3.1 Private loans

As salaries are not enough to globally create profits, people, companies have to borrow. We all know it too well: mortgages, consumer loans of every kind, credit cards. The more we borrow and spend the higher sales we make and the higher the profits of companies.

The problem is that loans have to be repaid. While in the year, where loan is transformed to sales system receives more money into circulation, in subsequent years is the volume of money in economy shrinking by installments and interest. These money stop circulation in economy, they cannot generate further sales and they are returning to banks. The only way how they could get into circulation again would be through further loans. However, this is without further monetary policy manipulations impossible to maintain for eternity.                                                                   

Imagine simple mortgage for 20 years with 4% p.a. interest. Do you know how much are you going to pay extra against the principal? It is 47%. Take the same mortgage for 30 years and the result is striking 73%!

The chart displays how much buying power the economy is losing in total if purchases are funded through loans. The methodology is simple, it compares all interest paid over full term of the loan against principal.

This extra money, which you pay on interests are costs of lost opportunity, they represent those sales, which you are never going to make because you decided for purchase on loan and the result is the permanent decimation of your buying power for decades to go. That is the way thousands of households are deciding every day and so accumulation of these decisions are creating the aggregate result of both positive side of loans on sales (momentarily increase of profits) as well as negative – sure degradation of sales (profits) in the future. Interests represent diminishing of monetary supply in circulation, which when not replenished will cause collapse of the whole financial system.


  1. At the beginning of the cycle there is capital in the bank from profits from previous years. Under profits we here understand all its forms that are company profits, personal savings.

  2. In the next step households will take out loans, which are transformed into consumption, sales and bring profits to companies. These profits are financed from old profit, which is now missing at the bank.

  3. New profit comes back to banks, old capital represents uncovered money, which at the moment does not exist. If their owners, depositors wanted to withdraw    them at that moment (together with new depositors who just deposited new profits) it would not be possible, bank do not have these money, and it will have them only if households will repay their loans. This is first, systemic risk of banking system generating new money and it is in the fact, that depositors believe that their money are at the bank safe but reality is that this money are not physically there. If all depositors would decide to withdraw together all their money any bank without help would immediately go bust. Every bank. Therefore there must be an option to refinance (either interbank or from central bank) which can supplement momentarily missing financial resources which will be coming back in future as repayments of issued loans.

  4. Next comes the phase of repaying, households are reducing their common consumption by expenditures equaling installments and interest. Profits of
    companies are falling in line with reduced sales. Loss in private sector is the same as total volume of installments.

  5. The more money is out of circulation, the more the sales are falling. More and more money are at the banks, because interests are causing the ebb of buying power. Uncovered capital at the banks is becoming covered (as a result of installments), that means money are back at the accounts for real. People are no longer willing to borrow, as their installments are maximal possible.

  6. At the moment of full repayment of all loans is indebtedness of households zero, bank has on its accounts financial resources at full volume of original capital, new profit and paid interest.
    However, that new money cannot be born out of nowhere. There is a law of preservation of matter and therefore this new money must be coming from real economy, where their withdrawal from circulation caused depletion of sales of another companies exactly by same amount that is new profit plus interest.
    So there was a profit at the side of companies, bank got their interest but in global scale were this profits fully compensated by losses in different part of economy, through loss of sales.

From given analysis of loans as source of profits it is evident, that they cannot represent permanent and sustainable source of profits in capitalism. If the people are financing their needs through loans, it can and will increase of profits in certain companies, during repayments of interest there is profit created in the banks but at the global aggregate level it causes decrease of sales in another parts of economy, because buying power of all people was diminished by installments, which will not be showing as sales. Interest represent aggravating circumstance, by which the effect of arising global loss is multiplied and is greater than profit generated from sales on credit. We can feel it ourselves without any deep analysis. As soon as we take out a mortgage or any bigger personal loan our spending habits change dramatically: we reduce our standard spending and save more to cover those installments.

If somebody objects that loans can be repaid by new loans, even greater than old ones, so the answer is cruel reality that man can service only certain level of loans and that is given by his disposable income, diminished be necessary living costs. If individual already achieved this level of indebtedness, further increases are not possible. He would not have resources to repay and would go bancrupt.

Volume of profit coming from loans is therefore constant and given by total capacity of personal indebtedness multipied by number of people in the society.

It is necessary to keep in mind that such growth of profits is only temporary and highly cyclical and only seemingly substitutes missing buying power of people. What is at the beginning moving into profits is during the full repayment period source of losses, that are arising as unrealized sales from reason of permanent decimation of buying power caused by repayments of principal and interest.

If we have a society, where there is in circulation certain amount of money coming from wages (which by themselves are not sufficient to create profit) and we create additional buying power from loans during repayments we are going to get ourselves into situation that there will be not enough money in the economy to repay all the loans.

Simply, if there is in circulation for example 1 mil $ and to repay the loan and interest we need 1,4 mil this 0,4 mil does not exist and during repayments it will manifest itself by certain amount of loans not beeing repaid at all and individuals or companies will have to declare bankrupcy. During this bankrupcy the volume of capital in bank will be diminished by unpaid loans which means that savings from previous years will dissapear as well.  Therefore profits achieved in the past and deposited at the banks  are only illusory, their durability beeing seriously endengered by achieveing current profits again through loans. During repayments the whole system collapses ( there is not enough money in circulation to repay all principals and interests) and profits are ereased.

What is the meaning of interest if it is causing such negative fall in global buying power followed by fall of global profits?

Classical theory teaches that interest is a reward for risk taking. Simple mathematics is proving that existence of interest   at global scale is directly contributing to collapse of economy as a whole and as such is not repayable. Definitely not all of it, as there is no resources in the system for it. There are examples from history where certain nations considered interest as evil and was banned. Interest is causing ebb of capital from economy and its concentration in the banks which are trying to lend more and more. The more they are successful, the more money is being withdrawn from circulation and the whole economy is falling into recession. The recession would start even during repayments of principals, but interest is reinforcing it massively.

It is no wonder that first steps of central banks in recessions are lowering the interest rates and massive financial injection in the form of ultra cheap loans into retail banking houses. Without that the banks would go bust soon because there is not enough money in the circulation to repay all loans with interest.  Their deposits would remain uncovered and depositors would wake up into very rough morning discovering that their cash machine withdrawals would not be realized.

Therefore uncovered old and new profits (deposits) are temporarily covered by loans from central banks. Is it a permanent fix? Do the banks have the chance to repay back this money? No, they don´t. If this central bank loans were to be repaid (principal and interest), there would have to be somewhere in the real economy money to be able to return into retail banks. But these don´t exist, as this was the reason of failing to repay the original loans at the first place. The only thing commercial banks can hope for is that they will manage to provide new loans with even higher interest and gradually repay the central bank loans. However this procedure is causing further reduction of money supply in the real economy and further deepening of recession.  This new loans will not be repaid and the system is coming to a grinding halt.

 Subsidies into commercial banks in the form of loans from central banks do not increase purchasing power of people, only temporarily cover missing resources at commercial banks.  There is no further consumption, the people do not have their buying power restored. The only thing they are presented is an option for new loan. But to be able to get a loan of 1000$ is definitely not the same as getting a pay rise of 1000$ monthly. During recession there is huge unemployment, uncertainty, salaries are not rising and so there is no will to borrow. Everyday experience are foreclosures, people we knew lost their house or apartment because they were not able to afford monthly installments. In such circumstances consumers are not willing or able to fund their consumption through loans and so the wheel of capitalism is stopping. To try to revive the economy through new loans is therefore self-destructing policy which leads only to unsustainable growth.   

The only weak option with loan fuelled economy is connected with inflation. If inflation is higher than interest rates, that is the only way how to get more money into the system. But if inflation is not matched with equally rising wages, then the effect of rising prices is simply the increasing of profit margin and that is having the worst impact on available buying power as described later in the model. There are three possible outcomes regarding inflation and wages:

Interest rate < Inflation (products & services) > wages growth

The loans are getting more money into economy but the effect of that is negated by wages not keeping the pace with inflation. After a time, the people would not be able to buy through loans what they used to buy before as their wages will not be sufficient to obtain the loan itself. This method is therefore not a long term solution and leads to overall decline in buying power as a result of loans.

Interest rate < Inflation (products & services) = wages growth

If wages are rising at the same rate as inflation, we might say that this is a win-win situation. Loans are delivering additional resources into economy as inflation above the interest rates and equally rising wages are providing needed supplement to distributed wages. But the problem here is that inflation needs to be permanent and constantly above consumer interest rates, and that is rarely the case. In today´s environment, it would need to be at the level above 4-5% for mortgages and 8-10% for consumer loans, so average some 6-7%! That is not so desirable and would bring with itself scores of other problems like diminishing the value of pension funds, thus ruining future pensioners and their buying power.That could very well offset all the gains of inflation connected with loans as means of adding buying power into the system. It is important not to forget that it would need also wages to rise at the same speed. So it would be necessary to forget about current practises of productivity rising above wages, which is an unfavourable notion with many CEOs. But if you agree that inflation is the only option and you want to go that route then why complicate it by first injecting money into economy through bank loans(which is diminishing buying power during repayments), then hope and orchestrate inflation and make it permanent by adding further and further monetary additions to keep it going ? Because if you are willing to „print money“ you can as well supplement missing buying power directly through monetary stimulus to the government who redistributes it between people through various programs (see next chapters). By using direct monetary stimulus the size of it will be considerably smaller ( no need to be above the interest rate to offset the effect of loans) and no need for inflation! The monetary supplement stimulus might provide inflation potential but only a potential, which does not necessarily have to grow into fully blown inflation (see chapter Collectors vs. Inflators). To sum up, to really supplement buying power through loans is more complicated and risky business than anybody might think at the first glance. To make it work requires also highly coordinated inflation of defined parameters, which is too dangerous and unpredictable road to go.


Interest rate < Inflation (products & services) < wages growth

That would work for the loans but not for businesses. Increases of wages over productivity are short term fix to bring balance to unfair distribution of GDP if such need would be but cannot continue forever as businesses would go bust.          

The reasons, why the banks are not letting it sink into their collective consciousness, or they do not have to is because there is this further element of additional resources which is significantly supplementing the missing purchasing power. Without it, they would very soon see the consequences, as was evident in the first great depression in the thirties.  After that, introduction of New Deal, more active role of the state, rising of state debt started supplementing the missing purchasing power and the need to analyze their own success became more and more distant and its sources considered as a matter of fact.



As the loans do not represent source of buying power that can be permanently transformed into sales and profits because of effect of interest, which is decimating buying power until the very collapse of economy let´s try to have a look if transfers can deliver something better.

During transfers missing purchasing power is replaced by additional sources coming from state and consequently redistributed between citizens through various programs.

Financial resources, from which state is financing transfers, are:

The proportion of particular parts can be highly variable, depending from macroeconomic policy the government chooses. 

There is a bitter debate raging about the role of the state, the need to reduce the spending and cut costs, especially during the recession as state budgets are getting hit by lower taxes. This theory is trying to explain that state expenditures are indeed absolutely necessary even in good times and if such additional resources are not added into the economy on a regular basis, it starts to deteriorate.  It is difficult to grasp that knowledge as natural instinct of every businessman and even ordinary citizen is to start saving if things are not going well. But what works for micro economy does not apply for macro economy as well. This distinction is absolutely essential, and ability to get through that common ordinary man thinking is key to any success of nation or state.  At that top level, methods and strategies used by companies competing between each other are no longer valid. The role of a government of a country is not to win over its businesses, but to provide a framework in which they can prosper. At that position, things like monetary aggregate comes into play and profits are no longer achieved because of good business ideas but because there was money added into economy which allowed for some to become millionaires and keep that profits.