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.
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.
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.
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.
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.
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?
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.
Granted, a certain portion of the money supply was not originally debt. But is that still true today? Imagine a scenario where the total money supply is 10 cents, none of which is debt. Then, the country goes off the gold standard and begins “printing” new money under the current system (i.e. all new issuances of money are debt). Let’s say that the Fed “prints” $10 so that the total money supply is now $10.10. And, further, let’s say that the $10 of printed money accrues 2% interest per year, or 20 cents. It seems clear that under this hypothetical scenario, the 10 cents of non-debt currency would quickly get swallowed up by the interest, and, going forward, all dollars in the system would be accruing interest. If no new money were “printed,” there would not be enough money in the system to pay off the $10.
Now, I don’t know what the total money supply was in the 30s when we went off the gold standard, but it seems to me that that would be the point in time from which all new “printed” money would have been accruing interest. I haven’t investigated this, but given the huge increase in the money supply since then, isn’t there a significant chance that the non-interest bearing portion of our money supply was long ago overtaken by the amount of money owed in interest? I read that last year alone the federal government had to pay well over $400 billion in interest payments. If the link below is accurate, the $400 billion in interest paid last year alone dwarfs the total money supply in the system during the 30s.
Perhaps my last post was confusing. Indeed, you are correct that the current amount of debt and annual interest owed dwarfs the latter-day interest-free money. My main point is that this does not represent an insurmountable paradox, where new credit is required to pay down old debt.
The best example I can give of this example is simply that interest payments earned by banks re-enters the economy as debt free money, rather than new loans. If the bank creates $100 in the form of a new loan, and $5 gets paid back in the first year (obviously possible), most of that is not going to be re-lent. Bank employees and owners will likely spend the money. This allows it to be earned by debt-holders in the economy and used to pay down more of the debt. Over time the debt is eliminated, without the need for any new credit to be issued…or money be created.
As said before, there are only two cases the paradox actually exists. One, all debts (including interest) must be repaid in one giant payment. Or, two, the bank refuses to allow money used to repay loans to re-enter the economy in any form other than new loans. Loaning it to others means they are not spending it. If done to a logical extreme, this means that no one in the banking industry eats food. Do you really believe bankers don’t eat? It essentially means that bankers and bank employees work for free, in terms of real goods. This is obviously false as well.
If money is lent into existence at interest, then yes, it is obviously unrepayable in the long run.
The fact of the matter is that no money is “lent into existence” in the United States. The Federal Reserve creates money by buying government and private debt with interest free money or by paying interest on bank reserves with newly created money. Private banks do not loan money into existence, instead, they take money from short-term lenders and lend it to long-term borrowers, which presents its own problems.