David Hedqvist
Sep 3, 2018 · 1 min read

It is a common misconception that it is “impossible for everyone to repay their loan AND interest” but it is not actually true, and you just need to understand a bit of accounting basics to see it.

A simple loan from the bank to you where you accept the money as a deposit in your checking account will appear on the bank’s balance sheet as one entry on the assets side (the loan) and one entry on the liabilities side (your checking account balance).

If you pay back part of the loan the entries on both sides will be decreased by this amount and the total money supply will have decreased.

On the other hand, if you pay interest out of your checking account, the liabilities side is decreased (the checking account) but the assets side stays the same (the amount of the loan is still the same). So where does the the difference go? We can’t have an unbalanced balance sheet. The interest is earnings for the bank and will temporarily be under “current year earnings” (under equity) but at some point someone will want to do something with these earnings and they might for example be moved to the deposit account of an owner when he gets his dividends.

Money is much easier to understand if you think in terms of balance sheets. We can’t have an imbalance so in theory all interest can be paid and all loans repaid.

    David Hedqvist

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    Writes about economics, money, computer science, cryptocurrency and related topics. Running bitcoin.se since 2012.