Banks create the debt. They do not create the money to pay the interest on it.
Household, business, and sovereign debt have all grown faster than income for decades, and each downturn tends to get resolved by another expansion of credit rather than a net paying-down of what came before. That pattern raises an uncomfortable question distinct from ordinary scarcity, the everyday condition of wanting more than available means allow: is there something about how the money used to service debt is created in the first place that makes universal repayment structurally impossible, not just difficult?
Heterodox monetary economists answer yes. When a bank issues a loan, it creates new deposit money equal to the principal, a mechanic mainstream central-bank research (the Bank of England’s own 2014 explainer among them) confirms as how modern lending actually works. What Margrit Kennedy and others in this tradition flag is what happens next: the interest owed on that principal is not created alongside it. The borrower has to find that additional sum somewhere in the existing money stock, money that was itself somebody else’s principal or savings. Because every loan in the system carries the same gap, the argument runs, the aggregate stock of money is always smaller than the aggregate stock of debt, so if total lending ever stopped growing, some borrowers would default from arithmetic, not mismanagement. Kennedy’s Interest and Inflation Free Money (1995) is the most cited full statement of the claim, illustrated with a 184,000 across fifty years.
This specific claim is genuinely disputed, and honestly presenting it means saying so. Post-Keynesian economist Steve Keen and others have built stock-flow-consistent models showing interest can be repaid without any need for new aggregate money, because interest payments become income for the lender or other agents and recirculate as spending rather than sitting idle; on this view there is no built-in mathematical paradox as long as money keeps changing hands. Both camps agree an individual borrower can still default when expected income fails to materialize. They disagree on whether the debt-money creation process itself, independent of any one borrower’s circumstances, leaves a shortfall that recirculation can fully close or only partly and unevenly close. No peer-reviewed consensus settles this either way; it remains a live dispute between heterodox and mainstream monetary economics rather than an established mechanism.
Source: Margrit Kennedy, Interest and Inflation Free Money: Creating an Exchange Medium That Works for Everybody and Protects the Earth (Seva International, 1995); Bank of England, “Money Creation in the Modern Economy,” Quarterly Bulletin 2014 Q1; Steve Keen, Debunking Economics: The Naked Emperor Dethroned?, Revised and Expanded Edition (Zed Books, 2011), for the circulation-based critique of the interest-repayability claim.