When banks don’t lend

The problem with a drop in lending is that under fractional reserve banking as debt is paid off the money is destroyed and removed from circulation unless new loans are written, and thus new money created, to pump it back up. The current crisis is not from debt being paid down but from being charged off but the effect is the same.

When there is less money its value goes up and loans are harder to pay off leading to further defaults amongst those with debts; as our monetary system is presently set up it either expands or collapses. It is a house of cards and the reason for the obsession with growth but growth can’t go on forever. Eventually wealth becomes too concentrated and debts become too high to service.

I read somewhere, but don’t recall where that someone calculated that a penny invested at 4% interest at the time of Christ would, by 1750, have been worth a ball of gold the size of the Earth.

By my calculations 1 Oz of gold, or $20.00 at the time of the last depression, invested a 4% interest compounded monthly would accrue a mass of gold equal to the weight of the earth annually after 1,600 years While there are plenty of savers the gold is nowhere to be seen; as the debt burden gets too high society continually crashes and the illusory wealth is wiped out.

Today we have a fiat currency so the Fed could just print the money but that creates its own problems. The imbalances will be eliminated one way or another.