Keynesian credit creation meets its Armageddon

Or how runaway government debt threatens to collapse the entire credit system

Few commentators are aware that the dynamics leading to an inevitable collapse of credit are increasing. When these dynamics begin to unfurl, there is bound to be a global rush out of fiat credit into gold. This is why prescient central banks have been accumulating bullion.

This week, the more observant among us will have detected a fork in the road of credit creation. Major nations are now officially in recession, suggesting that interest rates should be reduced according to the Keynesian playbook. But inflation is showing signs of rising again, mandating the opposite. These are a rerun of the conditions which discredited Keynesianism in the 1970s, leading to a common description of something that was to statist economists impossible: stagflation.

The only reason that the US is not in an official recession is the massive amounts of government spending in excess of tax revenue: in other words, it is printing its way out of recession. Inevitably, this will continually undermine the dollar’s purchasing power even further, an effect which feeds into the inflation pipeline. Any hopes of a sustainable reduction in interest rates can be dismissed on these grounds alone.

The US is not the only nation with this problem. Intractable budget deficits abound in the UK, Japan, and Europe as well. According to the Institute of International Finance, global government debt has increased from $33 trillion in 2008, to $71 trillion before the covid crisis three years ago, to $90 trillion today. With interest rates and borrowing costs having also risen inexorably, global government debt has gone parabolic.

The table below shows current estimates of some debt-to-GDPs and budget deficits by the same measure.

In inflation creation terms, the US and 9% budget deficit is the worst offender. That is likely to be the trigger destabilising the finances of the other nations on the list.