“Debts are subject to the laws of mathematics rather than physics. Unlike wealth, which is subject to the laws of thermodynamics, debts do not rot with old age and are not consumed in the process of living.
On the contrary, they grow at so much per cent per annum, by the well-known mathematical laws of simple and compound interest …
It is this underlying confusion between wealth and debt which has made such a tragedy of the scientific era.”
A farmer who raises pigs faces biophysical limits on how many pigs he can take to market. But if that pig farmer took on debt – a promise to repay at a future date – he would in effect be issuing a claim or lien on his future production of pigs. If he borrowed the equivalent value of 100 pigs, he could represent the loan on his balance sheet as ‘-100 pigs’
While debt as the farmer’s accounting entry is negative, negative pigs do not really exist. If the farmer should suffer a series of lean years and be unable to pay the interest, he might soon owe more pigs than could be raised on his farm. After a year, with interest looming, he’d show “-110 pigs”; in 5 years, “-161”; in 40 (assuming a patient bank), “-4526.”
When the bank finally came to call on the pig farmer to collect repayment of its loan, it could well find that most of the virtual wealth that had grown so appealingly on its books had to be written off as a loss.