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this post was submitted on 30 Dec 2024
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It's how the financial system works. Money is created out of loans that need to be paid back with interest, and the money for that interest comes out of other loans made by other people. It creates an ever increasing mountain of debt, and it pushes businesses to keep growing to stay ahead of their interest payments. The ones that don't are bought up by the ones that do. Naturally the most greedy and sociopathic float to the top in this system.
And so you get the eternal search for more things to exploit to keep growing and more profit. These things are baked in at a fundamental level.
No, it creates seignorage. Central bank lends money to bank so bank has a reserve so that it can lend book money, bank's customer pays back loan, bank pays back loan, central bank made a profit. Profit is put into the state budget and thus re-distributed.
If your business accumulates an ever-increasing mountain of debt then that's a problem with your business, not the monetary system. You could, for example, not take on loans, or not more than you can pay off. I'd say that's the smart thing to do.
And the whole thing is necessary: Without the banks having to pay back more money than what they got from the central bank the central bank could not lower the amount of money in circulation which, during a recession, would mean uncontrolled inflation. That is why you see central banks raising interest rates when there's inflation: So that they can mop up surplus money, so that the value of money stays stable. Similarly, during deflation they want to increase the amount of money in circulation so they lower the interest rate, might even turn it negative, or (this has been on the table for the Euro) even right-out transfer money into everyone's bank accounts.
This one thing (at least in the case of the ECB) is the sole purpose of the central bank and the monetary system: To make sure, as best as possible, that a sandwich tomorrow costs the same as it did yesterday. When the economy grows more money is needed to reflect the value in circulation or you'd get deflation, when the economy shrinks, less value is in circulation thus less money is needed or you'd get inflation. The central bank always has to adjust.
...the target is 2% inflation instead of 0% because you need some wiggle room and some inflation is better than any deflation. The amount the central bank adds or subtracts from the monetary supply has no direct connection to the inflation rate, for that you have to take the actual economy into account, as said, if monetary supply tracks the economy perfectly, shrinking and expanding in response to it, there's no inflation, and no deflation.