Say you have a bank that creates money on demand, if you borrow $1000 into existence and pay 10% interest,
only $1000 exists, therefore more people must borrow for you to be able to pay back, but then won't other
people be in your position? So it becomes a game of musical chairs.
Even if money goes back to the banks, it can only come into circulation through debt.
Only 3% of our money is in coins and notes, and this is not enough to cover the interest.
is this how it works? I'm not too sure.
Charging interest only makes sense if you don't issue the money,because if you are the sole issuer that creates an impossible situation.
You are assuming that any given amount of money can only be spent once.
faber est suae quisque fortunae
inquisitiveteenager: Say you have a bank that creates money on demand, if you borrow $1000 into existence and pay 10% interest, only $1000 exists, therefore more people must borrow for you to be able to pay back, but then won't other people be in your position?
people be in your position?
That's a common misconception. Probably a deliberate one on the part of many.
No. Dollars are not destroyed by spending them. Even if there was only $1 in circulation it would still be possible to pay off your debt of $1100. You would simply have to repeatedly earn that single dollar back from the bank each time you use it to pay your debt.
Dollars are simply used as place holders when exchanging real goods.
Peace
Does anyone else find that the OP is a muddled description of fractional reserve banking blended with the compound interest paradox?
Irish Liberty Forum
Even if that money went back into the banking system, you have to borrow it back and you're nack to your oporblem.
Even if that money went back into the banking system, you have to borrow it back and you're back to your original problem. You borrow that money abck from the bank, you have to pay interest, and you borrow again.
MatthewWilliam compound interest is not a paradox, it is a form of contract between lenders and lendees.
It's also worth keeping in mind that assuming you have borrowed this money to invest it in productive enterprise, then the amount of goods relative to money also increases, and the value of money itself will thus change.
In fact, you wouldn't borrow at 10% interest if you didn't expect to make more than that in profit. Now if this was in terms of production of goods, and not just speculation on a bubble or some-such, then the $1100 you had to pay back would in real terms be worth less than $1000 because of deflation.
Now all you have to introduce is the idea that contractual agreements attempt to preempt such inflation or deflation, and that in a climate of productive investments and an absence of bubbles, nominal interest rates may very well become negative. Or more likely, since when interest rates become negative people may hoard more money thereby reducing the pool of loanable funds, then nominal interest rates may fluctuate around zero; between these two forces of productive deflationary investments and hoarding in anticipation of deflation.
Does that sound right? I'm not really sure but it's the best explanation I have for now.
nazgulnarsil: MatthewWilliam compound interest is not a paradox, it is a form of contract between lenders and lendees.
Perhaps I should have made it clear that I don't beleive in the "paradox" either (for the reasons stated in the first two replies).
ah. i see a lot of the OP's sentiment on the web and I think it is largely due to the silly Money As Debt video that has been making the rounds for a few years.
It's easy to see how this paradox breaks down.
First, let's see the only scenario the paradox truly works in. Say I'm the bank and you're you. I lend you $5, and you owe me $7 in return. You instantly return the $5. You still owe me $2. I loan you $5 again. Now you owe me $9. Note that money here is meaningless, as it is never traded for actual goods and services.
Now let's check reality. I lend you $5 and you owe me $7. You buy $5 of tools from Jones. Using these tools, you produce 1 tomato per day. You sell the tomato to Jones for $1, then pay it to me. You do this 4 more times. Now Jones has no money. I have $5. You still owe me $2. The next two days you sell tomatoes to me instead of Jones. You are now debt free.
In a modern environment, banks have dozens to hundreds of employees they must pay. They must pay rent on their land and offices. They must purchase paper, computers, and office supplies. And the profit that is left over isn't used 100% to make new loans. The owners use some fraction of it to buy whiskey, pay country club dues, and go on lavish vacations. Thus, the money is available to be earned through productive labor in the market.
Banks spend money in addition to loaning it. People earn money through producing goods, rather than simply borrowing it. Your paradox requires that all transactions are loans or loan repayments, rather than exchange of produced goods and services.
Check my blog, if you're a loser
inquisitiveteenager: Even if that money went back into the banking system, you have to borrow it back and you're back to your original problem. You borrow that money abck from the bank, you have to pay interest, and you borrow again.
No you wouldn't. You could buy it back in exchange for goods.
inquisitiveteenager,
Lets compare your scenario with lending money where no money creation occurs.
Say I have $1000 dollars in my pocket and then lend it to you for 10% interest. No new money has been created. How will you pay back the principle as well as the $100 in interest? By earning some of the dollars currently held by others.
The idea that money creation through lending is bad because it doesn't create enough money is silly.
In our current system, all money enters the system as debt, right? Let's say the Fed "prints" money by lending it to the federal government through the purchase of treasuries. Then, let's say that the federal government spends the newly printed money, which then works its way through the system until $5 of it lands in your wallet. You then lend the $5 as described in the passage below:
"Now let's check reality. I lend you $5 and you owe me $7. You buy $5 of tools from Jones. Using these tools, you produce 1 tomato per day. You sell the tomato to Jones for $1, then pay it to me. You do this 4 more times. Now Jones has no money. I have $5. You still owe me $2. The next two days you sell tomatoes to me instead of Jones. You are now debt free."
Even assuming that you receive the original $5 plus interest, that doesn't mean that interest has stopped accruing on the $5. In fact, that same $5 is still debt, the federal government's debt, and interest is still accruing on it. As interest is constantly accruing on every single dollar in the system, on an aggregate basis, isn't there an ever-increasing need for more money to pay back principal and interest?
Ludwig Von Rothbard:Even assuming that you receive the original $5 plus interest, that doesn't mean that interest has stopped accruing on the $5. In fact, that same $5 is still debt, the federal government's debt, and interest is still accruing on it. As interest is constantly accruing on every single dollar in the system, on an aggregate basis, isn't there an ever-increasing need for more money to pay back principal and interest?
You switched up my hypothetical. But even in yours, there's a big flaw in the logic. The federal government did not create the original money supply by issuing debt. Specie was already being used as money. Federal Reserve notes/accounts were titles to specie. Then, the government exempted all banks from fulfilling these titles. This money was a debt to no one.
In general, the more debt there is vs total money supply, the harder it will be to repay that debt. But this is far different from impossible, or a logical tautology. It simply means people have to work harder - they have to produce more real goods, and create a greater number of transactions than they would otherwise.