Catallaxis

Debt Trapped: Exploring Monetary Futures

Daniel O'Connor  |  Integral Ventures, LLC

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With the US economy caught in a system-wide debt trap rooted in the design of its currency, our economic future is contingent upon the policy decisions currently being made by US monetary authorities and their international counterparts. An inquiry into the primary monetary policy uncertainties yields a set of diverse, yet complementary scenarios for our immediate future. These scenarios provide an interpretive frame-work for strategic decision making by entrepreneurs and executives, investors and consumers, citizens and activists.

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“There is no subtler, no surer means of overturning the existing basis of society than to debauch the currency. The process engages all the hidden forces of economic law on the side of destruction, and does it in a manner which not one man in a million is able to diagnose.”

— John Maynard Keynes

“The process by which banks create money is so simple that the mind is repelled.”

— John Kenneth Galbraith

In the midst of what many Americans understand to be a modest, though genuine, recovery from the Great Recession officially dated from December 2007 to June 2009, there remain enough lingering indicators of recession, from chronic unemployment to falling home prices, to alarm all but the most politically compromised economic pundits. While the financial crisis that punctuated this Great Recession becomes better understood through a spate of recent books and one compelling documentary, in my opinion there remains a widespread lack of appreciation for the root cause of the crisis and the continuing crisis-potential it presents. I presented my concerns about the crisis-potential in the US economy in a host of articles written from 2002 to 2006, one of which, entitled Debt Trap, explained in the simplest terms possible a fundamental flaw in the design of our monetary system for which there is no inherent fix and no easy exit._{1 2} 

The Monetary Debt Trap  

From 1971 through 2010, the total debt in the US economy—Total Domestic Debt—has grown from $1.7 trillion to $50.5 trillion, with an average annual growth rate of 9.2%. This remarkably high rate of debt accumulation is well above the 6.9% average annual growth rate in the inflation-saturated Nominal Gross Domestic Product, which grew from $1.1 trillion in 1971 to $14.7 trillion in 2010. Thus, even fully inflated economic growth has not kept pace with the growth in debt over the past 40 years. What this means, on the surface, is that the debt accumulated by all the sectors in the US economy—governments, businesses, and households—is getting progressively more difficult to service by the annual income we are all producing, regardless of whether the economy is in recession or expansion._3 4

While it has become clear to most economic observers that the US and many other developed economies face an overwhelming debt burden, it is far more important to understand why debt has been relentlessly accumulating at a rate beyond that of fully inflated economic growth. The reason is to be found in the design of our currency. The US dollar, like all national currencies these days, is a debt-based currency created, not by the government’s printing press, but through the extension of credit from the central bank, via the fractional-reserve banking system, to borrowers in the government, business, and household sectors. As each new dollar is created, a new dollar of debt is also created, and as the supply of dollars accumulates over time, so too does the balance of debt.

Keynes vs. Hayek: Economics Goes Hip-Hop

Daniel O'Connor  |  Integral Ventures, LLC

This past week brought the release of the second in what I hope will be a continuing series of educational music videos from EconStories, the creative collaboration between John Papola of Emergent Order and Russ Roberts of George Mason University.  Both of these music videos are brilliantly written, directed, and performed in order to present the basic Keynesian and Hayekian perspectives on the boom-bust cycle still poorly taught in most universities and completely ignored by the mainstream television news.  Any economics professor who isn't using these videos, with permission from the copyright holders, to jumpstart a quarter full of reading and discussion about the boom-bust cycle is missing a great opportunity. 

The first video, released June 22, 2010, is entitled "Fear the Boom and the Bust: A Hayek vs. Keynes Rap Anthem."  From the EconStories video site, which includes lyrics, this is the set-up:

In Fear the Boom and Bust, John Maynard Keynes and F. A. Hayek, two of the great economists of the 20th century, come back to life to attend an economics conference on the economic crisis. Before the conference begins, and at the insistence of Lord Keynes, they go out for a night on the town and sing about why there's a "boom and bust" cycle in modern economies and good reason to fear it.