Money lending establishes a relation between the provider of the loan and the debtor. Depending on its nature, a loan follows certain rules determined by the particular country by-laws according to the given nature of the loan. All over the world, there are numerous types of debts – national debts, mortgages, consumer credits, credit cards, leasing, and others. In the last decades, all over the world, indebtedness actually grew in all debt spheres very rapidly. There are several countries that have decreased their national debt and the debt of the private sector; but they are rather exceptional.
Debts are actually the omnipresent reality of the contemporary world. Countries and citizens get a rating that depends on their indebtedness, their income, and their history of settling past debts. According to this score, the lender calculates an interest rate for the loan. All of those things intervene in what we call the debt system.
Find out more about types of debt here.
The debt system
The contemporary world could not exist without debt because almost everything in our economy is based on it. This is why lending cannot be stopped; if we tried to, the whole system would collapse. New debts are often taken to pay off the old ones, loans are consolidated in various ways, they are transferred and interests are changed. The purpose of every debt is that it should be paid. If the debtor is not able to settle the debt in the long-term, they should be punished by having his or her property fall into the lender’s ownership.
Since there is a huge number of debts all over the world, the rules have changed in various ways. If a person is in excessive indebtedness, they have the possibility to declare personal bankruptcy. This process allows them to pay off only a small part of their previous debt. If a country goes bankrupt, the MMF helps and creditors must agree on a plan to settle the debt. This plan might include reducing the amount and extending the due date. Otherwise, all unpaid debts would irretrievably disappear during the bankruptcy of such a country.
Is it actually a correct solution for the debt issue? Isn’t it too much of a deviation from the original debt system? From a long-term perspective, this does not seem to be the right solution. This is because central banks help to make indebtedness sustainable by issuing more money and setting easier terms. Therefore inflation increases and the value of money can decrease. So far, it somehow works. Nevertheless, no one knows how long this ride may continue. The nature of the relationship lender – debtor should be that the one who provides the money to the other one gains it back in a certain period of time including the interest agreed upon.
Collapse of the system
There is no sense in thinking about catastrophic scenarios or the entire collapse of the debt system and the states. If that happens, one cannot actually prepare for it. However, we need to count on a “softer” option involving currency inflation growth as well as amortization of debts and their dilution. This would make life easier life to debtors but has a negative impact on people who save money. If an economy has an annual inflation rate of 5% for 10 years, prices would increase by more than 60% in that period. This means that the value of people’s money would decrease dramatically. An inflation rate of 5 % is entirely realistic for the future.
A suitable option to secure savings can be an alternative investment such as in precious metals or cryptocurrencies. This last option is set to be the easiest way to make payments in the future.