No 5  The Growth Imperative

So almost all money is created as loans, large and small, made by banks. And, you might say, the rent is called interest.

The problem is, banks do not create the money to pay the rent. They create the credit money they lend, but not the interest, which must be paid.

So will some wizard explain, please. where the rent is expected to come from,

It cannot be from the cash supply created by government. There is less and less of that, and banks have long had a dream (nearly accomplished) of a “cashless society”. In a cashless society, every transaction will be made with credit/debit cards, checks, bank-to-bank transfers, and other credit-money devices, all bearing interest (and other charges). 

OK, OK, so get on with it. Tell us: where does the interest money come from?

First here’s a question: what would happen if every borrower in a country, or the whole world, paid off their loans? That sounds like a great revolutionary idea. But it’s really a trick question. They could not do it, no matter how much they wanted to - because there is not nearly enough money to do it. and what money there, is mostly in the hands of the lenders already.

We are mortgaged well into the future.

The future, however, is where conventional monetary theory finds the solution. To pay the rent on our borrowed money supply, we must in the future create more wealth. 

Okay. How do we create more wealth? Let’s first define wealth.

Real wealth is land and properties, railways and farm tractors, and oil and lumber, it is manufactured goods, it is food, it is automobiles and yachts. It is also the infrastructure and machinery necessary to build more properties, extract and refine more oil, harvest more lumber, manufacture more goods, grow more food.

Creating more of that wealth, it is said, will pay the rent on our borrowed money supply.

You hear about it all the time. To maintain/return to prosperity, we are told, we must “grow the economy”. All stripes of conventional economists report and comment extensively on the percentage of GDP* growth this month, or this quarter. They cheer when the index goes up, frown when it goes down. Growth, they say, growth is the magic bullet.  (*Gross Domestic Product)

Maybe they just do not want to face the alternative. Maybe they are unable to conceive of an alternative.

Think of interest as a tax on the whole economy levied not by governments but by the banking system - a tax which can only be paid with economic growth in the form of newly created items of wealth.

I call that the growth imperative. In the next post, I will try to give an example.

No 4  Where’s Waldo - that interest factor?

Most of our money, the credit money behind a loan or behind your debit/credit card - the money we all do our major business with - is not cash that you can hold in your hand. But it is a loan, a loan of bank credit, for which interest must be paid.

Interest is why the law of money operates, why money goes where money is. 

To explain with two examples: one my size, and then a giant size. 

If I, or you, have $100,000 and you lend it out at, say, 3% interest, you receive $3000 in interest payments at the end of the year. Correct? 

Your borrower still owes you the $!00,000, however. Thirty-three years at that rate and you have nearly doubled your money. (You have had 33 times $3000 to spend at your pleasure.) And your borrower still owes you the $100,000. Good play, Shakespeare! Whatever your borrower has had to do to acquire those interest payments, he/she has been working for you for thirty-three years!

So, financially, it is better to be a lender than a borrower. As that little transaction plays out, wealth has flowed from your borrower to you.

Interest is the simple mechanism by which money goes where money is. It is like icing on the cake.

Example 2. 

Let’s go big. Let’s take the money in the world economy, trillions and trillions of dollars, yen, rupees, pesos - most of it created by commercial banks. Now, in case you did not notice, let me point out a simple, highly significant fact. Those banks create the money supply and lend it to us. But they do not create the interest, our “rent” for the use of the money. So the question is, where does the rent/interest come from if it is not part of the money supply created by the banks?

Come back next week, and we’ll try to figure out where the interest payments must come from. That will be a big blog. Meanwhile, think about it in terms of “growth”. It may be hard to conceive, but my challenge is to put it in clear, understandable language.

No 3   Bank Loan: Endless Investment - for the Bank

Remember the law: Money goes where money is.

So, you have obtained some money from your financial institution - not cash, but credit money. What was the key question you asked before signing, (and signing, and signing) the papers to get the loan? Give yourself a complimentary check mark if you asked, "What's the rate of interest on this loan?"                     

This blog is about interest. We might call it rent. You can live in this $25,000 Loan Street dwelling as long as you pay the interest. Correct? But, no, you say, we have to pay back the principal of the loan.

No, no, and no!

Now this may be a little difficult to grasp, too. The bank does not want you to pay back the principal, ever. So long as you pay the rent, you can continue to keep the credit money. The only reason you would want to pay back the money is to get rid of the rent payments. The advantage of paying back the principal is all on your side.

From the bank’s point of view, when you pay back the loan, they have to write a profitable asset off their books. No loans, no profit. No profit - no dividends for shareholders. The expectation that you will pay off the principal is just window dressing. They created the credit in your account so that you would pay them a rental fee, for as long as you will. It makes simple sense to the lender. When you, the borrower, return the principal of the loan, you stop paying the rent for it. That is to your advantage, is it not?

In the next blog we will jump from the simple money-creation scene in the bank to the big picture of a world economy rooted in that simple scene.