The debt-based money system that is the foundation of Wall Street’s control of the economy and society is based on an underlying logic. So long as its practice is true to that logic, the debt model of money creation can be a driving engine of real-wealth production—up to the point at which the economy encounters the limits of the planet.

Driven by greed and blinded by hubris, Wall Street forgot the logic and created a debt bomb that guaranteed economic and financial collapse.

The Logic of Productive Saving and Investment

The logic of a debt money system assumes that the financial system receives the savings of working people and in turn lends those savings to entrepreneurs and enterprises to finance capital investment projects that expand society’s pool of real wealth.

This logic assumes that savers are deferring immediate consumption so that the economic resources that otherwise would be directed to their consumption are instead devoted to creating new capital assets that support greater future consumption. It further assumes that the benefits of this new real wealth are shared equitably among those who contributed to its creation. The savers who defer their consumption receive a fair share as interest. The entrepreneurs who convert the savings into productive capacity receive a fair share as profit. The workers who provide the labor receive a fair share as wages, and the governments that provide the supporting infrastructure receive a fair share as taxes.

The operation of the financial system was more or less consistent with this logic from the 1940s through much of the 1970s. Then an orgy of deregulation allowed it to morph from a servant system to a predator system devoted to making money without the bother of financing productive enterprise.

The Illogic of Negative Saving and Consumer Debt

In October 2008, BusinessWeek called attention to what it called a gigantic credit bubble, “consumption that was not justified by income growth,” and estimated that for U.S. consumers the total gap between income and consumption over the previous ten years totaled some three trillion dollars. That gap was one of the many conditions for financial disaster resulting from the creation of phantom-wealth illusions but, of course, it was, and continues to be, highly profitable for Wall Street.

Anytime debt exceeds the capacity to repay it, there is a problem for someone. When the total debt of a society is greater than the total market value of all its real resources, it means that the expectations of the holders of the debt, for example people whose retirement savings are invested in supposedly safe derivatives based on toxic assets, cannot be fulfilled. The society faces the difficult task of determining whose claims and expectations will be fulfilled and whose will not.

In the current instance, there is a deeper issue. BusinessWeek was talking about consumer debt. The logic of the money system assumes that debt is a means by which savings are translated into investment in expanding productive output. In our current case the money lent comes from an accounting entry, not from savings, and it is used to fund consumption, not production. The debt and the expectations of those who hold it grow exponentially, but actual production does not. This creates an ever-greater disconnect between expectations and the real wealth available to satisfy them.

When the total debt of a society is greater than the total market value of all its real resources, the expectations of the holders of the debt cannot be fulfilled.

It is the same situation when the government spends beyond its income to finance nonproductive consumption items like an outsized military establishment and Wall Street bailouts. Deficit spending by government may be justified for investments in various forms of real productive capital, like infrastructure, education, health, research, and environmental rejuvenation. These build the society’s productive capacity and thereby contribute to the creation of corresponding real wealth. By contrast, wars deplete real wealth, and Wall Street bailouts, in the absence of corrective structural reforms, simply revive the phantom-wealth machine.

Although this may sound a bit complicated, the basics are simple. Borrowing for investment in productive capacity is generally good, because it results in the creation of real new value. Borrowing for current consumption is bad because it creates no new value and creates debts that can only be rolled over into ever- greater debt that the borrower can never repay.

We are in trouble as a nation not because our expenditures exceed our income, but because the excess expenditure went to consumption rather than to investments that support increased future output. Furthermore, we make up the difference between our consumption and our production with imported goods purchased on credit extended by the producing countries. The more we allow cheap products from abroad to crowd out domestic jobs and businesses, the more dependent we become on imports, the faster our foreign debt grows, and the faster our capacity to repay the debt declines.

These systemic imbalances create ever-growing instability on a path to ultimate collapse. It is also a path to a condition of permanent servitude called debt slavery.

Language of Deception

…the deceptions are built right into our language.

One reason we tend not to see such irrational and destructive dynamics of the money system is that the deceptions are built right into our language. We refer to speculation as “investment” and to phantom wealth as “capital.”

The practice of equating money with financial capital comes from a time when savings, representing deferred consumption, were used to invest in new productive capacity. In the global casino economy, that idea seems a bit quaint, yet we continue to use the old linguistic conventions.

This obfuscation of the language is an important contributor to the mistaken perception that as a global society we are getting richer, when in fact we are getting poorer in ways that put the future of the species at risk.