I just created 100 pennies.. and loaned them out, you owe me 101 pennies…..

[odolvlobo]

Let's make some real calculation: Each month, you borrow $100 to buy food, and those $100 goes to the food company as income, and food company put $100 to bank, and bank loan out $90 (10% reserve requirement) to another borrower, he spend all $90 to buy products from your employer, your employer have $90 income, and he is so generous and gives you all $90 as salary. So, how could you payback your $100 loan with $90 salary at the end of the month?

The reason these examples are stupid is that they assume that one person holds all the money in the world and that value can only be traded using that money. Of course, neither of those assumptions are ever true.

Ok, lets assume that 7 billion people holds all the fiat money in the world and value can be traded using those money. Did that change the way how it works? Putting billions of semi-conductor components into a CPU does not change the basic electrics theory that you can prove in a flashlight

Yes, because now I can produce something of value and exchange that for money that can be used to pay back the loan (and the interest).

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[dinofelis]

We can't deny that essentially we are living in a world of debt and it is debt that until now keeps everything from going into deflationary depression. It's like a bubble waiting to pop and we just keep on the money printing in order to ensure there is enough supply of money. Right now there is no clear answer to the debt problem because it has been a norm for so long and basically not only the people but the nation as a whole have been living beyond their means. Not to imply in a negative way but I'll be surprised if the current bubble can sustain itself for another decade or so. 

This is correct, but not for the reason suggested above, "that there is not enough money". It is like  Rudolf Havenstein of the Reichsbank in the Weimar republic has woken from the dead.

The money nowadays, world over, consists of base money (notes and coins) and different types of debt which have degrees of moneyness, for simplicity's sake we can call all debt money. The base money and the debt together make up the aggregate money volume, the size of which affects the demand for holding money and therefore the value. The problem with this is that the debt can be extinguished when the loans are paid back or written off, (In paranthesis, the money system managers do not like writing it off, and that is why you see bad loans parked in bad banks instead, never to be paid back, but never to be written off) and wreaking havoc in the economy.

It would be much better to have base money, and only a minimum volume of debt. So why do not the keynesians print base money to produce their beloved inflation, and instead create debt? The reason is that the masters want to hide the money creation from their voters. This is a conspiracy theory which also happens to be a conspiracy fact. (The greatest conspiracy theory is the one that suggests that conspiracies do not exist). To hide the money creation they use to secure their continued power, they are willing to risk the stability of the global economy.

Brilliant.  Well-said.

[solarion]

It would be much better to have base money, and only a minimum volume of debt.

It wouldn't be better for everyone. Returning to a debt free currency issued by the treasury(Lincoln greenbacks, Kennedy notes) would be bad for the fed, congress, & commercial banks for instance.

[NotLambchop]

...Putting billions of semi-conductor components into a CPU does not change the basic electrics theory that you can prove in a flashlight

Bitcoiners:  Wrong about semiconductors, flashlights, electricities, moneys, and just about everything else since 2009^TM.

[Erdogan]

It would be much better to have base money, and only a minimum volume of debt.

It wouldn't be better for everyone. Returning to a debt free currency issued by the treasury(Lincoln greenbacks, Kennedy notes) would be bad for the fed, congress, & commercial banks for instance.

And it would also bring back freedom, and personal sovereignty. Or, maybe it is the other way around, in the genreral market, the desire for freedom will bring back sound money.

[johnyj]

Let's make some real calculation: Each month, you borrow $100 to buy food, and those $100 goes to the food company as income, and food company put $100 to bank, and bank loan out $90 (10% reserve requirement) to another borrower, he spend all $90 to buy products from your employer, your employer have $90 income, and he is so generous and gives you all $90 as salary. So, how could you payback your $100 loan with $90 salary at the end of the month?

The reason these examples are stupid is that they assume that one person holds all the money in the world and that value can only be traded using that money. Of course, neither of those assumptions are ever true.

Ok, lets assume that 7 billion people holds all the fiat money in the world and value can be traded using those money. Did that change the way how it works? Putting billions of semi-conductor components into a CPU does not change the basic electrics theory that you can prove in a flashlight

Yes, because now I can produce something of value and exchange that for money that can be used to pay back the loan (and the interest).

If you can do that, the rest 699999999 people will also be able to do that, and every one of them will need more money than they had originally borrowed to do that, that still does not make the ends meet

The only way to make your ends meet is someone else going default. With this system running continuously, there will be more and more people going default, thus banks collect one dollar interest from you while lose one dollar from that defaulted guy, the result is still not able to sustain long term wise, since banks also need interest income to operate

[johnyj]

Actually OP's question is simplified, the loans are all long term loans, and they overlaping each other

First year banks make $100 loan, second year banks make another $100 loan, but the repay of the those loans might last until 10 years later. After 10 years, the first loan is paid back, but by that time there are magnitudes more money out there due to loans from third year/forth year and so on...

It is this large amount of money supply out there makes people think that there are enough money to pay back the loan. But OP is correct, every one of these loan has to be paid back by more than originally borrowed, but since they never happen in a same time frame, people seldom have a liquidity problem, but long term wise this makes a sure destinity of exponentially increasing debt

Growth is the key for sustainability of this scheme, if you can continuously issue larger and larger loans every year to pay back the original loan and interest, you can play forever. But if there is no growth, thus no demand for larger and larger loans, then the system will collapse

[solarion]

Captain ZIRP to the rescue! ...still not enough to bring the zombie economy back to life. Bring on the negative interest rates!

Damn you savers...damn you!

[odolvlobo]

Let's make some real calculation: Each month, you borrow $100 to buy food, and those $100 goes to the food company as income, and food company put $100 to bank, and bank loan out $90 (10% reserve requirement) to another borrower, he spend all $90 to buy products from your employer, your employer have $90 income, and he is so generous and gives you all $90 as salary. So, how could you payback your $100 loan with $90 salary at the end of the month?

The reason these examples are stupid is that they assume that one person holds all the money in the world and that value can only be traded using that money. Of course, neither of those assumptions are ever true.

Ok, lets assume that 7 billion people holds all the fiat money in the world and value can be traded using those money. Did that change the way how it works? Putting billions of semi-conductor components into a CPU does not change the basic electrics theory that you can prove in a flashlight

Yes, because now I can produce something of value and exchange that for money that can be used to pay back the loan (and the interest).

If you can do that, the rest 699999999 people will also be able to do that, and every one of them will need more money than they had originally borrowed to do that, that still does not make the ends meet

If I borrow $1000 and repay the loan at $100 per month for a year, I don't need $1200. I need $100.

[dinofelis]

Let's make some real calculation: Each month, you borrow $100 to buy food, and those $100 goes to the food company as income, and food company put $100 to bank, and bank loan out $90 (10% reserve requirement) to another borrower, he spend all $90 to buy products from your employer, your employer have $90 income, and he is so generous and gives you all $90 as salary. So, how could you payback your $100 loan with $90 salary at the end of the month?

The reason these examples are stupid is that they assume that one person holds all the money in the world and that value can only be traded using that money. Of course, neither of those assumptions are ever true.

Ok, lets assume that 7 billion people holds all the fiat money in the world and value can be traded using those money. Did that change the way how it works? Putting billions of semi-conductor components into a CPU does not change the basic electrics theory that you can prove in a flashlight

Yes, because now I can produce something of value and exchange that for money that can be used to pay back the loan (and the interest).

If you can do that, the rest 699999999 people will also be able to do that, and every one of them will need more money than they had originally borrowed to do that, that still does not make the ends meet

If I borrow $1000 and repay the loan at $100 per month for a year, I don't need $1200. I need $100.

Indeed, it is crazy how this blatant error is so long-lived.

The ONLY situation in which "1) 100 pennies are created  2) these 100 pennies are lend out 3) one has to pay 101 pennies back in total"
would create a problem, is when the original lender is not going to spend a single penny of the partial paying back for goods and services.  But if that original lender is not interested in obtaining any goods or services, then why ask an interest (or even, why want the 100 pennies back in the first place) if it is for not buying anything with it ?

The reason why anybody is going to lend pennies and ask interest, and want the money (plus interest) back, is bacause they want to get goods and services for it !  If you do not want goods and services, you're not interested in having money either.  You could just as well GIVE AWAY the 100 pennies.  And you're certainly not interested in getting any interest on it.  You only want your money back plus interest, because you want to SPEND it.

Well, if, during payback, the creditor spends AT LEAST the amount of interest that is due by the debtor, then there is no problem for the debtor to pay back the whole amount plus interest, without extra money creation.

Creditor invents 100 pennies and lends them to debtor (debtor promises to pay back 101 pennies over 10 years).

first year: debtor pays back 10 pennies
second year: debtor pays back 10 pennies

if from these 20 pennies that the creditor now holds, he SPENDS a single penny, that penny can be earned by the debtor.

In that case, the debtor (holding 80 pennies, and earning the one that the creditor has spend) can now pay off the entire loan plus interest. 

The important thing is that the creditor, in all of this, has spend 1 penny to buy goods and services.  That's needed.  That's all that is needed.

[dunchy]

@dinofelis

So if I get you:

1) OP's scenario is not possible. This is just common sense. Simple arithmetic, you cannot give back the non-existent part (additional penny).
2) But, nevertheless, this game can go on in perpetuity and indeed never touch this non-possible case of paying back everything, if the following conditions are met:

- Continual creation of additional debt which itself is possible only if growth (demand for loans) is continual.
- Loans are made with different maturities

?

[dinofelis]

@dinofelis

So if I get you:

1) OP's scenario is not possible. This is just common sense. Simple arithmetic, you cannot give back the non-existent part (additional penny).

2) But, nevertheless, this game can go on in perpetuity and indeed never touch this non-possible case of paying back everything, if the following conditions are met:

- Continual creation of additional debt which itself is possible only if growth (demand for loans) is continual.
- Loans are made with different maturities

?

No, there is no need, for creation of additional debt or growth or whatever.

Is this so difficult to understand ?

What is needed for a finite money supply that is nevertheless lend out with interest, to be sustainable, is simply ONE SINGLE CONDITION:
that the lender (who is entitled to receiving the interest) SPENDS at least the amount of interest on goods and services.

That's all.

If I print 100 pennies, I lend them to you, and I ask 101 pennies back next year, that's obviously not going to work if you have to pay this back IN ONE SINGLE GO.

But if I print 100 pennies, I lend them to you, and I ask 50 pennies back in 6 months from now, and I ask 51 pennies back in one year (totalling 101 pennies back), then this is very well possible on ONE SINGLE CONDITION:
that between 6 months and 1 year from now, I BUY something from you  worth (at least) 1 penny (the interest).

It goes like this:

a) I print 100 pennies, I have them now.

b) on the first of january, I give them to you.  Now I have 0, and you have 100 pennies.

c) on the first of july, you give me 50 pennies.  I now have 50 pennies, and you have 50 pennies.

d) on the 3rd october, I buy an apple from you, against a penny.  I now have 49 pennies, and you have 51 pennies.

e) on december 31st, you give me 51 pennies to liquidate your loan.  I now have 100 pennies again, and you have nothing.

f) if you want to, we can start over next year.


The important point in this game is that I GOT AN APPLE FOR NOTHING while we were shifting pennies.

This is why I'm in this game for a start: I want to get free apples.  So I WILL spend some of the pennies you give back to me.  Otherwise this doesn't serve me any purpose.  If I print money, I want to enjoy goods and services for it.  (I'm the state, right !....)

You see that at no point, I had to print an extra penny, we had to have growth or whatever.  At no point, you had to subscribe to another loan.  You only had to produce an apple, and give it to me for free (against a penny, which was the interest you had to pay me, which I got out of nothing because I printed the pennies for nothing).

[twiifm]

@dinofelis

So if I get you:

1) OP's scenario is not possible. This is just common sense. Simple arithmetic, you cannot give back the non-existent part (additional penny).

2) But, nevertheless, this game can go on in perpetuity and indeed never touch this non-possible case of paying back everything, if the following conditions are met:

- Continual creation of additional debt which itself is possible only if growth (demand for loans) is continual.
- Loans are made with different maturities

?

No, there is no need, for creation of additional debt or growth or whatever.

Is this so difficult to understand ?

What is needed for a finite money supply that is nevertheless lend out with interest, to be sustainable, is simply ONE SINGLE CONDITION:
that the lender (who is entitled to receiving the interest) SPENDS at least the amount of interest on goods and services.

That's all.

If I print 100 pennies, I lend them to you, and I ask 101 pennies back next year, that's obviously not going to work if you have to pay this back IN ONE SINGLE GO.

But if I print 100 pennies, I lend them to you, and I ask 50 pennies back in 6 months from now, and I ask 51 pennies back in one year (totalling 101 pennies back), then this is very well possible on ONE SINGLE CONDITION:
that between 6 months and 1 year from now, I BUY something from you  worth (at least) 1 penny (the interest).

It goes like this:

a) I print 100 pennies, I have them now.

b) on the first of january, I give them to you.  Now I have 0, and you have 100 pennies.

c) on the first of july, you give me 50 pennies.  I now have 50 pennies, and you have 50 pennies.

d) on the 3rd october, I buy an apple from you, against a penny.  I now have 49 pennies, and you have 51 pennies.

e) on december 31st, you give me 51 pennies to liquidate your loan.  I now have 100 pennies again, and you have nothing.

f) if you want to, we can start over next year.


The important point in this game is that I GOT AN APPLE FOR NOTHING while we were shifting pennies.

This is why I'm in this game for a start: I want to get free apples.  So I WILL spend some of the pennies you give back to me.  Otherwise this doesn't serve me any purpose.  If I print money, I want to enjoy goods and services for it.  (I'm the state, right !....)

You see that at no point, I had to print an extra penny, we had to have growth or whatever.  At no point, you had to subscribe to another loan.  You only had to produce an apple, and give it to me for free (against a penny, which was the interest you had to pay me, which I got out of nothing because I printed the pennies for nothing).

You didn't get an Apple for nothing.  It takes work to print pennies like it takes work to grow apples. 

[johnyj]

It goes like this:

a) I print 100 pennies, I have them now.

b) on the first of january, I give them to you.  Now I have 0, and you have 100 pennies.

c) on the first of july, you give me 50 pennies.  I now have 50 pennies, and you have 50 pennies.

d) on the 3rd october, I buy an apple from you, against a penny.  I now have 49 pennies, and you have 51 pennies.

e) on december 31st, you give me 51 pennies to liquidate your loan.  I now have 100 pennies again, and you have nothing.

f) if you want to, we can start over next year.

That's a good view, split the payment into smaller time frame will solve the liquidity problem, and increased money velocity will reduce the demand for amount of money. But that is another topic, I don't think OP's question is about dividing the loan into smaller batches

If you look at smallest time frame, for example overnight lending on interbank market, in 1 day 100 pennie might generate 0.01 interest, and since there is no lower time frame that you can go, and banks must get new money to pay the interest, that will drain the money supply and eventually lead to a liquidity problem that can only be solved by printing new money

Charts EUR LIBOR interest rates - maturity 1 day


In fact I don't think banks really spend a lot of their interest income, otherwise the economy has recovered long ago. For them it is all about getting more and more money, what they are interested is to expand their balance sheet as large as possible

[grendel25]

That's messed up man.  Someone in internet land thinks I owe them money.  I'm not going to be able to sleep now.  Thanks a lot!

[dinofelis]

You didn't get an Apple for nothing.  It takes work to print pennies like it takes work to grow apples. 

Printing a $100 bill takes much less resources than anything you can buy with $100, right

Only bitcoin takes about as much resources to "make" them than what you can buy with it, if the mining cost approaches the block reward.

[dinofelis]

That's a good view, split the payment into smaller time frame will solve the liquidity problem, and increased money velocity will reduce the demand for amount of money. But that is another topic, I don't think OP's question is about dividing the loan into smaller batches

No, this is an old, wrong, and recurring story that debt-based money with interest can only exist with infinite printing, because "you have to pay more back than has been printed/lend out".

If you look at smallest time frame, for example overnight lending on interbank market, in 1 day 100 pennie might generate 0.01 interest, and since there is no lower time frame that you can go, and banks must get new money to pay the interest, that will drain the money supply and eventually lead to a liquidity problem that can only be solved by printing new money

Of course not, because short-term lending is not the ONLY source of money. 
If it were the sole source of money, then you would be right, but it isn't.  If the same "printer" also lends out on longer terms, and spends, on these longer terms, more than the interest just due on these longer terms, the spendings of the money lender (the CB) can cover paying the short term interests too.

This kind of story confuses always the quantity of money, and the fluxes of money.  Loans, and interests, are FLUXES of money.  The velocity of money allows you to have a total flux of money which is larger than the amount of money. (it is the ratio).

In fact I don't think banks really spend a lot of their interest income, otherwise the economy has recovered long ago. For them it is all about getting more and more money, what they are interested is to expand their balance sheet as large as possible

They do spend it, for instance on salaries of their employees, and on dividends of their share holders ; on golden parachutes of their CEOs and on all the goods and services they buy for their functioning.

[johnyj]

In fact I don't think banks really spend a lot of their interest income, otherwise the economy has recovered long ago. For them it is all about getting more and more money, what they are interested is to expand their balance sheet as large as possible

They do spend it, for instance on salaries of their employees, and on dividends of their share holders ; on golden parachutes of their CEOs and on all the goods and services they buy for their functioning.

Just take a look at the FED's balance sheet, the interest income normally is re-invested to buy more bonds, means they lend out most of the interest income

From a banker's point of view, it is very unusual to spend large amount of income on goods and services, since the banking mind is to accumulate and grow the portfolio, most of their spending is on buying more debts and assets, operational cost is minimum comparing with the size of their loan. You can judge this from the fact that banks can always afford the most expensive salary and computer hardware (means they have much more income than those expenses)