1. Money doesn’t actually exist
2. Government issue bonds for sale base on a promise to buy these back at a given amount on a given date.
3. Government gets money for bonds and spends it to create revenue
4. The promise to pay is then called government debt
5. Governments can issue more bonds to cover this debt or they can use revenue.
6. Issuing bonds to cover existing debt increases debt
7. The largest buyers of bonds are banks which are allowed to operate on a fractional reserve system.
8. Fractional reserve means that for every dollar they spend on bonds they can issue 10 times (or another multiplier) that amount in currency and charge interest on the loan.
Year 1. government sells $1 to a bank with the promise to pay $2 in 2 years time, government debt is then $2 dollars. Bank can then lend $20 to you today.
year 3. Government doesn’t have $2, sells $4 to bank with promise to pay $8 in two years. Government debt is now $8 and bank can lend you $160.
year 5. Government doesn’t have $8, sells $16 to bank with promise to pay $32 in two years time. Government debt is now $32 and bank can lend you $640.
(Did anyone catch the rice chessboard thing about expontial growth?)
obviously this doesn’t quite work exponentially but the growth coefficient means that debt will increase over time as will the ability of the banks to leverage and sell you debt.
Some companies such as hedge funds releverage this debt – financial crisis in 2008 where a single dollar was sometimes leveraged up to 1000 times.
of course the whole thing is a house of cards where the only guarantee is the assumption that natural capital (the worlds resources) is infinite and productivity (the labor of the working class) will increase in efficiency over time. Both of which assumptions are false.
the myth is perpetuated because, as you see, it makes the banks very very very rich.