But we are nowhere near this happening. Because it's so obvious, I doubt anyone would ever extend credit on BTC, so in that sense you are right, a debt crisis will not happen in bitcoinland.
Yes, that's the point, and it is not the only reason. If you closely study how today's fiat money are created, you will notice the fundamental difference between a debt based money (fiat money) and honest money (gold/silver/bitcoin)
Before 1971, US dollar is 40% backed by gold, so in certain degree fiat money is not debt based, but after that backing is removed, all new created money are backed by future debt. After 40 years, it has grown into a huge mountain there is just no hope to pay back that amout of debt without significant increase in income
But bition might be able to help pay back that debt, the only thing it requires is its value grow to a scale close to the current debt
Not quite. You are using a modified version of the "wealth effect" argument that is used to support the housing and other asset bubbles as a means of restoring economic growth.
Let's analyse it a little bit.
First of all, debt/credit created in the private sector (that includes mortgages, credit card debt, margin debt, you name it) is independent of whether the dollar is backed by gold or not. We had a credit explosion in the 1920's when the US$ was still in the gold standard. We've had another one starting in the 80's and peaked in 2007, when the US$ is not in the gold standard. In both cases, the vast majority of the debt is private sector debt. This is important because given that the private sector doesn't have access to the printing press it means that the only way to pay it back is if (as you pointed out) income goes up substantially or if assets purchased with this debt (such as houses or stocks) increase in value, so that they can be sold to pay back the debt. Given that they actually need to be SOLD in order to pay back that debt, it all goes back to actual income increasing (otherwise, by the very act of selling them the price goes down so the debt remains high as a % of assets' value). We saw an example of this in 2008.
How does the "wealth effect" come into play? Well, according to many people, and most certainly policy makers in the US and elsewhere, if peoples' assets increase in value, people will feel wealthier and therefore will spend more. This will increase GDP and therefore disposable income for all. The economy will acquire "escape velocity". So, the recipe for any economic downturn is to try to reinflate asset bubbles to restore that "wealth effect". The 2000 dot-com crash led to the housing bubble, the 2008 crash led to the current reflation of both equity and housing markets, etc.
The problem with this is that it doesn't really work, or at least it doesn't work enough to make it worth it. Most asset-rich people will not change their spending patters if they are even richer, while the really poor that could use the extra dollars to spend, don't have any assets and are therefore not benefiting from the asset bubbles. Warren Buffet may have been a few billion $ richer than last year but he will consume exactly the same as last year.
When and where would such an asset boom successful and positive for the economy? If the asset price increase spurred investment in productive businesses that generated income. In that sense the dot-com bubble didn't go wasted because several successful businesses came out of it, and today's productivity and arguably standards of living are higher that 15 years ago thanks to the Internet. When venture capitalists invested in Google, Amazon, etc., they actually created value. I'm not sure the same can be said about the housing bubble, but that's another story.
Now to the interesting part: As bitcoin increases in value, more and more income is spent in it, just like any other asset. The very fact that the value rises compared to the US$ is because people spend US$ to buy it. On top of that people spend their money in mining equipment, electricity, etc. This initially actually
reduces the available income, but in the process it creates an asset with a certain value (as determined by the market), which could in theory lead to people creating businesses around it that would improve productivity and potentially raise available income. If for example there are businesses that take advantage of bitcoin's features to offer better micropayment services or P2P microloans or whatever else, this could have a positive effect on the actual economy and income. If, on the other hand, you rely on the asset bubble itself to help the economy, it's not going to work. It's a zero sum game, and by its very nature it decreases rather than increase available income (as US$ income has been spent on bitcoins).
So the important thing is to establish a robust ecosystem of businesses that offer services that wouldn't be possible without the bitcoin, so that they net add value to the economy.
