Paper Promises

Owing Big Time

The Western world is awash in debt. Some nations have borrowed three to four times their annual economic product. They can never repay debt of that magnitude; even servicing their debt will overload most developed nations, which already face aging populations and decreasing productivity. Countries will have few choices when it comes to their obligations: They will default or “inflate the debt away.” Either way, creditors – whether private individuals, financial institutions or governments – are in for some bad times.

The rise of paper money – currency without the backing of a hard material like gold or silver – has primed the borrowing pump. Because governments control their money supplies and can issue more money at will, they can borrow with abandon. They benefit from creditors’ confidence in their ability to repay, but given the total debt outstanding, that confidence may soon dwindle.

The United States “is now the world’s largest debtor nation,” but it is also the globe’s biggest economy and maintains the main reserve currency. Given that, any shift in global confidence will affect every country, especially China, which holds so much of America...