Saturday, October 9, 2010

It is NOT possible to get out of debt...EVER...How does it feel to be an indentured servent with no end?

   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)
View My Stats