Ever wondered where money comes from? Would it surprise you that only around 10% of all money in circulation exists has physical notes and coins?
FACT #1 : A great majority of 'money' in circulation does not exist as notes or coins.
What is money? It's a medium of exchange used for trading goods, property and services. The value of money depends on it's availability and the total amount in circulation. It follows the law of supply and demand. Some countries have massively devalued their money by making too much of it - overexpansion of the money supply. But that is only half the story. What if a country decides to not increase it's money supply? What if increasing prosperity allowed all citizens to repay their debts/mortgages/loans?
The economy would collapse. This is because a majority of "money" in circulation is virtual... and people are struggling to pay off their virtual debts on the computer screen at the bank.
FACT #2 : Banks create money out of thin air when people take loans .
Assuming a fractional reserve requirement of 10%, First National Bank with $100 of notes can lend out $1000. That $1000 of virtual money is then gets deposited in Second National Bank which lends out $900. It gets deposited in Third National Bank that in turn can now lend out $810.... and so forth. This is known as the money multiplier, and in practice allows for almost limitless expansion of the monetary supply. So what? On the surface of it all is fine and rosy, until you realize that the 90% of money in existence was created by the banking system as debt, and interest is being charged on that money.
FACT #3 : Interest is charged on this money created out of thin air.
How do banks get away with it? When you take a loan from the bank (say to buy a house), you sign over collateral. This collateral has real value. It exists in the real world. Failing to pay your mortgage would mean the bank can gain ownership of your house! Effectively, banks legally conjure money into existence as numbers on a computer screen and then charge you interest for it.
FACT #4: Mortgages can be sold between banks as they hold real value (property).
The economy has to somehow generate the money needed to pay off the interest. In practice, this means the money supply has to grow around 3% a year just to break even and pay off the interest that is generated by this virtual money.
FACT #5 : Interest charged on thin-air-money is paid by money drawn from the monetary pool in circulation that itself is created out of thin air.
The money supply is expanded by people taking more loans. Ever wondered why banks seem to really want you to sign up for credit cards? There you go. Now unless there is a corresponding 3% increase in productivity, or a real world increase in efficiency to match the 3% rise in the monetary supply, inflation occurs. Inflation is simply the devaluation of your currency. Even if the economy is completely stable, a bottle of milk that cost $1 to buy this year will cost $1.03 next year by default.
FACT #6 : There will NEVER be enough money in circulation to repay the debt.
In theory and in practice, everyone in the country will NEVER be able to pay off all their loans/mortgages/credit-cards. The system is deeply flawed as the need to pay interest on 90% of all money in circulation is absurd and requires perpetual expansion of the money supply. The 3% mentioned earlier is exponential and over time it builds up. This guarantees a baseline rate of inflation that will double the money supply roughly every 25 years. Hence a $1 bottle of milk today will cost $2 in 24 years, $4 in 48 years, and $18 in 100 years. Sound familiar? Ask your grandparents how much they paid for a loaf of bread back in their time.
A cycle of perpetual debt is born. As a whole, the population will never be able to repay their loans, mortgages, and credit cards. Those from wealthy households may be relieved to pay off their mortgages quickly, but the system guarantees that people at the bottom will not be able to do so and still afford basic goods and services required for daily living (due to inflation). The system is engineered in such a way that it guarantees people at the bottom of the socioeconomic level are unable to pay off their debts. The only times when this does not happen is when the economy is expanding, which cannot go on indefinitely at an exponential rate!
The system is deeply flawed, and guarantees "boom and bust" cycles, in which the population as a whole finds it difficult to repay their debts and foreclose (read: banks seize houses of owners who cannot pay their mortgage). The rich and the financial elite become richer. Landlords become richer than ever before as properties hedge against inflation.