My thought experiment: I borrow 100 dollars from the bank, and I pay the bank back with freshly issued government money that I earned from working for the government. The debt at payoff, due to interest, is 110 dollars. But what is money created by the government? It is debt. Just look at any US bill. Used to be, they were called "certificates" because they were redeemable for gold. Now, they are called "notes" because they are really debt. Look at today's US currency and you will see the description: Federal Reserve Note. A note, is a promise to pay, an IOU. So, I pay off the loan, but if you think of it, the debt never really goes away. It is merely transferred. I paid that loan off with a newly created debt from the US Gov't. The interest still accumulates. The only thing that changed was the ownership of the debt. Whereas I borrowed 100, and owed a total of 110 dollars, now the federal government, by creating 110 dollars, now owes 110 plus more interest. It compounds. It has to. If it doesn't the system crashes. QE's purpose is not to stimulate the economy. That's a lie. It's to keep the economic debt based monetary system from imploding. There is a huge deflationary force countered by the Fed's QE and Fed Gov'ts stimulus spending.
he does not. he goes BK and bank does a write-down. to quote you "That is exactly what is happening with mortgage foreclosures, credit card defaults etc."
The $10 in interest comes from the creation of additional debt. It's a Ponzi System. And how do such systems end? Obviously they do not last forever.
and of course we can have a 3 agent economy by adding the government. the government can issue more money and hand it to the borrower (e.g. HARP/HAMP/etc) to be able to pay-off his consumer debts or bad investment decisions. the government can also give something to the bank (e.g. TARP). so now all are happy and have the confidence again to fuck it up anew. note that nobody paid for their mistakes (neither the bank nor the borrower) at the present time (moral hazard). instead sometimes in the future the government will have to default or tax everybody to death. HA you can easily come up with these simple analogies to what is currently happening.... but it is amazing how many people do not understand the money - in 21st century
I disagree. All money is created thru balance sheets. For every "Asset" created, there is the creation of a "liability." Basic double entry book-keeping. That's the system we have. (Coins are different)
The post-keynesian, economist Steve Keen of Australia's area of research is specifically these type of situations. http://www.debtdeflation.com/blogs/ Watch - Keen Talk: Why Credit Money Crashes
He has also discussed the endogenous theory of money creation. That is, banks do not wait for reserves to lend. They lend first, and find reserves later. Think of it this way. You go to the bank to get a loan. Does the clueless loan officer have any idea what the bank's balance sheet looks like? What a reserve ratio is? Does he even know what a balance sheet is? He just knows he's getting a commission.