The Elephant In The Room: Debt Grows Exponentially, While Economies Only Grow In An S-Curve → Washingtons Blog
The Elephant In The Room: Debt Grows Exponentially, While Economies Only Grow In An S-Curve - Washingtons Blog

Saturday, October 30, 2010

The Elephant In The Room: Debt Grows Exponentially, While Economies Only Grow In An S-Curve

Michael Hudson is a highly-regarded economist. He is a Distinguished Research Professor at the University of Missouri, Kansas City, who has advised the U.S., Canadian, Mexican and Latvian governments as well as the United Nations Institute for Training and Research. He is a former Wall Street economist at Chase Manhattan Bank who also helped establish the world’s first sovereign debt fund.

Hudson says that - in every country and throughout history - debt always grows exponentially, while the economy always grows as an S-curve.

Moreover, Hudson says that the ancient Sumerians and Babylonians knew that debts had to be periodically forgiven, because the amount of debts will always surpass the size of the real economy.

For example, Hudson noted in 2004:

Mesopotamian economic thought c. 2000 BC rested on a more realistic mathematical foundation than does today’s orthodoxy. At least the Babylonians appear to have recognized that over time the debt overhead became more and more intrusive as it tended to exceed the ability to pay, culminating in a concentration of property ownership in the hands of creditors.


Babylonians recognized that while debts grew exponentially, the rest of the economy (what today is called the “real” economy) grows less rapidly. Today’s economists have not come to terms with this problem with such clarity. Instead of a conceptual view that calls for a strong ruler or state to maintain equity and to restore economic balance when it is disturbed, today’s general equilibrium models reflect the play of supply and demand in debt-free economies that do not tend to polarize or to generate other structural problems.

And Hudson wrote last year:

Every economist who has looked at the mathematics of compound interest has pointed out that in the end, debts cannot be paid. Every rate of interest can be viewed in terms of the time that it takes for a debt to double. At 5%, a debt doubles in 14½ years; at 7 percent, in 10 years; at 10 percent, in 7 years. As early as 2000 BC in Babylonia, scribal accountants were trained to calculate how loans principal doubled in five years at the then-current equivalent of 20% annually (1/60th per month for 60 months). “How long does it take a debt to multiply 64 times?” a student exercise asked. The answer is, 30 years – 6 doubling times.
No economy ever has been able to keep on doubling on a steady basis. Debts grow by purely mathematical principles, but “real” economies taper off in S-curves. This too was known in Babylonia, whose economic models calculated the growth of herds, which normally taper off. A major reason why national economic growth slows in today’s economies is that more and more income must be paid to carry the debt burden that mounts up. By leaving less revenue available for direct investment in capital formation and to fuel rising living standards, interest payments end up plunging economies into recession. For the past century or so, it usually has taken 18 years for the typical real estate cycle to run its course.
Hudson calls for a debt jubilee, and points out that periodic debt jubilees were a normal part of the Sumerian, Babylonian and ancient Jewish cultures. Economist Steve Keen and economic writer Ambrose Evans-Pritchard also call for a debt jubilee.

If a debt jubilee is not voluntarily granted, people may very well repudiate their debts.

And as I have previously pointed out, our modern fractional reserve banking system is really a debt-creation system, which is guaranteed to create more and more debts. As then-Chairman of the Federal Reserve (Mariner S. Eccles) told the House Committee on Banking and Currency on September 30, 1941:
That is what our money system is. If there were no debts in our money system, there wouldn’t be any money.
The modern banking system is therefore really a debt-creation system. See this for details.

One thing is for sure. The exponential growth of debt is a structural problem which - unless directly addressed - will swallow all economies which try to ignore it.


  1. It's interesting to me the survival mechanisms cultures developed specifically to deal with the exponential nature of debt. Linguistically, it's not an accident concepts like forgiveness, bond, redemption, etc share double duty between religion and finance. Jubilee, Christian prohibitions on usury, Islamic bans on interest. These were all coping mechanisms to deal with debt destruction once it reaches crisis levels, or to attempt to restrain debt from reaching crisis levels.

    Incidentally, there is also religious strife rooted in debt growth. For example when people couldn't borrow inside their own ethnic group you have Christian antipathy towards Shylock the lender. I'd argue Jews were an easy target by Hitler because of (perceived) Jewish financing during Weimar's hyperinflation.

    Of course in modern society, we have the institution of bankruptcy that is supposed to act as a sort of constant level of underlying Jubilee to prevent debt growth from diverging too far from real economic growth. And used to have stronger regulation to prevent widespread fraud from postponing bankruptcies until it is too late.

    It's very telling that we've abandoned these things now- Too Big to Fail, radical deregulation, regulatory forbearance, etc. Unfortunately, many of these cultural prohibitions were written in blood. When notional wealth outstrips real wealth to such a degree, there are too many mutually exclusive claims to underlying assets. Not everyone can get paid. Historically, these are the conditions under which scapegoat groups have their wealth confiscated or are put into debt slavery, resource wars erupt, or the elite are toppled in violent revolutions.

  2. Hiyas George,

    An avid reader here. First time posting.

    Thought you might like a couple of links that have somehow slipped under the radar:
    Mervyn King sez: Stop fractional reserve banking!!!!

    Mervyn ponders abolition of banking as we know it

    Must say I was gobsmacked. Must be some kind of wheeze.


  3. Debt grows geometrically, not exponentially. You should learn the difference.

  4. Geometric growth for an infinitesimal interval is the same as exponential growth. The difference is insignificant to the message of the article anyway.

    Thanks for the informative blog.

  5. We seem to have found a way to have a 'debt jubilee' - that's called inflation!

  6. Folks ... I may have a solution here. Fixes the housing situation and subverts the fed.

    Constructive criticism, and any errors of facts or logic are welcome.

  7. I criticize the specific class of people who happen to be called bankstas cuz they's ugly and fat and we should probably hang them, then have a debt jubilee.

  8. I understand that the public debts of the US are growing exponentially and I also understand that interest along with fractional reserve banking and inflation are largely responsible for this compounding. What I cannot find is a clear explanation of how these things combine (interlink) with each other to create so much exponential debt growth to begin with.


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