How does loan interest arise, and what connection does it have to someone’s bankruptcy? We explore the complex relationship created by the operating principles of the financial system and the flow of interest in an easy and interesting way.

Where does interest come from?

Central banks have no choice but to keep printing money. This is because ‘interest’ doesn’t naturally arise within the capitalist system itself. When you take out a loan from a bank, you pay interest, yet the actual real-world system doesn’t account for this aspect at all. In a way, it’s a truly bizarre system.
This is the story of Ellen Brown, President of the Institute for Public Finance in the United States.

“Banks create money through loans. Banks don’t create new money for interest. Yet when we borrow from banks, we must pay interest. Banks always get back more than the amount they lent. We are paying interest on our own credit. There is no basis for any of it.”

This means that ‘if I pay interest, I must take someone else’s loan’. Therefore, in the modern financial system, while repaying debt may be beneficial for individuals, it creates another problem. When money starts circulating less, someone inevitably faces a situation where they cannot repay the interest. Since deflation, where money becomes scarce, is bound to happen someday, in the capitalist system, the phrase ‘no interest’ essentially means ‘someone goes bankrupt.’ This is because all money originates from debt.
Central Bank A issues $10, which Citizen B borrows. The total money on the island is exactly $10. → Central Bank A must print an additional $0.50 to cover the interest. → Citizen D borrows $0.50, bringing the total money on the island to $10.50. → Citizen B works hard and repays the entire $10 principal plus $0.50 interest. → Then what happens to the principal and interest borrowed by Citizen D? → More money must be printed, and someone else must borrow it. → Since there is no principal or interest to repay, the central bank has no choice but to keep printing money. → After the era of inflation passes and money becomes scarce, someone inevitably goes bankrupt.
So who will go bankrupt? Naturally, it will be those with low income and high debt, those unfamiliar with economic matters, and the most vulnerable in society.
Therefore, ‘competition’ is inevitable in a capitalist society. As long as ‘interest’—which doesn’t exist in the system—actually exists, we must constantly compete to take others’ money. Everyone fights desperately to survive. This is precisely why we live each day chanting ‘money, money, money.’ The saying that money is everything in a capitalist society stems from this. Monetary history scholar Andrew Gause likens it to a ‘musical chairs’ game.

“The current banking system is no different from children playing musical chairs. While the music plays and they dance, no one is left out. But when the music stops, someone always gets left out. There are always fewer chairs than people.”

How can we survive?

The saying that when I pay my loan interest, someone else goes bankrupt means that when someone else pays their loan interest, I could go bankrupt. We always dream of being the winner in musical chairs, but that’s just wishful thinking; there’s always a chance I could be the one left out.
And if the number of people unable to repay their loan interest doesn’t stop at just one but keeps growing, the problem becomes even more serious. If this happens repeatedly, the amount of money in circulation decreases. With less money available, the number of people unable to repay their debts increases even more rapidly. Bankruptcies occur in rapid succession, and insolvencies rise. Simultaneously, the money supply continues to shrink. The moment monetary expansion stops, we inevitably plummet in an instant. Deflation has begun. With the economy stagnating and money not circulating, bubbles start bursting everywhere. Once money dries up, corporate activity shrinks. Companies cut production and investment, laying off existing employees instead of hiring new ones. Jobs become scarce, and earning money grows even harder.
So what situation are we in now? Let’s hear from Ellen Brown, President of the Institute for Public Finance in the United States.

“We are experiencing deflation, not inflation. It’s the same as Japan. Despite attempting large-scale quantitative easing, they failed to increase the money supply.”

This isn’t just about the U.S. Concerns are emerging in China about a vicious cycle of deflation. Forecasts suggest deflation could deepen as economic activity by Chinese households and businesses contracts. Experts warn that if deflation persists, consumers may delay spending in anticipation of further price drops, while businesses reduce production and investment due to falling sales, potentially triggering a vicious cycle of economic stagnation.
Regrettably, this is the system of the society we live in. So what should we do? Let’s hear from Jeffrey Myron, Professor of Economics at Harvard University.

“Young people will continue to face difficulties finding jobs. This is because the global economy won’t grow rapidly. I hope they realize that doing anything is better than doing nothing. Experience, punctuality, the ability to start low and work your way up—these are better than not working at all.”

We must ‘survive.’ To survive, we must constantly do something—no matter how small, no matter how low the position—for the future, creating new hope. Even if it doesn’t feel right now, we must keep challenging ourselves and dream of survival. Because in the capitalist world, after enduring a cold winter, a warm spring always comes.