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.
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.
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 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).
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.
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?
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.
The extra $5K come from the same place the initial $100k came.
I mean have never even thought about it?
>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.
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.
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.
edit : typos
Debt restructuring and bankruptcy are things, too. A contractual obligation isn't immutable or inviolable.
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.
If the economy is growing, it is true that continual money creation is required to stop deflation, but a lot of people don’t realise to what extent because it isn’t commonly known that not only can the Government create money, but that in fact all bank lending does and is expansionary [1].
1. https://www.bankofengland.co.uk/-/media/boe/files/quarterly-...
- A loans $100K to B at 10%.
- B buys raw materials from A for $100K and creates products X and Y.
- A buys product X from B for $60K.
- B returns $60K to A.
- A buys product Y from B for $60K.
- B returns $50K to B.
A ends up with $90K and product X and Y. B ends up with $10K. At no step was money created out of thin air. Total supply still $100K.
You could simplify it some more by allowing B to pay back A using product X and Y instead of moving $60K around back and forth.
- A loans $100K to both B and C at 10%.
- B makes X and Y, C make Q and R.
- B and C can produce and sell X,Y,Q, and R to one another to their mutual hearts content, creating a lot of value, but in the end A can only be satisfied by $220K. Either B or C is going to end up short.
Why would A accept X or Y when it's detrimental to their business interests to do so?
Lets assume the product that B makes has a value which allows a 50% gross margin
A loans $100K cash to B at 10% markup (total value of system= 100K)
B buys raw material from A for 100K cash (total value of system now 200K as a magic 100K of raw materials were just added)
B creates product X and Y, now worth 200K (system is now at 300K)
A buys 60K of product X with cash (doesnt change value of system)
A cannot buy 60K of product Y with cash, though the total value of the system has increased.
There isnt enough cash in the system to settle all debts, but the total value of the system has increased. Cash would need to be printed to cover debts.
Fiat currency to some extent is balanced against the total GDP of the US.
If you do indeed lend 100k$ from a central bank and they "print" the money then the money supply increases by 100k$ for the duration of the loan. When you pay it back the money vanishes into nothingness again. Interest payments go to the central bank which makes a profit, governments spend the income and the money starts circulating within the economy again. [1]
[1] https://www.ecb.europa.eu/explainers/tell-me-more/html/ecb_p...
Spending money doesn't destroy it, it can be spent more than once in a year; even with no additional money, you just need higher velocity of money for their to be more money spent in one year than another. The extra $10K doesn't need to come from anywhere, the same way the base $100K (which was already spent the first year and thus "consumed" if you mistakenly assume money is single-use) doesn't.
That's the supply side consideration of the price of debt, but interest, like all prices, is determined by intersection of supply and demand, not supply alone.
Demand side consideration is “what new income in the future does taking on this debt now enable?”
It brings to mind a reducto ad absurdum of fixed currency amounts with massive deflation where your grandfather's couch cushion change is worth more than a new couch as why absolute fixed currencies are unviable.
Companies, and their profits, can't and don't create cash out of thin air. That isn't how the money supply works. This is a central banking problem.
Value != money supply