97% of the money in the world is debt. While this will surprise some, it makes sense when we understand what kind of economic system we live in. Looking at the history of our economy, we can also understand how we have ended up in such a system where creating money has never been more legal or easy.
For a long time, the gold standard was the system used to regulate global currency, which means that countries agreed to fix the prices of their domestic currencies in terms of a specified amount of gold. This type of economic system began thousands year ago back in Asia Minor. But, as society evolved throughout history, and especially after World War I, many countries abandoned it.
We can say that gold standard secured the currency of a country. For example, if you went to a bank with a $20 note they would give you a $20 gold coin which is more stable than a paper note because it was tangible and its value was then secured.
However the gold standard limited the money printing, and in 1971 the former US president Richard Nixon announced that it will no longer covert dollars to gold at a fixed value, therefore totally abandoning the gold standard.
That was when the fiat money system was introduced. The word 'fiat' comes from Latin and means "Let it be done". With nothing attached to the currency, you start printing more and more money that is only backed by the central bank’s and policy maker’s words. We can compare fiat money to tokens in an amusement park. You can only use those tokens in the park and therefore they only hold value within the park.
The 17th century French writer, historian, and philosopher Voltaire once said, "All paper money eventually returns to its intrinsic value, zero" which sums up the main problem with fiat money. It is not protected against inflation because it is not backed by any tangible commodity, so when you have money which loses purchasing power you need more of it, thus you end up needing to borrow; and that is the whole problem.
Developed countries use debt to refinance already existing debts. To give you an example, Japan, which is most indebted country in the world, has a global debt ratio of 247.0% (2014). That means their debt is almost two and a half times the amount of their ground domestic product. The UK is 6th in the world with a ratio of 98.8% (2014). Even though the fiat money has been heavily criticised, we are still using it. But how long can it continue to support our economy?