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.