We use a fractional reserve banking system. Currently the reserve ratio is 10% for large banks. Therefore when you get a loan, 90% of the money you get from the bank the bank conjured from thin air. Loans are backed by 90% nothing.
When I remember applying for student loans from the government, nothing that would be considered collateral by a bank was asked for from the government. Not surprisingly, we see ever increasing NPL rates and larger nominal balances…
Though there was some stuff about having to agree to be enlisted when the draft is made, but you know… metadata drone strikes these days may not always hit the desired target… ;)
With regards to having to pay back a loan, there is always that saying about trying to extract blood from stone…
Student loans are either guaranteed by the government, or there are special rules like you cannot discharge those loans via bankruptcy. Otherwise, banks would not make such loans.
Ultimately, if the loan is not repaid, and there is no collateral nor assets to seize, it comes out of the assets of the bank.
This is still fundamentally different from counterfeiting.
>Student loans are either guaranteed by the government
>Ultimately, if the loan is not repaid, and there is no collateral nor assets to seize, it comes out of the assets of the bank
Which bank in this case (since we're talking about government student loans, not private ones…)? Federal Reserve Bank of (NY, St Louis, Cleveland, etc)? Where do they get the money from?
Increasingly more (because seriously how much does yearly tax revenues pay the bill in full?), the government getting private (other central banks/ institutions/very wealthy individuals) buyers to buy their treasury notes/bills at record breaking supply auctions with currency that originated somehow from central banks…
Although the textbook definitions of counterfeiting and debt monetization may differ, I suspect there will be those who will never even question how the two could be perceived to be similar by anyone without dismissing them as completely insane and incapable of logical thought…
And somehow in the midst of this, we loose sight on resource allocation in general…
Furthermore, while there are economic models in which loans are collateralized by goods of value exceeding the amount of the loan, modern American loans are generally not that way.
> Paying back that loan in the normal way is neutral, preserving the money that was created.
Actually it destroys the portion of the money that was created.
Sort of.
The bank doesn't get to keep the principal it originally created, it gets destroyed. But then they're back to having some slack against their reserve ratio, so they can immediately go recreate the money again and loan it to someone else.
Which is how banks actually create money, and inflation -- by over time increasing the net amount of outstanding loan principal across all debtors.
This is also why it's important to have the government create a certain amount of money -- it's necessary in order to allow people on net to pay down their loans without causing deflation. Or even to prevent people from having to increase their net real debt as the economy expands.
And despite all the whinging about QE, the banks are still way ahead on the "average real debt per citizen" front.