Furthermore, during the life of a loan some of the money will be saved and re-lent by individual bond purchasers, by savings banks, insurance companies etc. These loans do not create new money, but they do create debt. Recurring cycles of inflation, recession, and depression are a nearly inevitable consequence. If, in the attempt to arrest the price inflation resulting from an excessive rate of debt formation, the monetary authorities raise the rate of interest, the result is likely to be a financial panic. This in turn may result in a sharp cutback in borrowing.
Monetary authorities respond to bail out the system by increasing bank reserves.
Governments may also respond by increasing the public debt-risking both inflation and growing government deficits. Governments got into this mess by violating four common sense rules regarding their fiscal and monetary policies. No sovereign government should ever, under any circumstances, give over democratic control of its money supply to bankers. No sovereign government should ever, under any circumstances, borrow any money from any private bank. No national, provincial, or local government should borrow foreign money to increase purchases abroad when there is excessive domestic unemployment.