There is a flaw with our current currency and money system. It is a system based on debt.
What’s wrong with debt? Debt doesn’t exist until it is created. Once it is created, interest must be paid on the debt. If you don’t have any more available money, you must create more debt to pay off the interest of the first debt, but now the new debt needs interest to be paid on it.
Fiat Currency: Fiat currency is a type of money that has no intrinsic value and is not backed by a physical commodity like gold or silver. Instead, its value is derived from the trust and confidence that people have in the issuing government. Examples of fiat currencies include the US dollar, the Euro, and the Japanese yen.
Borrowing and Interest: When money is borrowed, it typically comes with an obligation to pay interest. Interest is the cost of borrowing money and is expressed as a percentage of the amount borrowed.
Let’s walk through a simple example:
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Creating Money: Imagine that the entire economy consists of a single bank and a single borrower. The bank creates $2 out of thin air (fiat currency) and lends it to the borrower at an interest rate of 10%.
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Borrower Receives Money: The borrower now has $2 and uses it to buy goods or services.
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Repayment with Interest: The borrower needs to repay the loan with interest. With a 10% interest rate, the borrower must repay $2 (the principal amount) + $0.20 (10% of $2 in interest), totaling $2.20.
Here’s where it gets interesting:
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Where Does the Extra $0.20 Come From?: The bank only created $2, but the borrower owes $2.20. The extra $0.20 must come from somewhere. In a real-world economy, money circulates, and the borrower could potentially earn the extra $0.20 from other economic activities or transactions. However, in our simple example, there’s no extra money initially created to cover the interest. This illustrates one of the challenges of a debt-based monetary system, where the total debt can exceed the total money supply.
In the real world, banks create money through a process called fractional-reserve banking, where they only need to hold a fraction of deposits in reserve and can lend out the rest, effectively creating more money. The economy continually generates new money through lending and borrowing, but the challenge of repaying interest remains, driving economic activity and the need for continuous growth.
It’s a fascinating and complex system that underpins modern economies. Do you have any specific questions or need further clarification on any aspect of this?