Over the last 50 years, it became “normal” for governments to print their way into economic growth. This is especially true in the developed economies of the West.
As production shifted to the East, once-powerful economies like France or the UK (the list is obviously longer), had to somehow make up for the loss of economic output. Unable to produce wealth as before, these economies started printing wealth. Literally.
But there´s a problem: wealth is defined as the ability to constantly produce goods and services that generate income. At least, this used to be the definition of wealth. For instance, in the past, landowners were wealthy. Why? Because their lands could constantly produce goods that generated money, every single season. But this concept is lost.
Nowadays, wealth is defined simply as “having money”. The problem is that money can be easily spent or destroyed through malinvestments, while the land is always there, ready to produce the next crop. So, there is a clear difference between wealth and having money. Wealth creates money on a constant basis, while money doesn´t produce anything unless you convert it into wealth.
With their wealth mostly gone and displaced to the East, Western economies stopped producing goods and started to produce money in the form of debt. Lots of it. And this fooled people into feeling wealthy when they are not. The illusion is based on 2 premises:
1. Making sure the wealthy people in the East believe Western money is valuable, when it actually isn´t.
2. Making sure the consumers in the West believe their money is valuable, when it isn´t, while at the same time keeping people distracted from the fact that their debt (personal and national), is unpayable. Why? Because there is no wealth to generate income to pay it now, much less in the future.
As long as the wealthy Asians are happy to accept freshly printed Western money to pay for their products, and as long as people in the West keep blissfully smiling at their growing debt and future debt obligations (both personal and national), the illusion can go on.
As modern history proves, this charade can go on for a long time. At some point, the whole pyramid scheme of fake wealth by money printing will collapse. But nobody knows when, so the game of chairs continues, until the music stops.
Keeping the appearances: The West has lots of money but not much wealth
Third world countries print money at will, usually to pay their public servants and to short term stimulate their economies, as rampant inflation discourages savings and promotes consumption. Developed countries do the same, but with a twist: instead of calling it “money printing”, they call it “debt issuance”. The idea behind this is that money is not being freely printed, as this debt will be repaid in the future. Without going into complex technical details, economists say that every time a debt is paid, the magically created money at the time of debt creation is taken out of circulation, therefore removing that excess liquidity. And this indeed true. If it were true.
The reality is quite different: every single day, Western countries issue more debt, not only to pay back previous debt, but most of all to finance new consumption since their economies produce very little income because they have very little wealth. In the West, paying debt always means issuing new debt. So the extra liquidity is never taken out of circulation, which effectively means that developed countries behave in the exact same way as 3rd world countries, by simply printing money at will.
As production shifted to the East, once-powerful economies like France or the UK (the list is obviously longer), had to somehow make up for the loss of economic output. Unable to produce wealth as before, these economies started printing wealth. Literally.
But there´s a problem: wealth is defined as the ability to constantly produce goods and services that generate income. At least, this used to be the definition of wealth. For instance, in the past, landowners were wealthy. Why? Because their lands could constantly produce goods that generated money, every single season. But this concept is lost.
Nowadays, wealth is defined simply as “having money”. The problem is that money can be easily spent or destroyed through malinvestments, while the land is always there, ready to produce the next crop. So, there is a clear difference between wealth and having money. Wealth creates money on a constant basis, while money doesn´t produce anything unless you convert it into wealth.
With their wealth mostly gone and displaced to the East, Western economies stopped producing goods and started to produce money in the form of debt. Lots of it. And this fooled people into feeling wealthy when they are not. The illusion is based on 2 premises:
1. Making sure the wealthy people in the East believe Western money is valuable, when it actually isn´t.
2. Making sure the consumers in the West believe their money is valuable, when it isn´t, while at the same time keeping people distracted from the fact that their debt (personal and national), is unpayable. Why? Because there is no wealth to generate income to pay it now, much less in the future.
As long as the wealthy Asians are happy to accept freshly printed Western money to pay for their products, and as long as people in the West keep blissfully smiling at their growing debt and future debt obligations (both personal and national), the illusion can go on.
As modern history proves, this charade can go on for a long time. At some point, the whole pyramid scheme of fake wealth by money printing will collapse. But nobody knows when, so the game of chairs continues, until the music stops.
Keeping the appearances: The West has lots of money but not much wealth
Third world countries print money at will, usually to pay their public servants and to short term stimulate their economies, as rampant inflation discourages savings and promotes consumption. Developed countries do the same, but with a twist: instead of calling it “money printing”, they call it “debt issuance”. The idea behind this is that money is not being freely printed, as this debt will be repaid in the future. Without going into complex technical details, economists say that every time a debt is paid, the magically created money at the time of debt creation is taken out of circulation, therefore removing that excess liquidity. And this indeed true. If it were true.
The reality is quite different: every single day, Western countries issue more debt, not only to pay back previous debt, but most of all to finance new consumption since their economies produce very little income because they have very little wealth. In the West, paying debt always means issuing new debt. So the extra liquidity is never taken out of circulation, which effectively means that developed countries behave in the exact same way as 3rd world countries, by simply printing money at will.
In the second part of this article, I will demonstrate why debt is one of the most important issues that need to be solved, lest we plunge into an economic, social, and political abyss. But fear not: there is a solution to this problem. The real question is: are there politicians brave enough to implement it? See you again in Part II. |