I’m teaching exponential relationships to my class tomorrow morning and one of the applications of this understanding is obviously debt.

We just got finished discussing linear relationships last week, and it got me thinking: why is the accumulation of interest not linear? You’ve only borrowed the principal, so in my mind, if you’re going to have interest, it would be proportional to the amount of the principal you haven’t paid off yet.

Thinking like a lib (or maybe not since I can’t understand the way it actually works), the lender would be unable to access a certain amount of money that they previously did have access to, and thus would be privy to a proportion of that amount. As you pay on the principal, that amount should go down because they have more access to the money they previously had access to.

What purpose does your interest creating more interest serve other than simply to siphon money from the ones that need to borrow and those that have enough to lend?

Obviously that is the reason, but I’m just curious if there’s an actual reason they have, or if they really are just that blatant.

  • davelEnglish
    4·
    3 months ago

    There is a set minimum they must keep.

    This is fractional reserve banking / money multiplier, and turns out to be a myth: https://www.youtube.com/watch?v=cDNSNX48Kmo

    in some ways operate as issuers of the states money.

    I’ve never heard of private banks doing this; they certainly don’t in the US. That’s what central (i.e. state) banks or, in the case of the US, the Treasury do.

    In a way the private banks are issuers of state money, but for each “positive” dollar of credit they create out of thin air they also create a “negative” dollar of debt. So in another way of looking at it, they cancel each other out.

    The most succinct MMT explainer I’ve found is JT’s: Why The Government Has Infinite Money. The show notes on further resources are excellent.

    • knfrmityEnglish
      4·
      3 months ago

      I honestly don’t think that MMT holds up to scrutiny. It seems like a charming theory, but it only works when applied to the US dollar. If any other country decided to simply print money to fund their government budget, they’d quickly run into hyperinflation. The US gets away with it (for now) due to their extraordinary privilege of having the hegemonic global reserve currency.

      As I have understood it, private banks are also involved in money creation, as the interest they charge on loans is considered “new money.” Then again, not even liberal academics can fully explain how money is created (within their ideological boundaries of course). They have some ideas, but nobody commits to defining it.

      • davel
        2·
        3 months ago

        It seems like a charming theory, but it only works when applied to the US dollar. If any other country decided to simply print money to fund their government budget, they’d quickly run into hyperinflation.

        This is not true at all. Hyperinflation is very rare and only happens under specific, known conditions. It’s quite avoidable, except if you’re a small country that the US is trying to regime change, in which case all bets are off. PEGS Institute: What Caused Hyperinflation In Weimar, Zimbabwe And Venezuela?

        It’s not like the US is the sole country with fiat monetary sovereignty today; there are quite a few.

        Here’s a copypasta from a comment of mine on a post about China’s economy:

        [George Soros] later admitted in 2001, that the local monetary authorities did a good job in preventing the collapse of the Hong Kong market. The precise way that China avoided this speculatory attack was through its strict state-set capital controls and its state-owned financial system

        To use the metric of return on assets (ROA) and liquidity ratios to measure the effectiveness of China’s state-owned banking system is ultimately meaningless. This is because Chinese banks take on the means primarily resembling development banks. In turn, this system has an overall positive impact in the long term, despite not having the myopic short termism of Western commercial profit-oriented banks. This is due to the ability of long-term funding at low interest rates being key for the sake of large-scale infrastructure construction, which in turn is vital for long term economic development.

        The reason why China’s economy is able to be stable and avoid the damages of the Great Financial Crisis of 2008 and the COVID Crisis of 2020 was precisely because it was able to draw up large amounts of State investment to offset the decline in private investment.

        MMT isn’t a politics and isn’t prescriptive. It’s simply descriptive of fiat monetary sovereignty. Many liberal proponents and detractors alike seem to want to load up MMT with all sorts of things that it isn’t. It certainly isn’t going to solve all of capitalism’s internal contradictions under a dictatorship of the bourgeoisie. But China seems to be showcasing its veracity.

        As I have understood it, private banks are also involved in money creation, as the interest they charge on loans is considered “new money.”

        That doesn’t make any sense. The interest I owe on my loan is the opposite of money: it’s a hole I’m obligated to fill with money. It means I have to acquire money from somewhere, somehow to pay that interest or else default on my loan. In this sense, private banks are a drain on the economy, especially since almost all of the loans are for speculation rather than investment in industrial capacity. The neoliberal financialization of the US and other countries is creating debt deflation. No one can spend money because we’re laden with debt, interest charges, and late fees; and no one can get decent jobs because no one is spending money. That’s what Michael Hudson’s Killing the Host is about (PDF).

    • MeowZedong
      3·
      3 months ago

      On fractional reserve banking, thank you, I wasn’t aware.

      And on MMT, again, thank you for providing more sources. I didn’t want to type up a long post on this, so my comment was VERY generalized.

      JT’s video was good, but there are plenty of more in-depth sources around. I believe it was either RevLeft or Guerilla History that had some of the academics who came up with this theory on their show sometime in the last year as well, which are a good listen.