Re: Aggregate debt

From: William F Hummel (wfhummel_at_comcast.net)
Date: 06/13/04 

Date: Sun, 13 Jun 2004 02:40:51 GMT

On 12 Jun 2004 16:18:39 -0700, mikevilkin@mail.com (Michael Vilkin)
wrote:

>This article is extremely important to understand the roots of
>instability of our economy.

<Big snip>

>First, our moneylender will earn more and more interest. Second,
>total amount of debt will grow bigger and bigger. It means that our
>moneylender will own a bigger and bigger part of our little country.
> If our moneylender stops making new loans, the game is over.
>Borrowers will not be able to pay their debt. More and more people
>will find themselves in bankruptcy.
> This example illustrates the most fundamental principle of our
>banking system. It's impossible to pay accumulated debt unless the
>banking system continuously makes new loans.
> We should note, however, that when our moneylender spends money that
>he earned as interest, that money is returned to the economy.
> The worst thing to happen is if and when aggregate debt is many times
>bigger than the amount of money in circulation, and bankers slow down
>creation of money.
>That is a recipe for economic depression.

There is nothing inherently unstable about money lending within the
private sector. Banks provide the liquidity that firms need to manage
their cash flows, including the means of payment in advance of revenue
from sales. In return banks earn a fee for service or earn interest
on loans, which amounts to the same thing. They do not share in the
profits, but do share in the loss if the firm proves not to be viable
or is poorly managed and unable to repay its loans.

Bank credit has a major effect on economic growth. When banks get
overly cautious and fail to provide sufficient liquidity to meet the
demand, that's when the economy suffers. Banks need to at least break
even to remain in business. But if that's all they could do, in the
aggregate borrowers would be paying the interest on their loans from
what the banks spend, not from new loans.

Banks do increase their lending for the simple reason that there is
continuing demand for credit expansion in a growing economy. It's
myopic to argue that banks must continue to lend more and more just to
enable borrowers to pay off their debts. Banks lend to grow their
capital and pay dividends to their shareholders, not just cover their
expenses.

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