ABSTRACT
If we include interest, say at 5 per cent, then the balance sheets would look like this (assuming a one-year loan):
bank household loan 105 deposits 100 deposits 100 loan 105 equity 5 net wealth –5
As a consequence of the extension of credit, we have an extension of the balance sheets of the two parties: assets and liabilities have increased for both. Net value is not affected, since both sides of the balance sheets of both counterparties have increased by the same amount. Nevertheless, with each new loan, the instability of the banking system rises slightly, because each loan has a certain positive probability of default. Uncertainty has increased. This is an essential property of debt: debt has to be settled in the future. The future, as is well known, cannot be predicted with certainty.
