Most of the time economics really is this simple. From Charles Hugh Smith at oftwominds.com:
What will break is not as predictable as the reality that the current trajectory is untenable and unsustainable.
If we’re limited to our income, there’s only so much we can spend on consumption and servicing existing debts, and invest / save to build capital / future income.
If we have access to the miraculous elixir of credit, we can expand our spending / investing by borrowing more money. This boosts our consumption and perhaps our investing, but it also increases our debt service–the interest that must be paid on debts old and new.
When interest rates are near-zero / less than inflation, this burden is light. Once interest rates return to historic norms, however, large debt loads generate large interest payments, and the elixir of credit becomes a toxin sapping th borrower of income and an unencumbered future: rather than having the option of saving income to invest in the future, the borrower must devote an increasing share of income to debt service.
Unless income is rising faster than debt service, the tapeworm of debt service starves the borrower. This dual nature of debt–elixir and toxin–is scale-invariant, meaning that it functions in the same manner on the small scale of households all the way up to nation-states.
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