?
In fact, when this "flow of credit" ceases, the result is described as a "recession." And it is certainly quite painful. And when the flow reverses - that's real pain.
Now: imagine you were considering investment in a business, and that business had borrowed two trillion dollars last year. Or two billion dollars. Or two million dollars.
There are two possibilities. One, the business is in an expansion stage, and is creating equity with negative cashflow. It has a "burn rate." But it is using this money to make productive long-term investments which will, in time, reverse this and produce a profit.
Two: the business is a dog. It is losing money. It needs to be liquidated or at least restructured. Woof! Sorry, Old Yeller. The time has come to say hello to Mr. Smith and Mr. Wesson.
Which is it? There is no way to know. However, if we discover that the same business has been borrowing money every year, in the same way, for the past decade, we probably have our answer. If it has been bleeding for the past quarter-century... behold: Exhibit A.
In this interpretation, the United States, as a whole, is a money-losing operation. The fact that the dollar is a fiat currency has allowed us to disguise this, because fiat currency is essentially equity, and equity can always be diluted. So our losses are funneled into a hemorrhage of new shares, in the classic equity death spiral of the dying corporation. But since USG, unlike most dying corporations, is sovereign, the game can continue indefinitely.
Read the whole post, he also has Plan M to revitalize the financial sector.
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