I'm hoping to start a discussion on fractional reserve banking and the economic effect of increasing money supply through debt creation. This is a topic that has recently become of interest to me and I was hoping to find some people with a bit more knowledge on the subject than I have. Website, video, documentary, book, and article recommendations would be much appreciated.
I believe I understand the basics of modern fractional reserve banking in which banks create money by extending loans to people for houses, business, investments, etc. In New Zealand 98% of the money supply is created in this way. The loans that the banks make have interest attached which means over time more money must be paid back than was initially borrowed. In order to pay back the extra money you have to get someone else's debt-money which they also need to pay back, plus interest. What I'm having trouble understanding is how this system is supposed to work in theory.
If person B needs to go into debt so that person A can pay back their debt, does the system ever become stable? I just don't get it.
I believe I understand the basics of modern fractional reserve banking in which banks create money by extending loans to people for houses, business, investments, etc. In New Zealand 98% of the money supply is created in this way. The loans that the banks make have interest attached which means over time more money must be paid back than was initially borrowed. In order to pay back the extra money you have to get someone else's debt-money which they also need to pay back, plus interest. What I'm having trouble understanding is how this system is supposed to work in theory.
If person B needs to go into debt so that person A can pay back their debt, does the system ever become stable? I just don't get it.