> However, the moment you actually use that money (eg to buy something), the money leaves the bank (unless the other account is also at this bank, but let’s keep it simple). Liabilities on the balance sheet shrink, so assets need to follow. That needs to come from reserves because the loan asset keeps its original value.
"Everything should be made as simple as possible but no simpler."
You're omitting the thing that causes the money to be created out of thin air. If the other account is at the same bank, now that customer has money in their account that didn't previously exist. And the same thing happens even if the money goes to a customer at another bank -- then that bank's customer has money in their account that didn't previously exist. Even if some reserves are transferred from one bank to another, the total reserves across the whole banking system haven't changed, but the total amount of money on deposit has. And the transfers into and out of the average bank are going to net to zero.
The created money gets destroyed when the loan is paid back, but the total amount of debt generally increases over time so the amount of debt-created money goes up over time as banks make new loans faster than borrowers pay them back.
Your loan is loan+interest;
when your loan is created, we do not create the interest-part on it - the interest-part is the rest that you have to pull from someone else, since bank gives you loan X - but asks loan X + interest Y back from you -> thats the reason why there needs to be another fool somewhere else who is then again taking a loan.
its one of the main architectural choices of our money architecture :-D
Only the loan principal is destroyed when it's paid back. The interest goes to the bank, which then gets to spend it or distribute it to shareholders who then get to spend it etc.
Suppose a mechanic takes out a mortgage to buy a house. The bank uses the interest on the loan to pay part of the bank manager's salary. Then the bank manager pays the mechanic to fix his car. Nobody inherently has to take out another loan for the borrower to pay back the bank.
The main reason debt keeps going up is that housing prices keep getting less and less affordable, requiring people to take on more and more debt to buy a house or pay rent.
"Everything should be made as simple as possible but no simpler."
You're omitting the thing that causes the money to be created out of thin air. If the other account is at the same bank, now that customer has money in their account that didn't previously exist. And the same thing happens even if the money goes to a customer at another bank -- then that bank's customer has money in their account that didn't previously exist. Even if some reserves are transferred from one bank to another, the total reserves across the whole banking system haven't changed, but the total amount of money on deposit has. And the transfers into and out of the average bank are going to net to zero.
The created money gets destroyed when the loan is paid back, but the total amount of debt generally increases over time so the amount of debt-created money goes up over time as banks make new loans faster than borrowers pay them back.