In the runup to the 2008 global financial crisis, developed nations went on a borrowing spree. Debt was used to drive economic growth, allowing for immediate consumption and investment. Spending that would have taken place over years was accelerated because of the availability of easy money.

The consequences from excessive debt continue to be felt around the world. Yet it’s still fashionable in certain economic circles to downplay the problems of debt and its claims on future income and wealth.

This argument is flawed. It ignores the effects of fractional banking and leverage, which can multiply the process rapidly.

Borrowing is assumed to finance assets or investments that generate income or value in order to repay principal and interest. A significant proportion of current debt does not meet this test.

Only (around) 15%-20% of total financial flows go to investment projects, with the remaining 80%-85% used to finance existing corporate assets, real estate, or unsecured personal finance to facilitate “lifecycle consumption” smoothing. Borrowings were frequently used to finance pre-existing assets where anticipated price rises were to be the source of repayment.

Under these conditions, a slowdown in the ability to borrow ever-increasing amounts can lead to a sharp fall in asset prices — to levels below the outstanding debt, creating repayment difficulties. This is precisely what happened in many housing markets in the 2008 crisis aftermath.

In the U.S., as well as Ireland, Spain, and Portugal, construction and GDP was boosted by debt-fueled housing investment for which there was no demand. As Lorenzo Bini Smaghi, a former member of the European Central Bank, observed: “[many countries] accumulated an excess of public and private debt before the crisis to try to sustain their standards of living and their welfare systems, which turned out to be unsustainable and required a sharp adjustment when the crisis broke out.”

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Debt has a fixed maturity. Deteriorating asset values or creditworthiness can reduce the ability to refinance, triggering financial crises, as illustrated by recent European sovereign debt problems.

Debt is also intermediated by banks, which by design are leveraged with each $1 of capital supporting anywhere (up to) $30 in loans. Losses can rapidly threaten the solvency of financial institutions. This in turn increases the risk of failure of the payment system crucial to the functioning of modern economies. Banking system weakness can reduce the supply of credit to successful businesses, hampering economic activity.

The argument that every debtor has a corresponding creditor ignores the fact that the lenders may be foreign. Where the borrowings are sourced offshore there is net outflow of cash to the lender, which can affect domestic wealth and activity as well as increase financial risk.

Reducing debt through debt forgiveness, defaults or inflation is not without consequences. Savings designed to finance future needs, such as retirement, are lost. This in turn results in additional claims on the state to cover the shortfall or reduce future expenditure, which crimps economic activity.

“ A rapid increase in debt levels is unsustainable, given constraints of an aging population and slower growth overall. ”

Debt irrelevance assumes a Ponzi Scheme where nations need to borrow ever-increasing amounts to repay existing borrowing, but also to maintain economic growth. By 2008, the U.S. needed $4-$5 of debt to create $1 of economic growth, compared to $1-$2 of debt per $1 of GDP in the 1950s. Currently, China needs $6-$8 of debt to create $1 growth, compared to $1-$2 as recently as 10-20 years ago. Such a rapid increase in debt levels is unsustainable, given constraints of an aging population and slower growth overall.

In his book “One Lesson: The Shortest & Surest Way to Understand Basic Economics,” Henry Hazlitt summarized the problem: “Everything we get, outside of the free gifts of nature, must in some way be paid for. The world is full of so-called economists who in turn are full of schemes for getting something for nothing. They tell us that the government can spend and spend without taxing at all; that it can continue to pile up debt without ever paying it off, because ‘we owe it to ourselves’.”

Almost nine years after the global financial crisis, debt levels have not decreased significantly. There has only been a transfer of debt from corporate and individual balance sheets to sovereign states. The slow deleveraging has relied on a mixture of asset sales, modest debt write-downs, and increased saving.

Reducing debt to the required levels at the needed pace is increasingly difficult. The real options such as default or large scale debt write-offs are economically and politically difficult. For example, significant write-downs on sovereign debt would trigger major crises for banks and pension funds. The resulting losses to savers would trigger a sharp contraction of economic activity. National governments would need to step in to inject capital into banks to maintain the payment and financial system’s integrity.

But without strong growth and high inflation, debt levels cannot be sustained. If and when the problems reemerge, the ability of governments to intervene will be impaired.

Satyajit Das is a former banker. His latest book is “The Age of Stagnation” (published internationally as “A Banquet of Consequences”). He is also the author of “Extreme Money” and “Traders, Guns & Money.”