Interest and Principal
After reflecting on Steve Keen' Forbes post, which Dave supplied, i realise that i've never had an issue with the interest being repaid. It's always the principal for me. I'm sorry, but i thought this is what Steve Keen was addressing, how the principal gets repaid. But it isn't, he's all about the interest.
"So long as those flows are large enough to enable the FIRMS to make a profit after paying Wages and Interest, then they will have no difficulty in paying the Interest—and they certainly don’t need to borrow more money every year to repay it."
The only way I can see there being a problem repaying the interest is when the velocity of money tanks, as outlined by Dave's description of flows.
My apologies, i really should have been more thorough in my reading. I guess the question is, 'how does the principal get repaid?' Which brings me back to the point about inflation = default – interest. This simple equation has the potential to cause so much havoc it's almost sociopathic, especially when central bankers are targeting 2% inflation but are eyeing up negative interest rates.
To get the desired level of inflation they have to have either a desired level of interest in mind or a desired level of defaults in mind.
I imagine they offer credit well below a predicted interest rate (even negative). Say people load on at 0.5% interest this sets the default rate at 2.5%. Then up interest by a further 0.5% and viola! 2% inflation. Nevermind the newly made homeless (3% of total debtors). All in the name of financial growth!
What's the alternative? Financial institutions issuing debt-free money to boost the base money without the necessity of defaults to create the excess in circulation? Back to Dlumb's point about QE i suppose.