More than 90% of the money we use does not come from the central banks, i.e. does not exist as cash and is not backed by the government directly. Instead it is book money. Here is how this works:
When a bank lends you $1000 at 10% interest for a year, they don’t physically have that money. Instead, they write into your account: We owe you $1000. They also write into their account: Skaterboy42069 owes us $1100.
See how the $1000 you have in your account just appeared out of nowhere? They are of course balanced by the bank’s $1000, but there is an extra $100 (the interest) that was created permanently.
It’s up to you to come up with a way of making those extra $100 in one year. Now apply that to the entire monetary system and the whole economy, and you see how the only way is up.
As an aside: This is also precisely the reason why we need ~2% GDP growth annually, and any standstill or even shrinking is an absolute disaster. Debts don’t get repaid and are defaulted on, and money literally evaporates.
Ask yourself this: imagine GDP drops 10% over night and what that would do to the economy. Why would that be such a disaster if it would simply send us back to about 2018 GDP-wise (when we all lived in caves)?
More than 90% of the money we use does not come from the central banks, i.e. does not exist as cash and is not backed by the government directly. Instead it is book money. Here is how this works:
When a bank lends you $1000 at 10% interest for a year, they don’t physically have that money. Instead, they write into your account: We owe you $1000. They also write into their account: Skaterboy42069 owes us $1100.
See how the $1000 you have in your account just appeared out of nowhere? They are of course balanced by the bank’s $1000, but there is an extra $100 (the interest) that was created permanently. It’s up to you to come up with a way of making those extra $100 in one year. Now apply that to the entire monetary system and the whole economy, and you see how the only way is up.
As an aside: This is also precisely the reason why we need ~2% GDP growth annually, and any standstill or even shrinking is an absolute disaster. Debts don’t get repaid and are defaulted on, and money literally evaporates. Ask yourself this: imagine GDP drops 10% over night and what that would do to the economy. Why would that be such a disaster if it would simply send us back to about 2018 GDP-wise (when we all lived in caves)?