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> Which in practice means there's literally never enough money in circulation to pay off the 'debt'. I always wondered why so many people were in so much debt,

• nine_zeros 4y ago
  I struggled for years as a non-economics person to understand how money is produced and if there is a fixed supply of money, how can interest ever be paid. Going down that rabbit hole is so insightful. We are all stuck in a debt based system. The only way to pay off debts is to print more money and create even more debt. That's all there is. There is no way to eliminate all the debt+interest. None.
  • Delk 4y ago
    By the time you get into any depth in that rabbit hole, the question really starts being about what money actually is. In the end, money is just some kind of an abstract quantity that we collectively believe and agree can be used for obtaining something directly useful or desirable later. Its value is based on that mutual understanding and belief. As long as the economy isn't a zero-sum game, thinking of money that way makes debt (and interest) actually kind of make sense without having to turn it solely into a vicious circle of more debt to pay off the interest. If the real economy keeps growing and those abstract resources borrowed from someone else (debt) can be used for investment that allows for creating added real value (or decreasing real costs), that added value can be used for offsetting the interest. The entire arrangement may still require "printing" more money and creating more debt but that's not necessarily the only thing that's happening. The real value that can be obtained with that increased amount of money in circulation also increases as long as the real economy also grows. It kind of does seem to make it a requirement that the real economy actually keeps growing, though. Or, at least that's how it looks to me as a layman.
    • neilwilson 4y ago
      Money is just a promise. It is a formalisation of "Bill, here's a pig, owe me one". Then Fred does some work for you and you say to Bill "don't owe me, owe Fred". Humans know who they owe and who owes them. We write it down when society gets too big to hold all the people we might owe in our collective heads.
  • neilwilson 4y ago
    That's completely untrue. For every debt there is a financial asset. It all sums to zero. Interest pays for itself. It is nothing more than the wages of bankers. Banks earn interest and pay it to bankers and shareholders, who spend it with firms for stuff who then pay it back to the banks. It's always worth remembering to differentiate stocks and flows. $ and $/month are as different as miles and miles per hour.
    • origin_path 4y ago
      Yes. Hard to over-emphasize how important this point is. For the longest time I also incorrectly understood the money system because I watched videos (DVDs back then) that claimed there wasn't enough money to pay back all the debt, and I believed them. The simplest way to understand why this isn't true is to consider the following thought experiment. 1. Alice has $100. This is the only money that exists in the world. She loans it to Bob at a rate of 10% interest. 2. Bob receives the money and immediately hands it back to Alice in order to purchase supplies to set up his new business. Alice now has $100 again, and Bob owes $110. Note: total debt > money supply. 3. Bob creates his business and finds a customer - Alice again, who lent money to Bob because she needed his business services. 4. Alice pays Bob $20 for a widget he made. 5. Bob now has $20, Alice has $80. 6. Bob uses that $20 to pay off part of his loan to Alice. He gives it right back to her, which clears both his interest payment and part of the principal. Alice now has $100 again, and Bob has nothing, but Bob now owes Alice only $90. 7. Go to Step 4 and repeat until Bob's debt is reduced to zero. In this scenario Bob will eventually pay off his debt even though there apparently isn't enough money to do so. The reason is the difference between stocks and flows, as neilwilson points out. Debt is cancelled by a flow of capital, but money circulates and as it moves it creates flows. The less money you have the faster it needs to move to cancel a debt in unit time.
      • marapuru 4y ago
        Very well explained. Thank you for this.
      • nine_zeros 4y ago
        I don't think that when people talk about money being debt, they are denying that the flow will not destroy the debt. The flow surely will destroy the loan. But when the first loan was made, $10 was given to Bob. But Alice also saw the same $10 as an asset. This created more money in the system, as in, suddenly both Bob and Alice were rich. And when the debt was finally paid off by Bob, Bob is poor again. The only way more money can come into the system, and Bob can have money again, is if another loan is made. So it follows that the only way to pay off existing debts is to create more debt because of debt is repaid with just "work", wealth is destroyed, leading to recession/depression.
• quickthrower2 4y ago
  All money is debt, apart from cash. You don't have $10 in the bank. Instead, they owe you $10. When you borrow money for your house, this is new money introduced into "circulation". Where did it come from? Well when you borrow $100k you get $100k in your checking account and $100k debt. They add up to zero, so no problem! You then send the $100k IOU from the bank to you to someone else, and now bam you are in debt. Hopefully you got a good asset in return!