The inescapable mathematics of a debt trap

Stagnating economies together with high government debt loads inevitably create funding crises and debt traps. Nowhere is this problem more destructive than for the fiat dollar.

It’s not just the dollar. Economies in the Eurozone and the UK have insufficient growth to support their colossal mountains of government debt. In this article I explain the mechanics of a debt trap. And how a combination of rising interest rates reflecting growing risk and stagnating economies bring on debt traps, leading to yet higher interest rates making the situation even worse.

My memory is of the sterling crisis in 1975/76, when the IMF bailed out the British government, and the Bank of England had to fund medium-term debt with gilt coupons of over 15%. The Labour government was forced to cut its spending to resolve the situation. So I have a question for today: who is going to bail out first the US Government, then the UK and Eurozone, and who is going to force them to cut spending on the edge of a recession?

Only the markets will do it: crisis first, and only if we are lucky the solution follows. Read on…