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One Mans Debt Is Another Mans Asset

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@chekohler
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Hey Jessdebt slaves

As the world is in an insolvency crisis, we see debts pile up all over the place. As the economy has hit a brick wall and M2 money supply slows down, people continue to save more, spend less in these uncertain times. As more people lose their jobs, there is less money doing the rounds to pay for the debt. The consumer, the corporation, the banks and governments are all loaded up with debt.

Debt doesn't go away when you stop paying it, the interest rates on it rise for those who miss payments or worse, rise for those that do continue to pay to cover the shortfall of those that defaulted.

Feeding debt with debt

Governments across the world have a significant debt bubble on their hands, and instead of trying to look at ways of reducing it, they're trying to actively increase it by taking current debt off banks and corporations hands and issuing them new currency as reserves so banks can go out and issue more debt.

The hope is the cheaper the new debt is the more consumers and businesses will take on and stimulate growth that will pay back the debt over time as well as generate more tax receipts that can service the old debt governments have taken on to help the situation.

Why we can't allow debt to go bust

The unfortunate fact of a debt-based monetary system is that when debt is issued to one person, it's the asset of another person. All those home loans, car loans, student loans, credit card balances, could either be owned by the bank, businesses, pension funds etc.

They all rely on the servicing of the debt as an income source to pay salaries, to pay dividends, to pay bondholders, to pay retirees and strengthen their cash reserves.

If we let the debt go bust, we kill off all the businesses and banks holding that debt, and it would cause the systematic collapse of banks and all other systems. This is what governments and central banks are actively trying to avoid by the issuing of new bank reserves.

Why paying back the debt also hurts

As governments and central banks around the world try to keep the debt bubble going and inflating it with cheaper currency, what they are effectively doing is inflating the debt away. If I owe you $100 that I took out with you last year I can pay it back this year with cheaper dollars as prices rise through inflation you can earn 100 much easier than you could if prices were low.

This is also why deflation cannot be allowed to happen if prices fall its harder to earn money in nominal terms, even though the purchasing power is better, paying back the debt becomes more problematic and in some cases impossible.

So what's the problem with inflating the debt away?

Remember I mentioned someone owns the debt and expects to be paid back, so when you pay them back with the cheaper currency, they effectively are losing money for holding that debt. The pension fund may get its 7% return but if inflation is 2% by the time the investor gets paid back his not only getting 5% but a loss each year that compounds by 2%.

This means it gets harder to live off that purchasing power, and we create massive risk for pension funds, and the same goes for businesses and governments holding that debt.

Yes, they get paid back, but the money they get buys less, and thus they've lost to inflation more than they gained by holding the debt to maturity.

Theoretically, it's possible to pay down debt with inflation, but the unintended consequences of doing so could have widespread pain and issues we did not account for prior to deciding it was the best way out of this mess.

Have your say

What do you good people of HIVE think?

So have at it my Jessies! If you don't have something to comment, comment "I am a Jessie."

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