The new circular flow

On 4 January I said

I'm thinking of new-use-of-credit as extra money spent into the economy. And I'm thinking of cost-of-interest as a reduction of money available for current spending.

Scott Sumner would say it is not true that the cost-of-interest is a reduction of money available for current spending. I remember an exchange of comments at his blog Money Illusion. Here, Sumner's reply to an earlier comment by Woj:

Woj, You said;

“As the aggregate amount of debt and interest rises, the percentage of income used to pay interest costs or pay down debt also rises, lowering the amount available for consumption/investment.”

This is simply factually wrong. Every debt payment is money received by someone else.

Even if what Sumner said is true, it still misses the point.

If I use a dollar of income to pay a debt, I can't use that dollar to buy something else. And as the aggregate amount of debt and interest rises, there are more and more dollars that can't be used to buy something else.

Meanwhile, the dollars used for debt and interest payments are money received by someone in finance. As debt and interest costs rise, money moves increasingly out of the general economy and into the financial sector. And money in finance tends to stay in finance.

Oh, you can borrow it, maybe, but you'll have to return it. And you'll have to pay a little something extra. As debt and interest costs rise, and even just as time passes, money moves more and more into finance. As it does so, it moves out of the "nonfinancial" economy where people live and where goods and services (other than monetary services) are created.

As money moves out of the nonfinancial economy, we are forced to increase our reliance on credit. As our reliance on credit increases, money increasingly moves out of the nonfinancial economy. This is the new "circular flow". 

If it continues, civilization will not.