In Line or In Leaps and Bounds?

Often a store has to borrow money from a bank to have the ability to buy merchandise. They then have to pay interest for the loan.  The seller then recoups the interest by adding to the price of the items sold. Therefore for every purchase, we are indirectly paying interest to the bank. The bank is increasing its assets by collecting interest and also by creating debt.  The bank does not necessarily loan funds they have at the bank.  They may only have to have 10% of what they lend.

Well then, where does the money come from that a seller has in their account to use to purchase merchandise? The bank writes the amount needed on the computer within the borrowers account.  The money did not exist until the bank wrote that number as an asset for themselves from which they loaned the borrower.  If a bank has this ability to create assets without tendering something of value in return, it seems like there may be a problem in the future.

Since the assets created by the bank are receiving interest, they are not only providing funds beyond their means but earning money on assets they don’t really own.

The compound interest the banks charge in addition to any fees is being paid by the consumer in the prices paid for merchandise.  Subsequently, the bank is continually earning money paid by the borrower and the consumer.  At the same time a bank is earning these compounded amounts, the consumer is usually earning income on an inflation basis, meaning that their actual income is not different than it was in the past although it may have increased from $40,000 a year to $50,000 a year.  The consumer is earning money in a linear fashion, small increments over time.  In contrast a lending institution is earning more and more income each year due to the compounding nature of interest and fees being charged on larger amounts of money either in the beginning of a loan or earning interest on a growing debt.  The bank’s earnings have grown exponentially.

The consumer is not only paying interest on their own loans but interest within the price charged on items bought.

Even though the bank has not proffered their own cash to provide a loan but just created the money on the computer, it has the right to take the actual property away from the mortgager if they do not make their loan payments. As you can see, the bank assets can grow at a much faster rate (exponential) than the assets of someone who earns an income that moves along with inflation (linear).

This linear vs. exponential growth is bound to create economic strife.  By being knowledgeable about our money system, perhaps we can make strides toward a healthy economy.

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