I challenge the establishment.
Our whole financial system is based on the time value for money formula. 1 unit of currency today is worth 1 unit + interest at some time in the future.
Why?
Because you have use of my money for x months or years, so you have to give me more back to compensate my loss.
Why?
Paper money is still an analogy for gold. In the olden days of gold nuggets did a nugget grow in size after 1 2 or even 3 years? No of course it didn't. Perhaps you might argue if a plant or an animal were used as currency, then the time value of money formula might have validity.
Here is my view:
A clever group of rich old men figured out that they cannot take worldly goods or money with them after death. However they could pass wealth on to the offspring.
However this wasn't good enough for them. They felt that since even ancient economies fluctuated there could be no guarantee of the worth of unit of currency today compared with its value tomorrow. (i.e. its value can also decrease).
So the notion of interest baring money was born.
In today's capitalist societies we assume that we can buy goods, raw materials and labour in cheap underdeveloped countries add some value making a product and sell the item on for (total cost + profit). So long as a gap exists between raw materials and the finished product price there will always be inflation (or GDP). Therefore if there is always inflation the cost of money must also go up (carry interest).
I challenge the fact that we need to make huge profits and have this constant inflationary spiral. Steady state capitalism is the way forward.
I belive the concept of interest was arrived at in order to allow for the risk of not receiving the principal of the loan back. However in the 20th century it became apparent that the shortage of real capital as opposed to the printing of new government debt meant that the interest rate charged could be decoupled from the risk involved, hence rates in excess of 15%-25% became common while the underlying cost of lending that capital dropped lower and lower.
ReplyDeleteNow that real capital as defined by M3 is dropping across the western world it will be interesting to see where those rates move to. Expect a sharp upswing in true poverty i think, which will lead to the inevitable expansion of government debt to alleviate the suffering, through ever expanding welfare. The root though is the lack of real industrial economic output with the constant off-shoring of work to the lowest cost resource. Creating "new jobs" making sandwiches for any country that expands its public services to "count" its citizens is not creating anything of value at either end of the equation.