Then the money is issued. The credit created in the first step is available to loan to anyone in the economy (the usual case for bank-created money), or pay anyone in the economy for goods or services (the usual case for state-created money).
To describe the process precisely, what has happened here is that a loan was created in the first step from the users of the money to the authority that is now being loaned back or paid back to them for their goods and services.
This is the sleight of hand by which fiat money is created. As a result, the money creator gets the power to determine what will be promoted and what will not be promoted in the economy by controlling who gets loans or jobs.
Interest is a special case of authority-created money. Interest is fiat money created by a lender that is payable to the lender in order for the interest debt to be extinguished.
To be understood correctly interest must be disaggregated (separated into its functional parts). A part of it is necessary to cover risk and the costs of managing the loan. The rest is unearned income that is functionally a privatization of value, taken from the environment and/or the users of the money that backed the original money-creation loan. The lender is the beneficiary of this transaction.
We need to discuss further two issues that make the practice of private bank money and state money different.
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The difference noted above where money is issued by loaning it to the users of money (again in the case of private bank money) or paying members of the community of users for goods or services (again in the case of state money).
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Whether interest is involved in the money-issuance process (usual only in the issuance of bank money, or just with money that has already been created).
Bank-created money
Bank-created money is the system of money creation that we now live with. Its use is again based on the trust of its users that its value is stable, enforced by law in our case, and that we can use it in trade for value equal to the effort we put out in earning a living.
Since bank money is issued as loans, it is extinguished as each loan is paid off. Just like mutual money, the implicit loan from the users of the money is extinguished. As a result, in order for the economy to have money in circulation to grease the wheels of trade, loans have to continually be made to maintain the necessary funds in circulation for the economy to operate.
These loans carry interest. Bank-created fiat money therefore sets up a two-tier economy, with the lower tier consisting of the productive community, and the upper tier consisting of the FIRE community (Finance, Insurance and Real Estate) along with other major industries such as the medical industry, the vehicle/transportation industry, the energy industry, and the military industry.
This framework leads to a long-term structural problem in private bank fiat-money systems. When money is issued into the productive community with interest, both principal and interest are created and issued. However only the principal is issued into the productive community.
More money is created and due back to the financial community than was issued into the productive community. This leads to a scarcity of money in the productive economy.
The only way that this scarcity can be counteracted is for more and larger sums to be continually borrowed by the productive economy. The money supply must grow at an exponential rate or there won't be sufficient money in circulation to pay both principal and interest.
If economic activity doesn't grow fast enough to prevent system break-down, a recession or major depression occurs, where the financial community takes ownership of collateral for failed loans. This is the driver of economic cycles. Thus the FIRE community always wins: gaining money in good times or assets in bad times, and power all the time, so long as the system continues.
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