Edward Dowd is a former executive at BlackRock.
A debt-based economy is a system in which borrowing and lending money play a significant role in the overall functioning of the economy. It’s like a cycle where individuals, businesses, and even governments borrow money from lenders such as banks or financial institutions.
People often take on debt by obtaining loans or using credit cards to make purchases.
Such loans come with an agreement to repay the borrowed amount, usually with interest, over a specific period. The borrowed money is used to buy goods, invest in businesses, or support other economic activities.
Lenders benefit from this system by earning interest on the money they lend. They make profits by charging borrowers a certain percentage of the borrowed amount as interest. Borrowers, on the other hand, gain access to immediate funds, allowing them to make purchases or investments that they might not have been able to afford otherwise.
The debt-based economy relies on the assumption that individuals and businesses will be able to repay their debts in the future.
When debts are repaid, lenders have more money available to lend to new borrowers, stimulating economic growth.
However, if borrowers are unable to repay their debts, it can lead to financial instability and economic downturns.
Furthermore, and very importantly, a debt-based economy is also characterised by excessive credit expansion and the misallocation of resources due to artificial interest rates set by central banks.
Artificially low interest rates encourage excessive borrowing and credit expansion (money out of thin air), which create economic imbalances. Such expansion of credit leads to malinvestments in which resources are allocated to projects that are not economically viable in the long run, including speculative investments, overvalued assets, or unsustainable business ventures.
A debt-based economy is prone to boom-and-bust cycles, resulting in significant economic volatility and instability.
As such, a global economic crash is looming.