Asset Based Loan

I would like to know a few things:

1) Is most paper money in our economy based on debt (from the fractional reserve system)

2) When debt is paid off, does the money suppy contract, and how and why does this happen

3) Why is fractional reserve lending inflationary, since the same physical quantity of money is continually being redistributed, isnt it just the same as the inital saver spending the money but each time the spend becomes smaller due to reserve requirements. The broader money supply surely is just the value of the assets, or future assets backed against the loan. So why is it inflationary? And also if it is, dosent the additional money reduce purchasing power and thus the loan fails to match new prices requiring more loans.

4) Is the broader money supply created by fractional reserve banking simply the value of current or future assets

5) Is it true that if a borrower borrows on the fractional reserve system and creates the asset that is equivalent to the loan, then this represents economic growth as this new asset has added new value to society- in that society is willing to trade something for this new asset.

6 If the loan is paid off in full is the initial inflationary effect mitigated.

7) If the interest earned on bank loans is not redistributed in the economy does the banks earn a greater proportion of a nations wealth

Is our need for exponential economic growth (2% per year) needed to mitigate the exponential growth in the money supply

9) What happens when debts cannot be repaid, is the money supply permanently inflated?

1) yes

2) yes. It happens by design. When bank issues a loan, it creates money: borrower has money added to his checking account, while all of bank depositors have same checking accounts as before. When you repay the loan, money disappears.

3) Fractional reserve limits creation of money through lending, precisely to ensure that money does not grow faster than output of goods.

4) yes

5) yes

6) yes

7) yes. it is unlikely though, given that banks compete with each other both for borrowers and depositors, forcing banks to minimize the share of interest that they keep.

no, it is needed to mitigate exponential growth of population.

9) Doubts about ability to repay the debt lead to increased interest rates demanded from borrower, or if things get really bad, default. Both of which reduce lending returning things to equilibrium.

You are right in thinking that fiat money system is based entirely on trust, and will collapse if the trust disappears. But that is property of the economy in general.

When you chose to specialize on something (like writing opinion pieces on economics), you trust somebody else to make food and clothes for you, and trust yet another somebody to give you money to buy food and closes in exchange for your writing. All that exchange system could collapse, and we would be reduced to growing our own food and knitting our own clothing.

Category: Asset Based Loan by admin