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Is The World Ready For a Debt-Free Economy?

Could The World Continue to Function Without Debt?

More than 160 million Americans are carrying credit card debt, and the average balance for each household is currently $15,000. Total consumer debt in the U.S. has climbed above $11 trillion, which includes all kinds of debt, from student loans and credit cards to mortgages and car loans.

Looking at these statistics, it’s clear that a majority of citizens are surviving on credit. Maintenance of their lifestyle actually depends on having gone into, and stayed in, a substantial amount of debt.

The economy runs on debt

As much as we might dislike it, the world’s economy runs on debt. In order to sustain business as usual, debt is an inherent piece of the system.

In fact, money itself is created as debt through what’s called the Fractional Reserve System. Under the Fractional Reserve System, banks are only required to keep a small percentage of deposits on hand, and are allowed to loan out the rest.

For example, if a bank is required to keep 10% of all deposits on hand, and you make a $1,000 deposit, that means the bank can loan $900 to another borrower. It sounds legitimate until you consider that if you were to come back the next day to withdraw your $1,000, you might expect to have a problem, but you don’t.

The bank didn’t loan out your $900. They loaned out an imaginary $900.

Credit and debt are two sides of the same coin

When you apply for a new credit card, it’s only technically considered credit until you use it. Once you use some of your credit, it instantly becomes debt: money you owe somebody else.

For this reason, it’s vital to understand that credit and debt are two sides of the same coin, and you can’t have one without the other. If debt is going to be eliminated, then credit will have to be removed as well.

Student loan debt is mainly a US problem

Americans owe $1.3 trillion in student loans and more than 7 million citizens are in default -- with millions more behind on their payments. Students are being forced to consolidate and refinance their loans to avoid going into default.

You might think borrowing money in the first place was the problem, but when you look at Sweden, a different story emerges. In Sweden, it’s common for students to take out loans; not for tuition (because tuition in Sweden is free), but to use for daily living expenses.

About 70% of students take out loans in Sweden, at an average of $20,000 each, and yet there’s no student loan debt crisis in Sweden. This discrepancy could be due in part to the fact that Americans are allowed only ten years to pay back their loans, while students in Sweden get 25 years, German scholars get 20 years, and young people in England have up to 30 years to pay off their loans.

Can the world thrive without debt?

If debt disappeared from our economy, we’d have to change everything about the way we live, work, and do business. Companies that rely on revolving credit and the ability to obtain large loans could no longer operate. The number of firms that depend on credit to stay in operation is vast, and includes many Internet-based businesses.

Without debt and the ability to take out massive loans, the monetary value of goods and services would have to fall substantially. Today, because people can take out a $50,000 loan to purchase a car, manufacturers can price their cars in that range.

If nobody could take out loans that size, the price of cars would have to come down … as would mortgages, student loans, and other big-ticket items that most people require a large loan to purchase.

Without debt, society would have to thrive mostly on systems of trade and barter: either monetary exchanges of equal value, or trading of goods and services. Credit would be a tool of the past.

You can become personally debt-free

So the world is clearly not ready to go debt-free just yet, but you can do something about your personal debt. First, consider refinancing your existing loans in order to arrange a better interest rate. Even if you negotiate only a 2% reduction in interest, you could save thousands of dollars.

If you can’t refinance, or you’re so far behind that you can’t catch up but don’t wish to file for bankruptcy, try consolidating your loans. Debt consolidation is a great option when you owe substantial amounts to various creditors.

When you employ a debt consolidation service, it will negotiate on your behalf and get you at least a 30% discount on your debts. The service combines all your debts into one payment you will henceforth make to that company, which includes a service fee. You’ll have to make only that one monthly payment going forward.

It’s possible to live without credit or debt; many people have done it for years. It would probably demand an adjustment to your lifestyle if you wanted to go that route, but your life will likely involve much less stress once you do.

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Larry Alton is an independent business consultant specializing in social media trends, business, and entrepreneurship. Follow him on Twitter and LinkedIn.