Alright. Same village. Now we add banks and debt — this is where everything suddenly clicks.
The village (recap)
• 100 people
• Max production: 100 units of real stuff
• 100 coins originally exist
Until now, coins were just “there”.
Now we introduce a bank.
Step 1: The shocking part — the bank creates money
A villager wants to build a house but has no coins.
The bank says:
“I’ll lend you 10 coins.”
Those 10 coins did not exist before.
They are created the moment the loan is issued.
Now:
• Total coins = 110
• Total debt = 10
Nothing physical changed yet.
This is exactly how modern money works.
Step 2: When debt is healthy
The borrower:
• Pays builders
• Builders buy food
• Production rises: 100 → 110 units
Later:
• Borrower repays loan + 1 coin interest
• Bank deletes the 10 coins when repaid
• Keeps the 1 coin interest
👉 Money came into existence, enabled production, then mostly disappeared again.
This is good debt.
Step 3: When debt turns toxic (this is the real world)
Now repeat this for houses only.
• Bank keeps lending for house purchases
• But no new houses are built
• Land is scarce
So:
• Coins increase: 100 → 300
• Houses stay at 50
Prices explode.
People think:
“The village is rich!”
But really:
• Debt exploded
• Asset prices exploded
• Nothing new was produced
This is asset inflation.
Step 4: Why wages fall behind
Here’s the cruel mechanism.
Banks prefer lending for:
• Houses (collateral)
• Assets (safe)
They avoid lending for:
• Wages
• Risky businesses
• Small producers
So new money goes to:
• Landowners
• Asset buyers
Not to workers.
Workers must:
• Borrow to live
• Compete for housing
👉 Money is created, but not for them.
Step 5: The interest trap (quiet but deadly)
Remember:
• Bank creates principal
• But interest is not created
So where does the interest come from?
From:
• Other villagers’ money
• New loans
This forces:
• Constant debt expansion
• Or defaults
The village now needs growth just to stay afloat.
Step 6: Why “just give people money” scares authorities
If the chief gives:
• 1 coin per person, no debt
Then:
• People rely less on loans
• Banks lose power
• Asset prices stabilize
• Wages gain bargaining power
This is why inflation is often used as the excuse:
“We can’t do that, it would destabilize the system.”
What they really mean:
“It would destabilize this power structure.”
Step 7: Why Switzerland still works (barely)
Switzerland’s village:
• Banks create lots of money
• Mostly for mortgages
• Strong currency absorbs pressure
• High productivity pays the interest
But:
• Housing debt is massive
• Prices are detached from wages
• Stability is maintained by discipline and exports
It’s stable — not innocent.
The one-sentence truth
Modern economies don’t run on money — they run on debt, and debt flows toward assets, not people.
Final village takeaway
Banks are useful when:
• They create money for new production
They are harmful when:
• They create money for existing assets
Homelessness, inequality, and “why doesn’t money reach people?” all start here.
If you want, next we can:
• Add government and taxes
• Show why crises always follow housing bubbles
• Or explain why this system keeps repeating itself even though everyone sees the problem
