No money was created in the above example because neither Alice nor Bob are banks. You could also argue that even if Alice was a bank, there is no actual problem because the money has not actually been created, the bank is merely claiming the money is there, as people discover from time to time when there's a bank run.
"And when the debt was finally paid off by Bob, Bob is poor again."
Not quite. The above example is a thought experiment just to demonstrate that a common argument about money is false, but if we want to take it seriously then by the end of the process Bob has no money but he now owns a productive business. In reality of course there are more people than just Alice and Bob, so Bob will hopefully sell to more people and get rich that way.
"So it follows that the only way to pay off existing debts is to create more debt because of debt is repaid with just "work", wealth is destroyed, leading to recession/depression."
You're mixing up several different concepts. No wealth was destroyed in the Alice/Bob example. Both Alice and Bob ended up richer. Alice ended up with widgets, and Bob ended up with a business. Wealth was created, not destroyed.
I see where you are coming from but I can also see you are missing the point.
> No money was created in the above example because neither Alice nor Bob are banks. You could also argue that even if Alice was a bank, there is no actual problem because the money has not actually been created, the bank is merely claiming the money is there, as people discover from time to time when there's a bank run.
Creation of money is an abstraction. When Alice made a loan to Bob, Bob got a deposit in their bank account but Alice never lost her deposit. Alice sees the same thing as her asset as Bob sees as his liability. However, both can trade the asset/liability for goods and services. This is creation of money, via fractional reserve, since both the lender and borrower can trade goods with the same base money.
> Not quite. The above example is a thought experiment just to demonstrate that a common argument about money is false, but if we want to take it seriously then by the end of the process Bob has no money but he now owns a productive business. In reality of course there are more people than just Alice and Bob, so Bob will hopefully sell to more people and get rich that way.
And that is the point. Bob can pay off his debt by selling goods to others. But those others they sell the good too also only have money if it was created via debt somehow. Not a single human bootstrapped with dollars. It was all created via a loan on some balance sheet and the human simply acquired it via trading of their work.
> You're mixing up several different concepts. No wealth was destroyed in the Alice/Bob example. Both Alice and Bob ended up richer. Alice ended up with widgets, and Bob ended up with a business. Wealth was created, not destroyed.
Wealth obviously was destroyed. At the inception of the loan, the total amount of money in the system was money owned by Alice2. When the debt was payed off, the total amount of money in the system was Alice1. While it is true that Bob ended up with a business, it is also true that the amount of money in the economy has shrunk. Wealth was created with the new business but wealth was also destroyed with the asset/liability draw eliminated to zero.
What helps really understanding this wealth effect via fractional reserve is scaling your example to the entire dollar economy. By your example the total amount of money in the system effectively is zero because ultimately it is all two sides of the balance sheet. Yet, wealth is still measured in assets whose value goes up by that asset being more valuable through others spending money that was created via debt.
"When Alice made a loan to Bob, Bob got a deposit in their bank account but Alice never lost her deposit"
You're arguing with a scenario I didn't give. As I said already: neither Alice nor Bob are banks, therefore when Alice lent Bob the money she no longer had it. She didn't retain an appearance of having the money in her account because there is no account - it's all just cash. It's a very simplified scenario designed to show why the argument about money supply and debt is false in the general case.
"But those others they sell the good too also only have money if it was created via debt somehow. Not a single human bootstrapped with dollars."
Of course they did! Banking is an evolved system that sits on top of physical money. It isn't the case that all money is bank issued fractional reserve debt and it never has been so. Most people and institutions do indeed control at least some "hard money", even if it's just in the form of cash, or these days cryptocurrency.
In the west, we've come to rely more and more on fractional reserve accounts over time, but that doesn't change the correctness of the underlying argument - we aren't in a situation where paying debts off is impossible because there isn't enough money.
"At the inception of the loan, the total amount of money in the system was money owned by Alice2. When the debt was payed off, the total amount of money in the system was Alice1. While it is true that Bob ended up with a business, it is also true that the amount of money in the economy has shrunk."
You seem to be having a hard time keeping the various layers of the system separate! The amount of money in my toy scenario didn't change at any point because, again, neither Alice nor Bob are banks. They are people. When Alice lent to Bob she didn't create money: she had zero money at that point.
"And when the debt was finally paid off by Bob, Bob is poor again."
Not quite. The above example is a thought experiment just to demonstrate that a common argument about money is false, but if we want to take it seriously then by the end of the process Bob has no money but he now owns a productive business. In reality of course there are more people than just Alice and Bob, so Bob will hopefully sell to more people and get rich that way.
"So it follows that the only way to pay off existing debts is to create more debt because of debt is repaid with just "work", wealth is destroyed, leading to recession/depression."
You're mixing up several different concepts. No wealth was destroyed in the Alice/Bob example. Both Alice and Bob ended up richer. Alice ended up with widgets, and Bob ended up with a business. Wealth was created, not destroyed.