An upside-down world

Payments are made with cash or credit. Cash represents past incomes, and credit represents future incomes. The value of past incomes is material, while that of future incomes has yet to materialise and has a part of uncertainty, which is used to justify interest as a risk premium.

Cash and credit are used to pay for investments and consumption. Investments return their value with a fractional surplus, whereas consumption is consumed. Investing future incomes (credit) insures their materialisation in the form of a return on investment. Consuming future incomes does not make them less contingent, and it reduces future consumption.

Invested credit pays itself back. Consumed credit is paid back with less spending. Logically, cash should be consumed and credit invested, but reality is the other way round. Credit is mostly consumed, and a lot of cash is invested. The reason for this is the disparity in incomes. Some have more than they need, and many need more than they have.

Invested credit presents a problem of ownership. Is it the investor or the creditor who actually owns the investment? There is no such confusion when cash is invested. So the path of logic is inverted and the irrational does function… when growth is strong and shared, or when inflation is high. Consumed credit can compensate invested cash, when tomorrow’s incomes are always larger than today’s.

If future incomes are spent in advance, they cannot be spent again. More credit consumption today means less income consumption tomorrow, unless incomes increase enough to compensate paying back the credit. When that is not the case, new credit merely pays back past credit. And, to increase consumption, new credit has to multiply ever faster to stay ahead of the growing mass of repayments. At some stage the process stalls and the house of cards falls.

Credit for consumption is a programmed disaster, but it is the only way to compensate invested cash. The coming collapse could be The Big One, and once the dust has cleared, if the same disparity of incomes persists it will all have been for nothing. And it will persist, if the granting of credit and the property of investments are not seriously reviewed.