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Strategies & Market Trends : The Epic American Credit and Bond Bubble Laboratory
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To: philv who wrote (36296)7/19/2005 11:52:14 AM
From: Umunhum  Read Replies (2) of 110194
 
<A loan produced by the fractional banking system, when paid back should not affect the money supply, because it is taken back out of circulation when it is paid back.>

This is an erroneous statement. If someone borrows 100K at 10% interest for one year, he will pay back 110K at the end of the year. The net result of this loan extracted 10K out of the money supply. Thus an economy using a fractional reserve banking system needs ever expanding debt otherwise a deflationary collapse will ensue.

This is why the next few years are going to be so interesting. An economy based on fractional reserve banking is going to meet a resource constrained world.
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