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The Problems with Conventional Money

The interest-based lending can force some borrowers into default by design is a critique of the way money is created in modern economies and how interest functions within the system. This critique often highlights a few key points:

  • Money Creation through Debt

    In most modern economies, money is created when banks issue loans. However, when a bank lends money, it only creates the principal (the loan amount), not the interest. For example, if a bank lends 100rs, it expects to be repaid, say, 101rs, but only the 100rs was created. The additional 1rs (interest) does not exist in the economy until it is earned through production, trade, or other means.

    This creates a mathematical imbalance: The total amount of debt (principal + interest) always exceeds the money supply (just the principal). As a result, some borrowers may be unable to repay their debts because there simply isn't enough money circulating to cover all debts plus interest. This leads to a scenario where defaults are inevitable.

    loan default
  • Scarcity and Competition

    Because interest demands more money than was originally created, borrowers are forced into competition for the limited money available in the economy. Some borrowers succeed, but others fail, defaulting on their loans. The system relies on some individuals, businesses, or nations defaulting to maintain the balance.

    This creates a zero-sum game in which not everyone can repay their loans, even if they all work hard and are productive. In fact, if everyone tried to repay their debts at once, there wouldn't be enough money in circulation to do so, leading to widespread defaults.

  • Debt-Driven Growth and Economic Pressure

    To avoid default, economies are under constant pressure to grow. Economic growth creates new money (via production, profits, etc.) that can help repay both principal and interest. However, continuous growth is not always sustainable, and when economic growth slows or stalls, borrowers may find themselves unable to service their debts.

    In periods of economic downturns or recessions, this structural imbalance becomes more apparent. Businesses and individuals are more likely to default because they can't generate the additional income needed to cover both their debts and interest payments.

  • Systemic Risk and Economic Crises

    This dynamic contributes to economic instability. If too many borrowers default at the same time, it can trigger financial crises, as seen during events like the 2008 global financial crisis. When debt grows faster than the real economy can support, the entire system can become fragile, leading to widespread defaults and financial collapses.

  • Debt Jubilee Concept

    Some critics argue that the only way to periodically address this imbalance is through a "debt jubilee", where debts are forgiven en masse to reset the system. Historically, ancient civilizations like Mesopotamia periodically forgave debts to prevent economic collapse and social unrest. While not common in modern economies, debt relief programs for individuals, businesses, or even nations (like developing countries) reflect this idea.

  • Moral Hazard and the Default Cycle

    From a systemic perspective, the inevitability of some defaults serves as a way to clear out bad loans and reallocate resources. However, this can create moral hazard, where lenders and borrowers engage in risky behavior, knowing that some entities will fail, but the system will continue with bailouts or write-offs. Over time, this leads to cycles of boom and bust, with default as a built-in feature of the system rather than an anomaly.

    In essence, interest-based lending in its current form can create a system where not all debts can be repaid, and default becomes inevitable for some borrowers. This is a systemic feature, not a personal failure, leading to critiques of whether such a system is fair or sustainable in the long run.


Solution: LETS

This Django application is an example I created to illustrate a Local Exchange Trading System (LETS). In this application, users can sign up with zero balance. User can make offerings and accept offerings.

Want to run this code locally? Read detailed instructions on how to run this project.

Suhail VS @suhailvs