For approximately 30 years, the world allowed credit to balloon at least ten times beyond the size of the world’s true economy. Gigantic companies financed themselves with credit, even ran their daily operations with money they had loaned. That wasn’t surprising. Taking out loans was rewarded with fiscal deductions, positive interest rates, and a rich variation of other rewards and instruments. And then things went extraordinarily wrong.
Because of the easiness with which companies could take out loans, at one point, the fake, “credit economy” was at least ten times bigger than the real economy – real production (also in the services sector), real output, real exports and real imports.
The money that was dished out on paper, no longer had any relation to the total available cash reserve available in the world. A very dangerous situation, as any economist will tell you.
It all worked like clockwork and nobody notced that there was a problem, because it kept on going like clockwork.
But then, a group of people publicly cried wolf, and they slammed the needle hard into the credit balloon: American NINA (No Income No Assets) homeowners had taken out mortgages that had no relation to the real value of their homes. The sub-prime crisis was born, and it showed people not the elephant, but the balloon in the room.
In the real economy, for each coin signed for on an I-Owe-You, there must be a real coin. Or so, that’s how it used to be. But the world got so used to the continuous flow of money that pretty soon, nobody cared where money came from.
Look at Iceland, for instance: many Icelanders were used to doing their everyday groceries with their credit card, maxing it out completely and then simply waiting until their monthly credit cooling-off period was over, to simply go shopping out again.
And the world also looked to the size of the inflated credit balloon as a measure of the economy. Business models, entire national economies were based on it.
This wasn’t tenable. Now, the balloon is quickly deflating, and what do we do? We try to keep it inflated, even though we simply don’t realise that the balloon cannot be filled with the small money supply on this planet.
Sure, we could print enough Dollar, Euro and Yen bills, but then our planet would quickly be called ‘Zimbabwe’, not ‘Earth’.
The balloon must be allowed to empty itself, so that we can at least go back to living in a Real Economy. Yes, it will be hard and yes, it will be painful and yes, the world will be a lot less fun. But at least we won’t be kidding ourselves anymore.