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>> I presume the rules of compound interest would apply if the loan was not fully paid within one year. <<
One year has nothing to do with it.OK, so in this example the bank credits its own account in the amount of $27,500 up front. Correct?
Let's say the loan is for $100,000 at 5% payable yearly over ten years. At the end of the first year you would owe one tenth of the principal plus five percent of the principal: $10,000 principal plus $5,000 interest. Only if the $5,000 is not paid does the debt compound because of interest. At the end of the second year you would pay $10,000 in principal plus five percent of $90,000.
At the end of the third year you would pay $10,000 plus five percent of $80,000, etc.
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>>Question: How common are discount loans? That is, what is the aggregate of deposits created by banks in their own accounts from discount loans as a fraction of all deposits created by banks? <<
In simple discount loans banks credit their own accounts up front. They are fairly common though not the majority of loans. They are a component of many loans particularly in real estate transactions, where "points" are charged and collected up front off the
face value of the loan.
The larger issue is we are examining the economy as a whole with many overlapping loans flowing all the time.
I call it a dynamic non-equilibrium process.
The net interest that the financial sector collects from the totality of the non-financial sector is always translatable into a simple rate of interest for financial services rendered.
Cannot understand the meaning of this statement. Please amplify.
I agree that debt does tend to compound in respect to the economy as a whole. That compounding cannot be explained through interest.
Agreed. There is far more debt than there is money (by a factor of three or four), and interest explains only
a small fraction of the imbalance.
Indeed, those who attempt to explain it through interest self-identify themselves as cranks.
That seems a rather severe description of those who might be well intentioned but misinformed.
After all, the entire economic orthodoxy is mistaken on several fundamental issues but I don't
feel a need to describe them as cranks.
Douglas was not one of those.
The compounding is explainable through the A+B theorem.
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"...The totality of bank deposits plus currency is approximately 10% greater than bank credit, C1. M3 - C1 devolves from Fed open market operations funding a portion of government spending, and the small residual from the era of gold and silver
monetization, and greenbacks. Checking deposits plus currency, M1, is approximately 20% of M3. M1 derives from the composite of Fed open market operations and bank credit expansion. M3 - M1 devolves in the first instance from M1. M3 - M1 constitutes a revolving fund of finance that is a continuing source of lendable funds. Lendable funds in the aggregate derive from the composite of bank credit expansion and the revolving M3 - M1. In a growing economy, M3 - M1 is an expanding nodality with inputs that exceed outputs. But the outputs are funds that are being invested or spent. The stream of increasing spending is therefore funded by bank credit expansion, Fed open market operations, and disbursements from M3 - M1."
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