Money creation and interest

When you take out a loan the bank creates (out of nothing) a balance in your account, and a record of your promise to repay that balance in the future.  The money in your account is a positive value to you, and your promise to repay the loan in the future is a negative value to you.  If you add these values together they will cancel each other out and return to the original 'nothing'. 

 

You could add 'the money in your loan account' to 'your promise to repay the loan' by simply paying the loan off with the money that you have borrowed: the money that you have borrowed (and your debt) would cancel each other out and disappear.  In fact, as you progressively pay back the loan, the money you borrowed and spent into the economy will disappear out of the economy again, as your debt does. 

 

When the bank initially creates both the money in your bank account, and your debt to the bank, they are equal but opposite values that add up to nothing; however your debt to the bank increases over time because of the interest that you have to pay on it.  This means that when you finally pay back the loan all of the money will disappear out of the economy again but not all of your debt will.  For you to completely clear your debt, money must be created elsewhere for you to earn it to pay off your debt.  Because all money is created as debt this means that more money will have to be borrowed by someone else so that you can earn it from them, usually indirectly, to enable you to completely pay your debt off, including the interest. 

 

This means that the amount of debt in the system, and therefore the amount of money in the system, must always increase because of the interest that is charged on loans.  This is one of the reasons  that economic systems which create money out of nothing by lending it into existence (such as the economic systems of all developed countries) must always grow.

 

This page is linked from:

How money is created 

 

 

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