and services there are to buy. Trouble approaches either when there isn’t enough income to survive one’s debts or
when the amount of the claims (i.e., debt assets) that people are holding in the expectation that they can sell them
to get money to buy goods and services increases faster than the amount of goods and services by an amount that
makes the conversion from that debt asset (e.g., that bond) implausible. These two problems tend to come together.
Concerning the first of these problems, think of debt as negative earnings and a negative asset that eats up earnings
(because earnings have to go to pay it) and eats up other assets (because other assets have to be sold to get the
money to pay the debt). It is senior—meaning it gets paid before any other type of asset—so when incomes and the
values of one’s assets fall, there is a need to cut expenditures and sell off assets to raise the needed cash. When
that’s not enough, there needs to be a) debt restructurings in which debts and debt burdens are reduced, which is
problematic for both the debtor and the creditor because one person’s debts are another’s assets and/or the b)
central bank printing money and the central government handing out money and credit to fill in the holes in
incomes and balance sheets (which is what is happening now).
Concerning the second of these problems, it occurs when holders of debt don’t believe that they are going to get
adequate returns from it. Debt assets (e.g., bonds) are held by investors who believe that they are storeholds of
wealth that can be sold to get money, which can be used to buy things. When the holders of debt assets try to make
the conversion to real money and real goods and services and find out that they can’t, this problem surfaces. Then
a “run” occurs, by which I mean that lots of holders of that debt want to make that conversion to money, goods,
services, and other financial assets. The bank, regardless of whether it is a private bank or a central bank, is then
faced with the choice to allow that flow of money out of the debt asset, which will raise interest rates and cause the
debt and economic problems to worsen, or to “print money” and buy enough of those bonds that others are selling
to prevent interest rates from rising and hopefully reverse the run out of them. Sometimes their doing that buying
works temporarily, but if the ratio of a) claims on money (debt assets) to b) the amount of money there is and the
quantity of goods and services there are to buy is too high, the bank is in a bind that it can’t get out of because it
simply doesn’t have enough money to meet the claims so it will have to default on its claims. When that happens
to a central bank it has the choice either to default or to print the money and devalue it. They inevitably devalue.
When these debt restructurings and currency devaluations are big they lead to breakdowns and possibly
destructions of the monetary system. Whatever the bank or the central bank does, the more debt (i.e., claims on
money and claims on goods and services) there is, the more the likelihood that it will be necessary to devalue the
money.
Remember that there is always a limited amount of goods and services because the amount is constrained by the
ability to produce. Also remember that in our example of paper money being claims on “hard money,” there is a
limited amount of that “hard money” (e.g., the gold on deposit), while the amount of paper money (e.g., the claims
on that hard money) and debt (the claims on that paper money) is constantly growing. And, as that amount of paper
money claims grows relative to the amount of hard money in the bank and goods and services in the economy, the
risk increases that the holders of those debt assets may not be able to redeem them for the amounts of hard money
or goods and services that they expect to be able to exchange them for.
It is important to understand the difference between money and debt. Money is what settles claims—i.e., one pays
one’s bills and one is done. Debt is a promise to deliver money. In watching how the machine is working it is
important to watch a) the amounts of both debt and money that exist relative to the amount of hard money (e.g.,
gold) in the bank and b) the amounts of goods and services that exist, which can vary, remembering that debt
cycles happen because most people love to expand their buying power (generally through debt) while central
banks tend to want to expand the amount of money in existence because people are happier when they do that. But
this can’t go on forever. And it is important to remember that the “leveraging up” phase of the money and debt
cycle ends when bankers—whether private bankers or central bankers—create a lot more certificates (paper money
and debt) than there is hard money in the bank to give and the inevitable day comes when more certificates are
turned in than there is money to give. Let’s look at how that happens.
4) Then Come Debt Crises, Defaults, and Devaluations
History has shown that when the bank’s claims on money grow faster than the amount of money in the bank—
whether the bank is a private bank or government-controlled (i.e., central bank)—eventually the demands for the
money will become greater than the money the bank can provide and the bank will default on its obligations. That