Understanding the Debt Based Economy

The debt-based economy is a complex system that can be difficult to understand, but it's essential to grasp its basics. Most countries use a debt-based economy, where governments and individuals borrow money to finance their activities.

The majority of the money in circulation is actually created as debt, which means that whenever someone borrows money, a new unit of currency is created. This can lead to a situation where the total amount of debt exceeds the total amount of money in circulation.

In a debt-based economy, interest rates play a crucial role in determining the value of money. High interest rates can make it more expensive to borrow money, while low interest rates can make borrowing cheaper.

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The money supply in a debt-based economy can be expanded or contracted through bank lending, as seen in the story of Billy and Sally. When a bank lends money, it creates that money out of thin air, as a bookkeeping entry.

This means that when Sally uses her $900 loan to buy business supplies, she pushes up prices, even though no one else in the community has had their spending reduced by $900. Billy still thinks he has $1,000 in his checking account, which he can spend as he pleases.

Here's a breakdown of how the bank's balance sheet changes when it lends money:

This shows how the bank's balance sheet changes when it lends money, and how the money supply can be expanded or contracted through bank lending.

In a fractional-reserve banking system, banks create money by lending it to customers. This is exactly what happened when Billy's bank lent $900 to Sally for her business. The bank created that money out of thin air as a bookkeeping entry.

The bank's balance sheet changed significantly after the loan was granted. The assets increased by $900, but the liabilities also increased by $900 to account for Sally's new checking account. This is a key aspect of fractional-reserve banking.

To illustrate this, let's look at the bank's balance sheet after the loan was granted:

The bank's balance sheet shows that the $900 loan to Sally is an asset, but it's also a liability because it's a debt that the bank must pay back. The bank's shareholder equity also increased by $900.

When Sally pays off her loan, the $900 is extinguished just as magically as it was created. The bank's balance sheet changes again, with the liability of Sally's checking account being removed.

The monetary aggregates, such as M1 and M2, also changed significantly. They rose by $900 when the bank made the business loan to Sally, and then contracted by $900 when she paid it off. This is the very real sense in which bank lending can expand or contract "the money supply".

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The Debt-Based Economy can be a complex and overwhelming topic, but let's break it down. The federal debt is a significant concern, and it's essential to understand when it becomes unsustainable.

According to the article, the federal debt to GDP ratio is a key indicator of a country's debt sustainability. If this ratio exceeds 77%, it can become a significant burden on the economy.

A high debt-to-GDP ratio can lead to reduced economic growth, increased interest rates, and a lower credit rating. The article notes that the US federal debt has been above 77% since 2010.

The article also mentions that the Congressional Budget Office (CBO) projects that the US federal debt will reach 107% of GDP by 2030. This is a concerning trend, as it suggests that the debt is unlikely to decrease anytime soon.

The article highlights that a country's ability to service its debt is also crucial in determining its sustainability. If the interest payments on the debt exceed 10% of GDP, it can become unsustainable.

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A tradable proxy is necessary for trading, especially when people don't have what the other needs at the same time.

Prior to the existence of money, people traded directly by bartering, which can be cumbersome.

A tradable proxy like precious metals or alloys was used to facilitate trade.

These precious metals were perceived to have intrinsic value and were used as a standard unit of exchange.

Comparatively more advanced societies used standardized coinage, also known as commodity money, controlled by the government.

To make trading easier, precious metals were stored at secure facilities operated by goldsmiths or merchants for a fee.

These goldsmiths and merchants were effectively the first private bankers, safekeeping precious metals that belonged to others.

A receipt or a number of receipts was given to the depositor as proof of the amount deposited, which was used in trade instead of the precious metals.

This precursor to paper money was a significant innovation in trade.

Debt can have a significant impact on mental health, with 70% of people experiencing anxiety and depression due to financial stress.

Carrying high-interest debt can lead to a cycle of debt, where the interest paid on the loan exceeds the original amount borrowed.

The average American has over $38,000 in personal debt, with credit card debt being the most common type.

Financial stress can even affect relationships, with 60% of couples citing financial disagreements as a major source of conflict.

The consequences of debt can be long-lasting, with some people taking up to 20 years to pay off their debt.

Debt can also limit financial freedom, making it difficult to make large purchases or invest in the future.

The burden of debt can be passed down to future generations, with 40% of millennials expecting to inherit debt from their parents.

The relationship between debt and warfare is a complex one, and it's fascinating to see how they're intertwined in our global economy. The United States, for example, has been at war for nearly 20 years, and the total cost of these wars is estimated to be over $6 trillion.

War is a costly endeavor, and governments often rely on debt to fund their military efforts. In fact, the US government has increased its debt by over $2 trillion since 2001, largely due to the costs of the wars in Afghanistan and Iraq.

The global debt crisis has led to a surge in military spending, as governments seek to maintain their power and influence in a rapidly changing world. According to a report by the Stockholm International Peace Research Institute, global military spending reached $1.8 trillion in 2019, a 3.6% increase from 2018.

The consequences of this debt-driven militarism are far-reaching, and it's having a profound impact on our global economy. The total global debt, including government, corporate, and household debt, is now over $257 trillion, and it continues to grow at an alarming rate.

As the global debt crisis deepens, it's likely that we'll see even more military spending, as governments seek to maintain their power and influence in a world where debt is becoming increasingly unsustainable. The cycle of debt and warfare is a vicious one, and it's up to us to break it before it's too late.

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Some people view debt as a necessary evil in a capitalist economy, where it allows individuals and businesses to invest in growth and development.

The idea is that debt can be a catalyst for innovation and progress, as seen in the example of small business owners who take out loans to start their ventures.

However, critics argue that debt can also perpetuate inequality, as those who are already wealthy are often able to accumulate more debt and reap the benefits.

Fiat money is a type of currency that has no intrinsic value, but is backed by a government's promise to honor it.

In the United States, the value of the dollar is determined by supply and demand, not by any physical commodity like gold.

The government can print more money, which increases the money supply and reduces its value.

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The internet has made it easier than ever to access a wide range of perspectives, from social media to online forums and blogs. We can now easily connect with people from all walks of life and engage in discussions that challenge our assumptions.

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For example, the article section on "Diverse Voices" highlights the importance of amplifying marginalized voices, which can lead to a more inclusive and equitable society.