What if a family of four suddenly woke up one day and decided not to go to work. (We can assume that these four people are made up of a working father, mother and two elderly adolescents that have recently entered into the workforce.)
After a couple of hours mindlessly walking around the living room, they had an idea to go shopping and live a little, maybe grab a vacation on a cruise ship or even buy a new home. Well, since that they abdicated from their jobs, they will need sustenance to keep them going. They are no longer productive and they need a line of credit (a loan) to finance their extravaganza. This family is now ready to shop till they drop. They will be certainly heralded by the mainstream economic press and university professors of economics as doing the right thing - helping the economy and making sure that a level of demand is out there to support GDP growth.
Just a remainder - The money they received for this activity has been saved from the rest of the population. A baker, shoe manufacturer, a steel worker, teacher, farmer and everybody else, have pooled in their savings and loaned it to the bank. The bank in return to make a profit (spread) will re-loan it out to this family. (We shall a assume a full banking, non fraudulent system to keep things simple).
Now, these funds, given to this family is a form of personal sacrifice coming from rest of society in the form of present goods. The family will take these present goods and promise to make good on the loan in the future. They will of course provide future goods for the individuals that have sacrificed in the present. The passage of time will reflect an interest component. To keep it really simple, we will just use the present versus future value of a good difference as a function of time, not including the various risk components that go into making a loan. As time passes, the family has to rely on a way to return this loan plus interest. But, it can't. It doesn't have the means of commerce anymore, only of frugality. The next logical step would be to refinance the current loan for an even bigger loan. Lets for the sake of fun call these NINJA loans (No income, no job, no asset).
To obtain a new loan, there must be unused present resources in the economy that haven't been consumed to finance this loan. Let's move ahead and say that such funds don't exist. Society has extinguished its savings. What will the family do? It can't repay its debt. It will have to restructure its debt. This means a negotiation between them and its creditors. The family might say that it will return to work and pay a couple of percent on the dollar, forcing them into bankruptcy. The creditors are forced to take a loss. There future standard of living has been diminished as they not only sacrificed so far, but will not receive any compensation for this sacrifice. They will have worked for nothing.
This analogy is the same on a nation wide basis between two countries: One that supplies the funds, and the other one, that consumes the funds. One country makes goods and renders services, while the other consumes those that are imported. The render of the good may even make loans to the consumer country, giving them an ability to consume even more in the present. This, however cannot continue indefinitely. This sort of behavior never can occur in a full banking system in which loanable funds are not created out to nothing. Sooner or later, the creditor doesn't only ask for the interest, but the principal as well. If the consumer driven country can't pay, they are forced to live within their means. They are forced to take harsh austerity reality. A smaller level of consumption, lower wages, more work hours etc. marks an austerity. But don't be fooled that they suffer alone. The creditor nation has to take a loss as they will never be repaid. Society ends up poorer and demoralized.
This story is extremely simple, and profound, as it truly governs the relationships between countries. The next twist is adding a fractional reserve banking system, a disincentive tax system made by the government and special interest groups that compound this problem greatly.
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