I need your thoughts on something and extra credit will be awarded on the next test for a reasonable explanation. Currently, the way our banking/financial system is set up, when the Federal Reserve prints a dollar that dollar goes to the banking system where it gets loaned out to a person, business or government to buy something in the economy (a house, car, equipment, build a factory, a nuclear bomb, etc). When those entities borrow money they have to pay it back with interest to the bank. The interest rate is the cost, or price paid, for money borrowed. Got that?
Keeping this in mind, rewind the process wayyyy back to the FIRST day it was invented. Lets start with the very first dollar. A Central bank (i.e. The Federal Reserve) prints $1.00, and ONLY $1.00 and it flows to a bank. The bank then loans this dollar to me at a 10% interest rate for a period of one year. Remember, this is the first and only dollar in circulation.
In exactly one year I return to the bank with the one dollar (no one had heard of this thing called a dollar and would not take it for in exchange for any good or service) to pay back my debt, but I have a problem! I owe an additional $.10 in interest BUT there is no money to pay it, because there is only one dollar in circulation--- the one I borrowed! I CAN'T repay my loan. Yikkkes! I am going to be thrown in debtors prison!
I realize this is a simplistic example, or is it??? What is the difference, whether it is $1.00 or $5 Trillion dollars, IF the money gets into circulation the EXACT same way for each dollar? If all money is borrowed at the point of origin and an interest rate is charged for the use of that money, is it not true there will NEVER be enough money in circulation to pay it all back...ever? Is this a problem or am I just seeing ghosts? Where am I going wrong? Your thoughts are welcome.
(HT: The New Arthurian Economics)
Oh, I missed this post. Thanks for the link.
ReplyDeleteG. Thomas Woodward presents and unsatisfactorily refutes a similar argument here.
Woodward says (for example) that interest paid to commercial banks is "spent into existence" as interest on our savings. Maybe so, but then it doesn't circulate as interest-free money. It gets lent out at interest, again.....
I cannot handle the convoluted math necessary to answer the question you ask. However, I am certain that the ratio of savings to M1 money (that is, the ratio between the two components of M2 money) has an influence for good or ill on general economic conditions. (See mine of June 20th.)
As my old graph shows, things got similarly worse before, until we had the Great Depression. But then things got better even though we continued to use the same banking/financial system. So obviously it is possible to resolve the problem and keep the financial system we have in place. Maybe that will put your mind at ease...
Thanks again,
Art
Art...Thanks for that link. I swear I have NEVER read that passage and I made up my little story as a result of reading your stuff and pondering it. I think in very simple terms! :) Perhaps I am still missing the point (would not surprise me) and I have to go back and review your writings...I want to make sure I fully understand it before making any judgements...
ReplyDeleteGene, I only found that Woodward link myself, like 2 days ago. Not yet read the whole thing; but I was disappointed that in the relevant section he was careful not to identify the people or theories he was disputing. What am I doing up at 2:30 in the morning???
ReplyDeleteArt