Repay your debt - and Destroy the World

Money keeps the world going round, is the root or all evil and the ultimate way of keeping score. One would think that everyone knew where it comes from and where it goes, but alas, like the wind of old , its left up to the gods.

The U.S. government issues new money by printing off as much as it likes and issuing an I.O.U.
The banks issue fresh new money for loans and mortgages essentially the same way within certain limits. Thats how the banks give money away they don't have. But they are the primary creators of new money. If they don't increase their outstanding loans every year the money supply stays constant.
When you add it all up, almost all money in the economy is backed by debt somewhere. Increasing the supply of money (and debt) every year is the main cause of long term inflation, and its by design. Since money in itself is only a fraction of all assets (stocks, real estate and so on) it may not be as scary as it sounds.

But here is the frightening part. If you collected every single dollar in the U.S. and used it to pay off all public and private debt at once, there would not be enough. This is because debt charges interest and since all money adds up to just the debt portion, how will the interest be covered?

In the real world, debt doesn't have to be paid off at once. It is paid back in installments there are two factors at work:

(1) By the time the last installment is paid, the money supply will have increased significantly since more money will have been created via more I.O.Us. You will be forgiven for seeing this as the ultimate Ponzi scheme.
(2) The gross profit on the montly loan installment will become either profits or expenses to the bank and end up filtering back into the economy where it used by someone else to pay off another debt. If the banks kept their profits under the mattress we would all be in trouble.

The amount of money in the economy is shrinking as people pay off old loans and the bank don't start enough new ones. The machine is broken. If new money is not created, the ponzi scheme will ultimately fall apart. The amount of money in the economy is starting to shrink. The machine can't be broken for long without the whole lending industry getting destroyed since the only thing that can relieve the pressure of this scenario are failed loans and massive bank losses. There will not be enough money in the economy to pay off loans and interest. Although mathematically, if everyone's money was spared for loan installments it would take many years, in reality it would take less than that since people also need money to survive.

Normally consumer debt increasing every year would save the day but when your shopaholic cousin pays off her credit card instead of buying that handbag, she reduces the amount of money in the economy.

The Fed is meant to come to the rescue using its tools to create more money in the markets but the Feds actions are not changing peoples or banks behaviour enough, at least not yet. The Obama administration has to print off more money (against IOUs) to make up for your cousin's frugality. People talk about stimulus package efficiency and Keynesian economics, all of which play a part but simple math on your fingers could tell you that if the money supply shrinks the whole pyramid scheme falls apart. There is a good chance that he will not be able to print off enough.

So whatever you do, for the sake of your country, buy those manolo blahniks on credit or we're all finished.