Understanding credit and its collapse

It has been said that not one man in a million understands money. Even fewer understand credit. Yet we are in the largest credit bubble in history. It will not end well.

The reason that financial asset values will collapse along with currencies is the common factor of excess credit, an excess which has accumulated over the last forty years.

Nothing else matters. Forget “growth” which is actually growth in credit misleadingly described as GDP. Forget unemployment. Forget inflation, forget Fed policy. For too long macroeconomists have taken our attention away from the real issue — the tsunami of non-productive credit and the matching debt which is set to collapse.

In this article I point out the inevitable consequences of the unproductive inflation of credit whose value is now detached from real legal money, which is gold. Economic intervention by clueless governments has led to a cycle of increasingly large credit bubbles never being allowed to wash out economic distortions. Instead, they have been feeding into each other successively. Consequently, we are now living with the largest credit bubble in the history of mankind. Ultimately it will crash, driven by rising interest rates, bond yields and collapsing currencies. The current rise in bond yields signals that that moment has almost certainly arrived.

It is vital to understand the distinction between money and credit — without that knowledge we all become victims of our ignorance. The purpose of this article is to walk the reader through the evolution of money and credit from early history to the present day. Only when we have a clear understanding of the distinction between money and credit can we take the decisions to protect ourselves from what promises to be the most destructive collapse of credit ever recorded.