Does the repayment of debt destroy money?

Answer 1

Yes, in the sense that money is usually taken from the economy to repay a loan. The accounting entries at the bank show the loan to the debtor being reduced (asset), and the loans account reduced (liability). However, the bank has received money, which increases it's reserves (it's own account with the Bank of England). All banks have these accounts which they use to settle up between themselves at the end of each day. In reality, if the bank is not near it's reserve requirement, it will try to put this money to good use earning interest by lending it out again. The money supply in the UK grew hugely between 1997 and 2008, (by more than £1 trillion) because banks were creating new loans, which became new deposits and money, faster than old loans were being repaid. 40% of the new loans in this time went on property, which increased in price by 3 times, mainly because of all this extra money being created. 40% of the lending went of financial speculation, with only 10% to productive business. Eventually the real economy cannot support the extra interest, debt repayments and rents caused by all the new loans created, so we go from boom to bust. The government is now borrowing more to make up for the shortfall in borrowing in the private sector, where debt is being paid off, and banks are much more cautious with their lending. Bank lending is one of the main drivers of the boom and bust cycle.