INTRO

The decoupling of gold and money made creating new money very simple. As a result, with the end of the gold exchange standard in the 1970s, an unprecedented credit bonanza was allowed to take off. In order to understand the build-up of debt, we must go back in time to 1981 when Fed Chairman Volcker was forced to raise interest rates to 20% in order to save the dollar’s position as the world's reserve currency.

The dollar recovered as a result of Volcker's interest rate hike, and with inflation tamed, interest rates started to decrease sharply. The decline in interest rates after 1981 made it possible for governments to issue more debt. The same held true for companies and individuals. This period of unprecedented private debt build-up lasted until the start of the current credit crisis. Since then, the balance sheets of governments and central banks in particular have expanded significantly.

Countries with debt issued in their own currency cannot go bankrupt. They can always switch on the printing press to create as much money as is needed to pay off their debts. There is one drawback, however: when too much money is created, their economy can become paralyzed due to (hyper)inflation. At some point in time, even governments have to get rid of their debts. This will happen either through inflation, debt defaults or debt cancellations. Such monetary resets have been the solution many times in the past.