Whither the money? Are bad debts written off balance sheets as easily as they were once written on them?
Nature has her limits, her penalties and her dirty tricks. In debt, as in dollars, quality and quantity vary inversely. The more debt a man takes on, the less able he is to pay it. The quality of his IOU declines.
Logically, if not consistently, lenders demand higher rates of interest. Higher rates increase the weight of debt throughout the economy. At the margin, debtors begin to buckle. Credits go bad. Bankruptcy courts work overtime. That is what we see happening in Britain and America today.
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But, apart from the poor lender, is anyone really worse off? The credit may have been created out of thin air' by central banks doesn't it vanish just as painlessly? Alas, no.
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When a lender provides a borrower with a million pounds, both of them feel as though they have money to spend. Imagine that the borrower takes an extravagant vacation around the world. The money did not vanish into thin air. Instead, it went into travel expenses where it tricked the hospitality industry into thinking there was a boom.
Then, the borrower goes broke. Now, when the lender goes to collect, he finds that he is broke too. And the proprietor of a hotel in Sri Lanka stands in front of his new wing of rooms and wonders what happened to the free-spending customers and worries about how he'll pay the mortgage he took out to pay for it.
As the credit cycle continues, there are fewer people with money in their pockets and more capital investments that don't really make sense. In short, the money doesn't vanish into money heaven at all. Instead, it becomes a leaden ball that investors, business-men and consumers have to drag around for years.
Bill Bonner is founder of The Daily Reckoning and author of US bestseller Empire of Debt
