Debt, interest and velocity of money

Discussion in 'Economics' started by paperboy, Oct 12, 2010.

  1. I have a question for the experts here.
    I watched Chris Martenson Crash course. A loan with interest can only be paid with a new loan and it creates an exponential function that skyrockets and becomes a threat to the system sooner or later.

    But is this true? Is it a necessary fact or can not just the velocity of money increase instead? Maybe there is a natural limit in velocity as well!?
  2. That's silly... Doesn't this assume you take out a loan to stuff the money under your mattress? I've always thought Chris Martenson is a coconut, personally.
  3. Well someone has to earn the money that is to be be paid for the interest..or not. :)
    But if not then we would not be in this trouble. So i assume velocity of money can´t be controlled and especially not when debt is already to high so that banks won´t lend.
  4. Please read more on Fractional Reserve Lending & the need for a lender of last resource.

    Paying off a loan decreases money outstanding balances therefore decreasing the money supply. If substantial enough (like a systemic bubble) it will threaten the whole economy.
  5. Yes, if I have borrowed this money I have to make sure that it constitutes a productive investment, i.e. my return on this borrowed capital exceeds my interest cost. If that's not the case, I go bankrupt. I don't see any fundamental contradiction in any of this.
  6. Try this thought experiment:

    A system with one bank and one customer. The bank has $10 on deposit (don't worry about where it came from). It makes a loan of $100 to the customer at 10% by creating it out of thin air. After a year the customer owes $110 back to the bank. Where does the $10 in interest come from?
  7. dhpar


    if the guy did the productive investment he had to sell it to somebody, i.e. to the bank - and for at least $110 to cover his costs/principal/profit. the loan therefore gets repaid and everybody is happy (and the gdp is up by 10%; and all loans repaid; and martenson f#cked).
  8. There is only $110 in the system, and the bank is keeping its $10 reserve.
  9. dhpar


    read my post again - this was a thought experiment for you...

    if the guy borrowed for consumption (difficult when he is only alone in the economy) he would go BK - the loan would disappear as well with the bank taking a loss...the principal money would end up either with people who sold him the consumption goods or with the bank via repossession...
  10. That is exactly what is happening with mortgage foreclosures, credit card defaults etc.

    You still haven't explained where the $10 interest would come from. Let's say the guy just likes to have a $100 bill in his wallet, so he doesn't spend it or invest it. After a year he has to give the bank the $100 plus the interest.
    #10     Oct 12, 2010