Newb question: If new money only gets in the system by loans how do we not run out of money? If I lend you 100 bucks you have to pay back 105 that is great and all. If I loan you every dollar in existence and you have to pay back every dollar in existence plus 5% then there is a problem.
If there is only $100 in the economy, I can still owe you $105. To pay it back, I could start working for you and be paid $1 per hour. Now everytime you pay me $1, I would pay you back this dollar until my debt is zero.
In the real-world, with more than two persons, it would look more like this: I pay you back some amount of the debt, you spend this money and it propagates through the economy, until some part of it reaches me (in the form of a wage), so that I can use it to pay back more of the debt.
I realize that the amount of debt can be larger than the total amount of money. In fact given every dollar in existence is on loan from the federal reserve the total amount of debt will always be higher than the total number of dollars in the system by design. The question is, how does the system not implode under the massive amount of debt that is ever increasing?
This fact is part of the money system. When a loan is taken out from a bank, the principal of the loan is created, but the interest is not. This creates a competition in the economy to get the money that is not created to pay back the interest on the loans where some people can and some people cannot. Defaults are inherent to the monetary system as it is currently implemented. See "The Money Fix" (documentary) for the best explanation of this process that I have seen.
Read up on Steve Keen or find a good explanation video for fractional reserve banking.
The short answer is that we have a money supply that must grow by the amount of interest owed each year. This necessitates more loans. Which means more interest...
