The US is on a credit-money monetary system, meaning, quite simply, that money is debt. Two simple rules apply in this system:
1) Money is borrowed into existence.
2) Money carries interest.
From these rules, we can derive some fun results.
First, an almost trivial one: if all debts are paid off, there would be no money left in circulation. Fun!
Second: Suppose there are only two actors in the economy: the Bank and the Producer. Furthermore, suppose that in year 1, there is $100 total money in the system. By rule 2), this $100 carries some embedded interest cost, say 10% due in a year. In year 2, how much money must there be for a) the total money supply not to shrink and b) have no debt defaults? There will need to be $110: $10 new dollars will need to be created to pay the interest, plus $100 new dollars will need to be created to replace the money that is "maturing." By rule 1), all money is borrowed into existence, which means that the Producer will have gone to the Bank to borrow $110 in year 2 (the Bank doesn't barter -- they only take dollars for repayment of debt). Since the Bank isn't running a charity, it will require $110 worth of collateral to back the newly increased money supply. But now, of course, this $110 carries an embedded interest cost, let's say again 10% due in a year. On to year 3, etc., and we get compounding interest, which grows exponentially. The result is that to avoid a decrease in money supply (deflation, noooo!!!) and debt defaults (in which the Bank repossesses the Producer's collateral), the Producer must be able to provide an exponentially increasing amount of collateral to the Bank. (Changing the interest rate and the term doesn't change the fact of exponential growth, just timelines.) Fun!
