I think you are implying the companies and people borrow money for shits and giggles. The reality is that most companies borrow money only when the availability of extra capital would help them generate more revenues or capture addtional market share. So they would take into account the cost of servicing the debt and repaying the loan.
However, there are cases like IBM raing debt to buy back shares and boost share prices. I have no idea how that will work out for them.
>I think you are implying the companies and people borrow money for shits and giggles.
Nope. I was just using an example. It could have been $100k and only $50K was lent out. You sill would need $105k at the end of the year to satisfy all debts and have an equilibrium within the economy. Where is the extra $5K coming from? Magic??
> The reality is that most companies borrow money only when the availability of extra capital would help them generate more revenues or capture additional market share.
This doesn't change the fact that the demand back for money will exceed the actually money supply.
It is simple math really. The fact that they are using the cash to, hopefully, generate more revenues is irrelevant.
Private companies have no control over the the supply of money. This is a central banking problem.
>You sill would need $105k at the end of the year to satisfy all debts and have an equilibrium withing the economy. Where is the extra $5K coming from? Magic??
this makes very little sense. You are not lending the entire economy and then demanding more than the economy be paid back. You only lend a portion of the money supply so that a slightly larger portion is repaid.
Even if that were the case, isnt that what QE does?
>You are not lending the entire economy and then demanding more than the economy be paid back.
You are right that you are not lending the entire economy, I was just making the example as simple as possible. But, the second interest is being charged then the demand of money back exceeds the actual money supply. What companies and investors do to increase revue for 1 particular organization has no effect on the money supply. All companies are doing are vying to try and redistribute the money that already exists in their favor, they aren't creating money (if they are that is called counterfeiting and is illegal).
> Even if that were the case, isn't that what QE does?
Yes, QE increases the money supply. I am not saying that the money supply doesn't get increased (by the Federal Reserve), merely pointing out the fact that once you get on this treadmill it just goes faster and faster and faster, and there is no way to get off without a disaster (bubble).
Jax, I’m sorry but this is just fundamentally incorrect. The economy is not a zero sum game. Clearly there is annual economic growth, and that growth compounded over many years has lead to orders of magnitude growth in the size of the US/World economy.
Companies borrow money in order to invest in their own growth. Borrowing allows increased growth rate and in turn increased spending which has follow-on effects downstream (this is called the money multiple).
I very much enjoyed taking the intro Micro and Macroeconomics classes as part of my Econ degree. There are probably even great courses online for free now. I’d highly recommend it.
> But, the second interest is being charged then the demand of money back exceeds the actual money supply.
Not true, and I'm having a hard time finding your argument. You think if I loan you 1$ at 0% that's fine, but 1$ at 1% now exceeds the world's money supply? Even debt > total money supply is payable as long as interest payments are < payments being made.
> once you get on this treadmill it just goes faster and faster and faster, and there is no way to get off without a disaster (bubble).
Not strictly true. I have taken on debt with interest and paid that debt. Why is a disaster needed?
When a company pays back interest to a bank, the interest isn't magically removed from the money supply. So the bank also has $10k more profits, with which it pays its employees more, who can then buy more widgets from the company etc.
Yes, whether this is sustainable does depend on increased economic activity. Which is why it's so important to lend for (sustainable) productivity growth or you get a bubble which creates liquidity problems when it pops.
> You sill would need $105k at the end of the year to satisfy all debts and have an equilibrium within the economy. Where is the extra $5K coming from? Magic??
The extra $5K come from the same place the initial $100k came.
>What happens when there are new entrants to your economy?
Nothing.
>Are they all forced to split the 100k?
No, if the new entrant can provide value then someone that already has some that $100K can give it to them for a good or service.
>If not, where does new money come from? Magic?
Comes from the Federal Reserve, when they decided to increase the money supply. The problem is you are on a never ending treadmill that is designed to have bubbles and failures, not that new money has to sometimes be created.
> Comes from the Federal Reserve, when they decided to increase the money supply.
Wait, really? I was pretty convinced that the vast majority of new money is created by private banks, when they decide to loan out money that nobody has paid in. It's called fractional reserve banking.
Private lending actually destroys money supply, contrary to the "money multiplier effect". (Fed recently admitted this was bullshit) that has been taught for a long time. Government/public lending creates money supply
True; but the revenue / additional market share is never a sure thing. The company can't make a contract with the universe. The interest payments, however, are a contractual obligation.
Think of a restaurant that needs a new fryer because the one they had broke down. Wihout that new fryer , they will lose their business and livelihood. Debt allows them to make a risk calculation : they will take on an additonal overhead of deb servicing and in return they will keep their business.
Now think of a dentist who wants to open her own practice. Her savings may not cover the cost of buying equipment that is needed. An asset backed loan may be a better opion for her. Of course, there is a risk involved -- she may not generate enough revenues to cover the cost of servicing the debt or her other liabilities. Typically she would consult with her accountant before starting on this journey.
I would argue thay contractual obligations and regularity and severity with which they are enforced are a sobering influence on businesses. There are no contacts with universe needed for debt -- but there is an element of risk that needs to be accounted for.
The interest payment is partially because of the risk in the first place. Collateral if any is the only guarantee to the lender. They are taking the risk of losing it all or using a complicated yet sensible metainsurance plan at the cost of direct profit.
If hypothetically we could see the future perfectly the financial market would start to look downright weird as predestined to fail loans would always be rejected but approved loans would go low margin from competition.
However, there are cases like IBM raing debt to buy back shares and boost share prices. I have no idea how that will work out for them.