Why do people get bankrupt? – the process of money distribution

There are fundamental differences between the quantitative easing, QE, policy back in 2008 and the recent economic stimulus package in early 2020. The difference comes from how the fed is increasing the money supply in the market. Whereas the 2008 QE policy is to buy government bonds to lower interest rates, the 2020 policy is giving loans to the government, backed up by its collateral security. Despite the side effects of soaring stock prices and real estate values, the 2008 QE in 2008 is considered a big success. Since the side effect from the QE is growing to be out of control, the money distribution format to enhance market liquidity in 2020 has changed fundamentally.

Let’s take a look at the current financial structure in America to understand the 2020 stimulus measure. The key to the stimulus measure is the loan, and the principal attribute of the loan is “interest.” Interest is what distinguishes modern capitalism from obsolete financial systems such as gold standards or silver standards. For the economic entities who utilize the money, interest is a threat that decides who is to live or who is to die. The nature of interest enforces consistent competition between the economic entities and leads to continuous economic growth. Hence, understanding what interest does to the modern economic system is vital. Let’s take a look at the notion of interest from the process of money distribution.

Here, we create a virtual reality and start a Capitalist market. The Fed, central bank, prints out $100 for the first time and give a loan to the Person A with 5% interest. Until the loan maturity date, the Fed does not make any money. Over a period from loan issuance to the maturity date, Person A makes no economic activity and holds $100, which he has received from the beginning. On the maturity date, Person A is now bankrupt because he could not pay off $5 interest due even after A holds all the money in the world. *the Fed so far has only printed $100*

Now, let’s create another virtual reality, this time with three economic entities. The Fed prints out $300 for the first time and gives $100 loans to each Person A, B, C with a 5% interest rate. A, B, C make economic activities with burrowed money. On the maturity date, The balances of A, B, C are $150, $105, and $45 respectively. This time, only C is bankrupt because he could not pay back $55 + interest rate $5.

Two examples above indicate that the interest inevitably causes at least an entity to go bankrupt. Let’s go back to the real-life money distribution process of Fed → Bank → Business/Public → Public. The interest occurs every time money is transferred from the entity whenever the receiving end has to pay back. In other words, the public must take interest rates that incurred at least twice, once from the Fed and the other from the bank. This means that people have much more vulnerability to go bankrupt than the business, and business is more vulnerable than banks to go bankrupt.

Also, when taking a deeper look at the structure, it forces the entities of the society to take money away from the others to pay back the loan. If someone does not go down, the whole public goes down. In the example of Person A, B, C of each burrowing $100, A and B would go bankrupt if Person C had not gone down. Specifically, if the balance of all A, B, and C at the maturity date remained equally $100, all three would have gone bankrupt because none of them would be able to pay the interest of $5. It reflects that extreme socialism does not function with the modern capitalist financial system because of the burden of the interest rate. How about another example that shows the side effect of extreme capitalism? If the balance of A, B, C at the maturity date is $200, $50, $50 respectively, B and C are bankrupt while A becomes extremely rich. This is an example of social breakdown due to the gap between the rich and the poor.

To briefly put the effect of interest, economic equality puts everyone’s life in jeopardy altogether, and the large gap between the rich and the poor would make the majority of people penniless except a few. Hence, the structure is balancing out in the spectrum of two extremes. When wealth equality seems universal, the system creates the gap between the rich and the poor. When the gap is widened, structure distributes the wealth more equally. To this structure to function, interest is an integral part to find the right balance in the spectrum of socialism and capitalism.

This interest is called catfish in East-Asia. In a carp or loach farm, fishes die easily when their living environment is comfy and gives no danger. However, when the farmers let their natural enemy, catfish, loose in the cage, the fishes become much healthier as they exercise, eat well, and gain weight. Likewise, the members of the current economic system must work hard to survive from the catfish like creature called interest. To put it differently, members work hard to become a taker, not a giver.

What the modern economic system that survived for centuries has given us is a rather uncomfortable matter, “interest.” Someone will fail periodically because of its existence. Uniform wealth will bring a big recession, and the widened gap between the rich and the poor will bring the riches to the judgment day. This fiat money with interest, which is not supported by either gold or silver, is called credit currency. The credit currency is the backbone of the modern economy that allows printing money as much as society wants if needed.