Quote from slider123456:
All money comes from a bank on average the difference between interest an inflation is %1. So you gain %4 and lose %5. The difference is how much less the dollar would be worth every year on average. This is mitigated by a trade surplus where you are bringing in more money from outside the countries economic system but if that does not happen then the dollar is worth less. This long term loss is why the country is crumbling right now.
NO!!!! That is absolutely false!! Your lack of math skills is becoming incredibly frustrating. The 1% I lose is axactly offset by a 1% gain of the bank. The money just changes hands, it doesn't change the quantity of money in circulation.
Money can be printed by whatever entity people trust to protect against counterfeiting. Interest has nothing to do with the value of that money. How much money is printed is the only thing that determines the value of that money if the quantity of goods stays constant. Allow me to present a situation to demostrate. Their are 10 people on an island making up the entire economic situation on the island.
One is a banker who owns a house.
Another eight are entrepreneurs who either make goods or provide services, and each of them owns a house, but one of them also owns a second house.
The last is an employee of the banker who sleeps in a hammock because he can't afford a house because he only has $50 in the bank, but he knows he'll have saved an extra $100 by the end of the year.
The total value of each house is $100. The remainder of the economy is valued precisely at $9000 which includes the value of the services offered by the banker, as well as any currency already on deposit at the bank.
So the entire economy is valued at $10,000 and there are 10,000 $1bills printed at the bank.
The employee of the banker decides to take a one-year loan from the banker at 5% to buy the extra house for the market value of $100.
So from the 10,000 bills in the economy, 100 of them just went to the employee in order to purchase the house, who then gives it to the man with the extra house, who deposits it in the bank. At the end of the year the man pays the banker $105 for the house which has the effect of reducing the man's personal wealth by $105, and increasing the banker's personal wealth by $105.
The man who sold the house received $100 for the house, but lost the house and thus has seen no change in wealth.
The man who bought the house loses the $105 he paid the bank, but gains the $100 house for a net change of $5 loss to the bank.
The banker lost the $100 for the purchase of the house, but was repaid $105 for a net wealth gain of $5.
All houses are still only worth the market value of $100.
To the buyer, all other goods in the economy just got more expensive because he is $5 poorer. This is the inflation you speak of.
This is where your problem is.....
It will have the effect of a reduction in demand of all other goods because one of the buyers is now poorer. This will result in sellers dropping the price of goods and making them more affordable. That sucks for them but...... fortunately for them, another citizen just got richer by the same $5.
To the banker, everything got equally cheaper in the same amount because he is now $5 richer which causes an increase in demand from him to exactly balance out the reduction in demand on the part of the home buyer.
To the other 8 people, prices have not changed because they are neither poorer nor richer and since demand was exactly offset, prices of goods have not changed.
The interest simply caused a distribution of wealth. It didn't make goods more expensive, nor did it cause the entire population to become more poor.
