A simple yet profitable con

Imagine that three companies each deposit £10,000 into a newly created high-street bank. The bank now has £30,000 worth of capital.

One depositor requests to withdraw their original deposit of £10,000 as well as to borrow an additional £10,000, to be repaid at an interest rate of 4% over 5 years. In theory, the bank would lend £20,000 leaving £10,000 worth of capital. However, the bank cannot draw from its assets without the other company’s consents and so it instead creates £10,000 from thin air. Therefore, £10,000 of actual capital is leant but £20,000 still remains (£30,000 less £20,000 = £20,000?). £10,000 worth of additional money is subsequently born and the three company deposits are duly devalued by inflation.

The company borrowing the £10,000 eventually repays the bank £11,054.06 (£10,000 plus interest) following the sale of its own goods and services. The company also redeposits the original £10,000 with the bank. The bank’s assets are now £41,054.06: £20,000 deposit, plus £10,000 deposit, plus the the illusory £10,000 leant, plus £1,054.06 worth of interest “earned”. The bank’s return on £10,000 leant is thus £11,054.06, which is equivalent to 110.51% profit.

Now remember that it cost nothing (apart from perhaps an administration fee) to create the borrowed sum but actual goods and services were required to repay it as well as the interest. Also bear in mind that the goods and services produced by the company cannot be attributed to the finance borrowed because it did not, in reality, exist. Is this not a simple yet profitable con?

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