| | In principle(if not always in practice), there is nothing coercive about the concept of a "central bank" that creates currency from debt amd charges that debt account for interest. Even one that charges fees for its services. Our own is only partially derelict in these aspects. The picture is not as bleak as is easuly painted, but it is easily painted so, because the concept is confusing to most people.
If you believe that the Sun will come up tomorrow, that there will be futue economies to labor in and in which to create and circulate new value, then there is nothing coercive(to the economies)about the concept of either secured or unsecured loans, interest, or a central bank.
If you don't believe that the Sun will come up tomorrow, etc., then it is moot what our central bank does.
All of that is in principle. In practice, the concept of a central bank can easily be abused. The key aspect of a central bank that must be maintained is that it not directly participate in the economies except through secondary and indirect means, ie, by charging fees for its services, and not by 'spending' either the currency ('current accounts') it is able to create, seemingly from thin air, or the 'interest' that it charges for its loans. (It is on this latter issue of interest that our own central bank might be a little perverted.)
It is true that a central bank creates current accounts out of 'thin air.' But, it is also true that it accepts 'thin air' in return. Central banks end up holding the bag on notes. In theory, they can't spend any of that 'air.' They can only exchange non-spendable(by the central bank)thin air for thin air. As long as the non central banks underneath them are fundamentalluy sound in theior banking policies, the economies that this banking system serves are not being perverted.
In principle, central banks do not create current accounts/currency out of 'thin air.' They create them out of a claim on future value. But, there is a limit on claims on future value, and if that limit is exceeded, then the economies burdened with the excess creation of current acounts will be perverted.
You go to a bank to make a loan. You do not have an infinite capacity to do so. Nobody, no entity does. The bank issues you a 'current account' balance, but accepts your note, a claim on future value that if secured by collateral, is backed by actual value as well(collateral = in case $hit happens.) Some % of loans will default, which means, the promised claim on future value will not be fulfilled, and the debt must be retired by surrendering collateral=actual present value. That is one type of loan, a secured loan. In a sound banking system, that is the predominance of loans. There is another type of loan, an unsecured loan, much like a credit card transaction.. In that type of loan, a bank can still pursue failed loans, but with less pre-arranged direct legal claim on collateral. Unsecured loans generally charge a higher interst rate, which is a way of spreading the required collateral backup across both performing and nonperfromaing loans. So, even with unsecured loans, as long as the economies in whcih these loans are offered are mostly performing, there is still no perversion of the economies. Folks who make unsecured loans and perform pay for the failures of those who make unsecured loans and don't perform(ie, pay high interest rates on their unsecured loans.). The convenience of unsecured loans comes at a price that the participants choose to pay, but so far, no perversion of the economies.
In the above transactions between you and a bank, the debits and the credits all add up. You walk away from the bank with new current account balance, but you surrendered a limited claim on future value. You've promised to venture forth into the future economies, pull on your pump handle over time, and circulate a negotiated amount of future value. The bank gave up current account balance, but gained your claim on future value. Everyone is exchanging value for value.
That bank can go to another bank, and effectively exchange your note/claim on future value for a current account balance. Value in, value out, all ledgers balance. So far, just like your transaction. Lather, rinse, repeat....all the way to the central bank.
What does the central bank do? It accepts notes/claims on future value, and it issues current account balances 'out of thin air.' And it then...holds the bag full of notes. So, although it handed over 'nothing', it also accepted 'nothing'. It can't do anything with those notes...except hold them. In non perverted central bank based economies, the central bank cannot 'spend' those notes--convert them to current accounts, and then 'spend' those current accounts in the economies, exchanging value for value. It can only 'hold the bag.' It can accept current account balances to retire notes, and it can accept notes and surrender current account balances, but it can't do anything else with either in the economies. Through interest rate policy, it can apply drag/grease to the process by adjusting the interest rate charged for loans, but what ~should~ be done with such 'interest' is that it is converted to reloanable central bank current account balances, and not simply 'spent', either by the central bank or by the gov't.
Never mind central banks, 'interest' confiuses most people. But, 'interest' is a constraint placed on us by the universe we live in. Said another way, if there was no such thing as 'depreciation,' then 'interest' would be unnecessary. Because we live in a real, not theoretically frictionless universe, interest is required. But, totally not a problem. It doesn't lead to any impossibilities or conundrums or singularities or paradoxes or mysteries in our economies, which is another internet favorite scare the kids myth.
regards,
Fred
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