I'm late to the discussion, but I believe I might still have something to add here. Our financial system is, in a sense, so perverse that it's hard to believe.
Disclaimer: I'm not an economist and I had only a single year of economics in secondary school. What I'm going to write here is my best understanding from information I gathered out of interest.
I'll start with a direct answer to the topic question: it is impossible to pay off all debt currently in existence, without either changing the rules of our financial system or creating even more debt. I'll explain why this is the case below (the answer is mostly in the interest associated with every loan).
I think johnfrmcleveland is essentially right about banks creating money out of nothing, and the money thus created being as "real" as it gets. To illustrate, I start from a post on the previous page:
Zamfir wrote:@Autolykos, you might be misreading that article. There are 2 kinds of deposits here.The multiplier is the ratio between the deposits that the public has at the bank, and the deposits that the bank has at the central bank. The balance sheet of the central bank only counts those last deposits, but the first kind is also currency.
Ordinary banks do not loan out more money than they got in! Only the central bank does that.
Suppose people have 100 million in deposits at the bank. And the bank has 10 million in its reserve deposit at the central bank, or as paper banknotes in its vaults. The multiplier is 10. Then the bank can invest the remaining 90 million. So they can loan out 0.9 times the deposits they got in. A multiplier of 100 means they can loan out 0.99 times their deposits.
As johnfrmcleveland has explained, banks do in fact loan out much more money than is deposited to them. The latter paragraph is right that there is a multiplier, however. The multiplier is called the fractional reserve. If the government decides that the fractional reserve should be at least 1 to 10 and a bank has 10m deposited at the central bank, then that bank can loan out at most 100m to customers. That is, regardless
of how much money is deposited by customers at the bank. As johnfrmcleveland said, the fractional reserve is just a government-imposed safety measure that doesn't really change how the system works, although it does limit the rate at which banks can inflate the total pool of money and debt.
Suppose that MoneyHoard, my bank, has 1k deposited at the central bank and the fractional reserve is 1 to 10. This legally enables MoneyHoard to create a 10k money-antimoney pair, adding the money as a loan to my account (the principal) and the antimoney to their liabilities.
We can track what happens when I use the loan to pay someone, who then deposits it at their bank, which then issues a loan to someone else, and so on. This has been done earlier on in the thread. However, doing so is mostly a distraction, because all money that gets "created" in this way is balanced by antimoney somewhere. The really mind-boggling stuff can be illustrated from just my relationship with MoneyHoard.
In order to fulfill my debt, I will have to pay off the 10k principal plus some amount of interest, let's say 1k for the sake of the example. Observe that the bank has just created 10k of money but 11k of debt. Nothing in the economy is creating additional money to make up for the difference of 1k. This happens with every loan. So here we already have a problem in paying off all debt.
If I pay off my debt, MoneyHoard uses 10k of the money to anihilate 10k of antimoney in their balance sheet. The other 1k is earnings, which the bank can use however it likes. It might, for example, deposit the money at the central bank. MoneyHoard would then have 2k in its reserve and be able to create 20k of loans, receiving 2k of interest as earnings. This is how banks are able to accumulate money at an exponential rate, and will also explain why we have exponential inflation.
The obvious discrepancy is that MoneyHoard eventually annihilates all money it creates, yet is exponentially accumulating money. There is no (other) magical source to accumulate the money from; virtually all money in circulation is created in temporary money-antimoney pairs by banks like MoneyHoard. They only reason this situation can persist is because, somewhere down the chain, someone is taking a larger loan so I can pay off mine.
Concluding, banks create the money faster than they annihilate it and the total amount of money in circulation grows exponentially. As the amount increases its value decreases, hence inflation. The amount of debt grows exponentially as well and it is progressively greater than the amount of money. So paying off all debts is not only impossible, but increasingly so as time progresses.
I found that the documentary Money As Debt
(youtube) by Paul Grignon explained most of these things very well. The first ~27 minutes cover the factual basics: how the current financial system came into existence, how loans work and how money is coupled to debt. In the next ~12 minutes it gets opinionated, discussing the sustainability of the exponential grow of debt and suggesting alternative financial systems. In the ~5 minutes after that it portrays the banks as an abusive party and in the final ~2 minutes it goes on to overtly insinuate conspiracy. Regardless of where you want to stop, I highly recommend watching at least the first half hour of it.