This post on ZeroHedge reminds me of something that never gets much discussion these days. That is, how can you create a system of governance that prevents the state from borrowing? The gold bugs and libertarians are the only people who see borrowing as the source of all trouble. The people in charge never think about it, as borrowing makes it possible for them to be in charge. Easy money allows the worst elements to dominate a democracy, because it makes it possible for the unprincipled to buy votes.

The outlandish growth of the Federal government is due to debt. There’s no way the public would tolerate the tax burden to pay for it. Instead, the rulers found subtle ways to tax the people, always through debt. In order to mask the erosion of purchasing power, they allow banks to create  unlimited credit for the public to use in lieu of earnings. State and local government uses debt in lieu of taxes to pay for expanding unionized workforces. Of course, public pensions are just taxing future tax payers for present vote buying.

Public debt is a type of Ponzi scheme. Like all Ponzi schemes, this one will eventually run out of new money to pay off old money. At the peak of the baby boom, for example, the Feds will be paying 78 million Boomers to sit around at about $50,000 per year. That’s $4 Trillion a year in welfare payments. No one has the slightest idea how to pay it. State and local pension obligations are something like a trillion a year short of being solvent and that may be a polite fiction. No one really knows how broke pensions are right now.

Within the next two decades, the money runs out. It will happen with cities, then a state and finally the Federal government will run out of money. There’s also the fact that global debt has reached levels never seen in human history. There has to be some upper limit to debt creation. The world is based on never ending debt growth, so what happens when that limit is reached? People talk about peak oil as when growth in demand out-paces the growth in supply. That never happens with oil, but it has to happen with debt.

Then what?

The end of one era is the start of a new one. The new one is always about addressing the errors of the old one. If the end of the credit economy is ugly enough, serious people will have to come up with a solution to debt. That means some hard limits on borrowing. This assumes a soft landing from the financial crisis that comes from the end of the credit boom. if it ends in a world war, then maybe what comes next does not matter. The challenge for the post-collapse rulers will be keeping the bread lines peaceful.

Assuming the ideal denouement to the credit boom, how would nations put safe limits on public borrowing? State government have limits written into their constitutions, but those are often circumvented. A currency based in something useful like energy stocks could achieve a mix of gold’s limit’s ion credit growth, while allowing for a growth in the money supply as energy becomes more available and cheaper. It’s a hard puzzle to solve, for the simple reason people love spending today on the promise to pay tomorrow.