Let me break it down for you. Interest-rate-based debt contracts are pretty common in the financial world, but they can also make things unstable. When interest rates go up, it’s harder for people to pay back their loans, which means banks can lose money. This can create a sort of chain reaction, where banks get more cautious about lending, and that can make economic downturns even worse.
The other thing, fractional reserve banking, is when banks only need to keep a small part of their deposits as reserves. This lets them lend out more money than they actually have in reserves, which can lead to a huge growth in credit. But if people lose faith in a bank and want their money back all at once, the bank might not have enough reserves to cover it, which can cause a bank run and maybe even a collapse.
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