Saturday, March 6, 2010


Money you put into the bank adds to a pool of funds available for lending. That pool of funds is available credit.

When you take a loan, you dip into the pool of funds and put some of that money to use. When you take out a loan, you put credit to use.

When you take out a loan, you expect to pay it back. The bank also expects you to pay it back, and they keep track of it. The total amount of credit you have in use is your debt.

The borrowed money goes into circulation when you spend it. It becomes credit in circulation.

Credit in circulation looks and acts just like money. The person who receives it from you may never know you obtained it by borrowing. To that person, it is money. But you know it is credit in use, because eventually you have to pay it back.

To pay it back, you capture money that is circulating, remove it from circulation, and return it to the bank. At that point, everything is un-done. The credit is no longer in use, no longer circulating. It no longer counts as debt. And it becomes available again.

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