Can anyone tell me what exactly happens to the interest collected by the BoE?

Does it merely get pumped back into the economy as a new loan? Inflating the money supply?

Does it end up in the Treasury for them to spend/waste depending on your view.

Can anyone explain the following or have I misunderstood how the system works.

If the central bank produces all the money and lends out £1m to person A and person B which would give you £2m in the money supply and the base rate is 5% how do persons A/B get the £1,050,000 to pay the bank back at the end of the year? Do we then need a person C to borrow another £1m several months later to lend the £50k a piece to A and B to pay the central bank back?

This clearly doesn't make any sense, this can't be the system that in order to pay the central bank back the central bank has to continually create new money so it's existing loans can be paid back with interest?

There must be something missing from this loop what is it?

No, the interest rate is used to cause bankrupcies. It's designed that way - to make people poor.

This gives power to the government., It's all about power and control.

Central banks exist to restrict humanity, to limit trade, to block wealth creation and to steal from those that still manage to get somewhere even with the huge dead weight of fiat and taxation on them. They create booms in order to create busts in order to gain power over the general population. The reason is that rich people don't like to compete with others on a level playing field. When your defining charateristic is that you are wealthy, the rise of everyone else into the world of having plenty leaves you with nothing - not even self esteem. As an example - can you imagine the horror of those fat old rich men if they had to compete on other qualities for the attentions of good looking young women?

Too big a bust though, and the government loses control - this is the irony of the current situation. Too high an amount of money and hyperinflation will happen just because of mathematical inevitability.

Which in turn would mean political revolution, get too greedy and the masses revolt and you have no control.

Maybe, maybe not.

Once of the big problems the russian(and other) collapses presented ot our central bankers and politicians was that they were going to ascend into a kind of market anarchy - with tiny government and a whole lot of people trading amongst themselve sin a way that would both be genuinly free makret and also completely uncontrollable.

They expended vast resources to make sure that some form of state survived - in fact they always do in every unstable region - because the alternative they call "the threat of a good example."

http://www.thirdworldtraveler.com/Chomsky/...on_Example.html

I more suspect that you might end up with revolution in the one place the US govt can't interfere with. The US, as the govt quite ingeniously gave everyone the right to bear arms.

Chomsky has been a critic of the US for a long time, The Fateful Triangle was a good read.

I do think that the political elite have suckered by Wall Street and the City spin.

I just can't believe the American public believed they could run an economy based purely on consumption. 70% of GDP coming from consumer spending was unsustainable. Luckily we in the UK haven been so stupid and don't rely on the City......

Stopping producing is the smart move when your government steals so much.

Then the government has to steal more.

So people produce less.

The apathy at elections, the general firing off of all responsibility in the younger generations are, in fact, exactly what is required to get rid of the parasite. No need for revolution, no need for shots fired. Just stop feeding the beast and it eats itself. Whatever else the brits are, the one thing that marks them out is their emotional intelligence, they have fantastic instincts for mocking power and frustrating those who would act as "their betters".

Why is there a bloody annoying advert blocking the reply box so I can't see what I'm typing?

I think the answer your looking for lies in the countries trade surplus / deficit. If we have a surplus, more wealth enters the country allowing interest to be paid on debts.

If we have a deficit more wealth leaves the country leaving little or none to pay interest. causing defaults on debts.

This is the problem ... we have a huge trade deficit, yet the BoE continued to increase the money supply (mainly in the form of mortgages, I believe 80% of it is created this way) which ultimately leads to money being used for imported goods and services.

The system is designed to be inflationary, thats no secret. Modest amounts of inflation is healthy in our current monetary system, it is a sign of a growing economy.

All would be fine if we had a trade surplus, as the country would generally become wealthier, sterling would be more valued.

But instead we have the opposite!

I didn't want to complicate the above question by adding in external trading, but even that would still require creating new money.

It should be fairly easy to describe how the above system works, without the need for the complication of external trade.

You may have misunderstood or not understood the whole story, depending on your point of view.

When the central bank creates money, they do not just loan it into existence at the base rate. At least, not always. They also use what are called "open market operations". This is just a fancy term for "we print the money and spend it". However, rather than spending it on Ferraris and such, they usually purchase government bonds with it. The bonds disappear from the real economy and wind up on the BoE's balance sheet, and in return the bank or bond dealer gets the new money - on which no interest is payable.

So, in answer to the question you posed by example: if a bank has borrowed from the BoE for whatever reason, and it cannot come up with the funds to pay back the principal and the interest when it falls due, it can raise the money by selling some asset (usually short-term gilts) to the BoE.

HTH.

the bank 'does not set the interest rate', instead 'It defends a target by its money market operations' and by what it says and by what market participants that interact with the bank are doing ie things that can be done to influence the market other than entering the market in an active manner. But the bank is always in the market and active.

In your two person economy the market rate fluctuates depending on the worries and concerns of these two people.

The central bank supplies and removes money as necessary to defend the target interest rate.

If it only adds over time what it takes away over say a month then it merely smoothes the markets price for money so that if B wakes up with a nightmare and panics A is not impacted by B's temporary emotional state and fearful demands for high interest to borrow money. Instead the bank lends to A at the target rate or near to it and then later encourages the market to lend to the bank at a higher rate once B wants to lend at a lower rate to make money from surplus money.

Something like that.