[stephen_g]

No. The error that you have made is confusing stocks with flows. Your problem would be true under two circumstances - if all debts had to be paid at once, or if money disappeared when spent.

But when you introduce the time dimension, the system works. The money supply is a 'stock' of some quantity, but payments (principal and interest) occur over time, making them a 'flow'. Those payments will then generally be spent back into the system, which circulates (all expenditure is someone else's income). This circulation is measured as the 'velocity of money'.

So interest isn't a problem ultimately, but the increasing accumulation of wealth by the most wealthy may become more and more of an issue.