borrowing it or taking it from someone else. The assets and liabilities (i.e., debts) that one has can be shown in
one’s balance sheet. Whether one writes these numbers out or not, every country, company, nonprofit organization,
and person has them. The relationships between each entity’s income, expenses, and savings when combined to be
the relationships between all entities’ incomes, expenses, and savings transpire in a dynamic way to be the biggest
driver of changes in the world order. So, if you can take your understanding of your own income, expenses, and
savings, imagine how that applies to others, and put them together, you will see how the whole thing works.
In brief, if one spends more than one takes in one has to get the money from somewhere, and if one takes in more
than one spends one has to put the money one gains somewhere. If one is short of money one can get the money by
either drawing down one’s saving, borrowing the money, or taking it from someone else. If one has more money
than one uses it will either be added to one’s savings as an investment or given to someone else. What one’s
savings looks like—i.e., the assets and the liabilities—shows up in one’s balance sheet. If one has many more
assets than liabilities (i.e., a large net worth), one can spend above one’s income by selling assets until the money
runs out, at which point one has to slash one’s expenses. If one doesn’t have much more in assets than one has in
liabilities and one’s income falls beneath the amount one needs to pay out to cover the total of one’s operating
expenses and one’s debt-service expenses, one will have to cut one’s expenses or will default/restructure one’s
debts. Since one person’s spending is another person’s income, that cutting of expenses will hurt not just the entity
that is having to cut those expenses but it will hurt the ones who depend on that spending to earn income.
Similarly, since one’s debts are another’s assets, that defaulting on debts reduces other entities’ assets, which
requires them to cut their spending. This dynamic produces a self-reinforcing downward debt and economic
contraction that becomes a political issue as people argue over how to divide the shrunken pie. As a principle, debt
eats equity. What I mean by that is that for most systems, when the rules of the game are followed, debts have to
be paid above all else so that when one has “equity” ownership—e.g., in one’s investment portfolio or in
one’s house—and one can’t service the debt, the asset will be sold or taken away. In other words, the creditor
will get paid ahead of the owner of the asset. As a result, when one’s income is less than one’s expenses and one’s
assets are less than one’s liabilities (i.e., debts), one is on the way to having one’s assets sold and going broke.
However, unlike what most people intuitively think, there isn’t a fixed amount of money and credit in existence.
Money and credit can easily be created by governments. Their creating it is liked because it gives people,
companies, nonprofit organizations, and governments more spending power. Their taking the credit and spending it
on goods, services, and investment assets makes most everything go up in price which most people like. The
problem is that it creates a lot of debt and paying it back is difficult and painful. That is why money, credit, debt,
and economic activity are inherently cyclical. In the credit creation phase, demand for goods, services, and
investment assets and the production of them is strong, and in the debt paying back phase it is weak.
But what if the debts never had to be paid back? Then there would be no debt squeeze and no painful paying back
period. But that would be terrible for those that lent to them because they’d lose their money, right? Let’s think
about that for a moment to see if we can find a way around that problem. Since government (i.e., the central
government and the central bank combined) has the abilities to both make and borrow money, why couldn’t the
central bank lend money at an interest rate of about 0% to the central government (to distribute as it likes) and also
lend to others at low rates and allow those debtors to never pay it back. Normally debtors have to pay the original
amount borrowed (principal) plus interest in installments over a period of time. But what if the interest rate was
0% and the central bank that lent the money kept rolling over the debt so that the debtor never had to pay it back?
That would be the equivalent of giving the debtors the money but it wouldn’t look that way because the debt
would still be accounted for as an asset that the central bank owns so the central bank can still say it is performing
its normal lending functions. Central banks could do that. In fact that is what is now happening.
To understand what is now happening and will happen financially to you, to other individuals, to companies, to
nonprofit organizations, to governments, and to whole economies, it is important to watch how their income
statements and balance sheets are doing and to imagine what will likely happen. Take a moment to think about
how this is happening to you and your own financial situation. How much income do you have and will you have
in the future relative to your expenses? How much savings do you have, and what’s that savings in? Now play
things out. If your income fell or disappeared, how long would your savings last? How much risk do you have in
the value of the investments in your savings? If your savings fell in value by half how would you be financially?
Can you easily sell your assets to get cash to pay your expenses or service your debts? What are your other sources
of money, from the government or from elsewhere? These are the most important calculations you can make to