The problem of Money as Debt

Paul Grignon, in his video Money as Debt (see his channel), claimed that the lending of money by commercial banks by definition results in indefinite growth of private debt. People cannot repay the interest rates charged by the banks, either low or high. He proposes to ban the interests asked by commercial banks. I will show here that his logic is illogical.

The reason invoked behind the impossibility to repay the interest is because the interest itself is not lent to the clients. The bank creates only the capital, and this portion is the only one that can be repaid. If a bank gives me $100, asking me $110, as a result of the interest rates, I can’t pay it back, and I must ask another credit, in order to pay the interests of the first loan. That is, among the $100 of the second credit, I use $10 to pay the interests of the first credit, lefting $90 in my pocket. But now, I am left with $20 of debts for my second credit.

The problem Grignon ignores is that bank is an enterprise, and therefore has salaries. How are they paid for their daily work ? Simply, they earn their pay with the interest rates, and use the money to buy products, shelter costs, foods, and other services. In a sense, the interests return to the persons who ask bank credits. Thanks to this process, the interest can be payed back. Another aspect of the interests the followers of Grignon ignore is that a portion of the interests earned by banks serves to remunerate the bank deposit. The average individuals have no reason to put their money into the bank if that money does not earn any gains at all. That is why the banks propose interest-earning deposits.

A more complicated scenario goes like this : person X lends $100 (with $10 of total interests) to person Y, for 10 months duration, and thus Y is asked to pay $10 of capital + $1 of interest per month. At the end of the first month, Y has only $89 due to the first payment. Suppose X spends the $1 by buying products from Y, this will increase Y income to $90. The second month, Y pays $11 again, remaining 79 in the pocket. But if we continue in this logic, that means the last month (10th), Y must repay $11 even though (s)he has only $10. The problem is easily resolved by the banks willingness to grant additional time for Y to repay the remaining debts. The bank has no reason to doubt that Y is unable to repay the interests because during all this time, Y has always returned the money back, fully and in time. If the bank grants a delay of one month for the remaining 1 dollar, the loan will be repaid in full. Another way to circumvent this problem is by the bank’s requirement that the clients must repay the interest ($10) first, and the capital ($100) after. That is to say, the $10 of interests have already been paid after the first month.

Some people can even go further in this nonsense by saying that individuals usually save money, and given this, the interests cannot be repaid. But, as the ABCT makes clear, savings is a way of sacrificing present consumption for future consumption. Such action allows the bank to expand the credits by lowering the interest rates, and investors and entrepreneurs usually respond by making more long-term investments. The (expected) increased amounts of goods to be produced can be and will be consumed later by the individuals who have decided to wait and economize their money. The same argumentation applies to hoarding, which is normally extremely rare given that banks usually pay the clients for investing (i.e., putting) their money in the banks. When people make an act of hoarding, it is obviously because they expect to use that money later, but that at this very moment, they feel the need to protect themselves to unpredicted possible bad events.

Some others can even persist in saying that banks may not necessarily spend the money of the interests immediately, and decide to wait until. But unless the salaries of the banks have reasons to refrain from daily spendings that other people do not have, the argument is just ridiculous.

Some could argue that the money is captured in the sphere of finance, and the money is not available anymore for the interests to be paid. In fact, when someone buys an asset, it is because (s)he expects the price will go up, or at least not to go down, and when someone sells an asset, it is because (s)he expects the price to go down, ot at least not to go up. Thus, a selling of assets is proceeding, the seller earns the money. There are two reasons why this persons does this; either because (s)he wants to consume or wants to change the form of his/her savings. There is no way that the money will be imprisoned in the sphere of finance. Taking every possible scenarios, anyway, when people decide to refrain from spending, the price of goods will necessarily go down, and they will react by saving less, spending more, in order to take advantage of this opportunity. If that theory is correct, it can only mean that people will always continue to refrain from consumption by accumulating savings, despite goods becoming more attractive. As stated above, savings will be used at some point in time.

Some people may also say that in a world of open economies, the money in any given country that will flee and leave the country due to individuals buying products from other countries (i.e., imports) cannot come back, and thus interests cannot be paid. Here again, this ignores the law of supply and demand applies to open economies. When money leaves the country, it means there is less money for the same amount of goods and, as a result, the price of goods will fall due to people in this country (natives) who decided to buy less of these. But if the price of those goods diminishes, either the natives or strangers will sooner or later find them attractive in terms of price/quality ratio.

In a subsequent video, Money as Debt II Promises Unleashed, Paul Grignon responds to the criticism and argues that in a world where speculative finance prevails, the interests cannot be repaid. Specifically, when a bank grants a credit to a non-bank institution (i.e., investment banks) that will also lend that money to someone else, this person cannot repay the cumulated interests of the two lending banks. Specifically it says the following : “Picture what happens if someone else, such as you or I or an institutional non-bank lender obtains this dollar and then lends it out at interest? Well… now that same dollar is simultaneously owed to two lenders and has two simultaneous interest charges attached to it. In addition, if this dollar is loaned, repaid and re-loaned by the secondary lender, it is not available to pay off the principal of the loan that created it, except as another loan.” (Money as Debt II, paper version, p. 17). Grignon argues the same in his revised (paper) version of Money as Debt where he stated explicitly that “While much IS spent as interest to depositors, operating expenses and dividends, some of the interest income becomes new loans at interest, or investments, creating additional demand for money and an ultimate shortage of debt-free money available for borrowers to earn.” (p. 15).

What Grignon may have in mind is that the persons lending money are always the same and the persons borrowing money are always the same. After all, one would ask, why these people will consume the interests earned by lending money whereas they can accumulate even more money by making additional loans ? But this ignores one elementary principle. People borrow money because they want to spend and invest money now and repay the money later. This implies they will economize all of their money for the future repayments. There is no offers of loan without demand for loan. Sooner or later, these persons who lend mostly the money will have to consume as well.

To better answer the question however, imagine person X grants dollars to Y. When Y uses the money for productive investment, each month (s)he pay the interests, they are recycled through the spending of employees of the banks and individuals who break their interest-bearing bank accounts in their act of spending. But say that person X decides to lend a portion of the interest that has been earned to another person, Z. What happens is that when Z buys products from Y, the interest of the credit granted to Y will be repaid. Concerning the credit granted to Z, the interest can be repaid when X spends the interests (s)he earn to buy products from Z. If (s)he prefers to lend money, once again, the same process we have described will just continue. There is no increasing debt.

The counter-argument is thus largely invalid. To the extent that each dollar of interest will be repaid simply because the banks reinject the interests either through salaries for employees or interest-earning deposits for savers, it does not matter how many times a same dollar is lent.

If the theory advanced by Grignon is correct, that interest payments cause infinite debt growth, then, because this practice was common for centuries, if not thousands of years, all the economies in the world practicing interest payments would have already collapsed, and entered into a permanent era of chaos, long ago now.

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