Economic Interest: Pros and cons?
- Thread starter Ceicei
- Start date
A reasonable return on capital is an underpinning cornerstone of nearly all economic activity that is based upon an agreed medium of exchange rather than barter.
However, the 'interest' that most of us mean when we speak of the subject is fiscal/banking related and was, curiously enough, 're-invented' or, better, 're-implemented' by the emergent banks of the industrial revolution from a concept long held in contempt. An aside is that this principle is one of the main reasons why Anti-Semitism was rife long before the Nazi's ever came along, for the displaced and thus landless Jewish businessmen made use of it to expand their wealth at the expense of the powerful ruling families of Europe.
Anyhow, the subject of modern banking interest charges is a whole different ball game and is probably the biggest 'con' the world has ever seen.
I'm sure that most people are aware of it but I'll reiterate it for clarity. The modern banking system runs on what is called, disarmingly, the Fractional Reserve Principle.
What this means, in simple terms, is that if you deposit $100 with a bank then it enters that into the books as a deficit i.e. it owes you that money. However, it also treats it as an asset when it comes to making loans. A bank is allowed to lend out 90% of the capital it has deposited. So it can lend $90 of the $100 you gave them. Some of this money it will 'invest' in various schemes upon which it will hope to make a sizeable return. Also, some of this money it will 'lend' to private individuals with a repayment value, dependant on the term, that can be as much as double or triple the original loan.
That strange 'leverage' is down to the arcane machinations of the mathematics of compound interest. I won't go into that here as even as a qualified economist and accountant (AAT certified) I still don't understand how it was ever allowed in the first place
.
The short explaination is that most of the repayments you make in the early terms of a loan merely go to pay off the interest with a small fraction reducing the principle. That's how, for example, in the first year of my first mortgage, I paid several thousand pounds and yet only reduced the amount I owed by £150 :faints:.
Compound interest, if you'll forgive the pun, only works, as Ceicei says in the interest of the banking corporations. It ties a millstone of debt around almost everyones neck that serves only to feed the banking system and is economically unproductive.
It's a sibling of other economic 'sinks' such as currency speculation and the stock markets in that it is non-productive money and actually reduces the productivity of genuine capital. What I mean by this is that all it does it siphon money into the banking system and does not act as an economic multiplier for general wealth, which is what a tangible business that manufactures 'stuff' actually does (which is why trade got going in the first place and is the blood upon which the parasite which is banking feeds).
Anyhow, enough economic blathering
. Not all economists feel this way and I'm wondering, now I know we have similar backgrounds, if Tellner has a different take on this than me?
Sub-rosa-
I'm a Keynsian at heart by the way, T and have a mighty disdain for the 'childs' economics that is monetarism.
However, the 'interest' that most of us mean when we speak of the subject is fiscal/banking related and was, curiously enough, 're-invented' or, better, 're-implemented' by the emergent banks of the industrial revolution from a concept long held in contempt. An aside is that this principle is one of the main reasons why Anti-Semitism was rife long before the Nazi's ever came along, for the displaced and thus landless Jewish businessmen made use of it to expand their wealth at the expense of the powerful ruling families of Europe.
Anyhow, the subject of modern banking interest charges is a whole different ball game and is probably the biggest 'con' the world has ever seen.
I'm sure that most people are aware of it but I'll reiterate it for clarity. The modern banking system runs on what is called, disarmingly, the Fractional Reserve Principle.
What this means, in simple terms, is that if you deposit $100 with a bank then it enters that into the books as a deficit i.e. it owes you that money. However, it also treats it as an asset when it comes to making loans. A bank is allowed to lend out 90% of the capital it has deposited. So it can lend $90 of the $100 you gave them. Some of this money it will 'invest' in various schemes upon which it will hope to make a sizeable return. Also, some of this money it will 'lend' to private individuals with a repayment value, dependant on the term, that can be as much as double or triple the original loan.
That strange 'leverage' is down to the arcane machinations of the mathematics of compound interest. I won't go into that here as even as a qualified economist and accountant (AAT certified) I still don't understand how it was ever allowed in the first place
. The short explaination is that most of the repayments you make in the early terms of a loan merely go to pay off the interest with a small fraction reducing the principle. That's how, for example, in the first year of my first mortgage, I paid several thousand pounds and yet only reduced the amount I owed by £150 :faints:.
Compound interest, if you'll forgive the pun, only works, as Ceicei says in the interest of the banking corporations. It ties a millstone of debt around almost everyones neck that serves only to feed the banking system and is economically unproductive.
It's a sibling of other economic 'sinks' such as currency speculation and the stock markets in that it is non-productive money and actually reduces the productivity of genuine capital. What I mean by this is that all it does it siphon money into the banking system and does not act as an economic multiplier for general wealth, which is what a tangible business that manufactures 'stuff' actually does (which is why trade got going in the first place and is the blood upon which the parasite which is banking feeds).
Anyhow, enough economic blathering
. Not all economists feel this way and I'm wondering, now I know we have similar backgrounds, if Tellner has a different take on this than me? Sub-rosa-
I'm a Keynsian at heart by the way, T and have a mighty disdain for the 'childs' economics that is monetarism.
I thought that the interest rate was set by the Federal Reserve Board that meets each year made up of 11 member i think.
Is this even near what we are talking about maybe i am in the dark to what you all mean by interest are you talking about what credit cards set up as there interest or do you mean the overall meaning of interest.
Like i said, doesn't the federal reserve board meet each year to decide how are economic picture is developing as a forecast?
Owe yea, i believe the first counrty to use paper money created interest! That would probably be China.
Is this even near what we are talking about maybe i am in the dark to what you all mean by interest are you talking about what credit cards set up as there interest or do you mean the overall meaning of interest.
Like i said, doesn't the federal reserve board meet each year to decide how are economic picture is developing as a forecast?
Owe yea, i believe the first counrty to use paper money created interest! That would probably be China.
Empty Hands
Senior Master
It works in the interest (ha!) of whomever loans the money. It works in your interest when you place your money in a bank or a fund, and it works in the bank's interest when you borrow from them. Is it the bank's fault that America in general has no sense at all about the importance of saving and limiting debt load?
Without interest, who would loan anyone else money? You would be taking on a risk without any benefit or upside. Not smart.
Interest is pretty much natural, I imagine it even predates currency. You need something, I have it. I can lend it to you, but I will expect something in return as you having it means I am without it for that period. All is fair.
Problem is, IMO, that its gotten to the point where very few people actually own there own things. We take being in debt almost for granted. We pay more in interest on our homes then we pay in principle, cars are leased or borrowed for, etc.
Kinda get stuck in a hole early, and then spend most of our life paying things off. Houses, cars, student loans, etc.
Problem is, IMO, that its gotten to the point where very few people actually own there own things. We take being in debt almost for granted. We pay more in interest on our homes then we pay in principle, cars are leased or borrowed for, etc.
Kinda get stuck in a hole early, and then spend most of our life paying things off. Houses, cars, student loans, etc.
I was thinking something that this man wrote had coined the term Interest rate. Jethro Tull Turns out he is just an agriculturist, beside a band that always sings about economic situations, but they mainly sing about lack something. Example: grease finger smearing shabby clothes, owe aqualung.
No, it was actually by the usury of the jewish,christian,islamic an other religions under usury laws.
Interest is based on how the religions first produce just that the interest in religion like Islamic.
Irving Fisher is the influence for modern forms of interest, The Theory of Interest now all i could find on this is theGeneral Theory of Economics.
P.S. on another not related idea have you ever noticed that all of the Doors songs are about going the a Door of some type.
I tried to stay on topic just the dang exciting economic reading caused me to go into sleep deprived state. But the links should help some.
No, it was actually by the usury of the jewish,christian,islamic an other religions under usury laws.
Interest is based on how the religions first produce just that the interest in religion like Islamic.
Irving Fisher is the influence for modern forms of interest, The Theory of Interest now all i could find on this is theGeneral Theory of Economics.
P.S. on another not related idea have you ever noticed that all of the Doors songs are about going the a Door of some type.
I tried to stay on topic just the dang exciting economic reading caused me to go into sleep deprived state. But the links should help some.
Here is a very informative movie on this topic. The origins of banking, interest, and usury are discussed and it details how this system is operating in the Western World. Sukerkin's post is a preview. This movie has a bit more detail and will probably blow your mind.
I'll echo his thoughts, "I don't know how a system like this every got started in the first place..."
"This is the biggest con the world has ever seen."
I'll echo his thoughts, "I don't know how a system like this every got started in the first place..."
"This is the biggest con the world has ever seen."
michaeledward
Grandmaster
And the link and information that John just pointed to is the reason why a hyper-liberal like me would recommend people take a closer look at Congressman Ron Paul for Republican Party President.
OP
OP
Sukerkin, thank you for your comments. Even though you're from England, I imagine the way we operate in USA is identical.
Then how can compound interest be of any benefit to the borrower? If it is economically unproductive, what's the point then for us to even borrow when we should be saving up and paying cash? Unfortunately, as things go, it is difficult for many people to make major purchases (such as houses) on a cash only basis. Even then, the contracts drawn up will try to include the interest.
What's wrong with simply paying for something at face-value over a set period of time? The person selling gets the money in installments (although without the interest) and the person buying pays what they've agreed it is worth. Why not doing it in this way? The seller still gets some money and the buyer at least doesn't have to put out exorbitant amounts of money as interest (that could easily be triple the actual value of the item). It couldn't be that difficult. There are several companies that say "buy something interest free for a set period of time (typically anywhere from 3 months to 2 years)". If they can do that, why not make this method a more common practice in society?
- Ceicei
Sukerkin said:
Then how can compound interest be of any benefit to the borrower? If it is economically unproductive, what's the point then for us to even borrow when we should be saving up and paying cash? Unfortunately, as things go, it is difficult for many people to make major purchases (such as houses) on a cash only basis. Even then, the contracts drawn up will try to include the interest.
What's wrong with simply paying for something at face-value over a set period of time? The person selling gets the money in installments (although without the interest) and the person buying pays what they've agreed it is worth. Why not doing it in this way? The seller still gets some money and the buyer at least doesn't have to put out exorbitant amounts of money as interest (that could easily be triple the actual value of the item). It couldn't be that difficult. There are several companies that say "buy something interest free for a set period of time (typically anywhere from 3 months to 2 years)". If they can do that, why not make this method a more common practice in society?
- Ceicei
OP
OP
Hi Ceicei
In answer to your question, compound interest doesn't work in the interests of the borrower at all, quite the reverse. As I noted, they charge the interest on the amount you borrow before they take off the amount you repay, so most of what you give them merely goes to service the interest rather than paying back the loan. There's a reason that usury used to be a perjorative term.
To answer a couple of other comments above, noone disputes the right of those lending money to garner a decent return on their capital, as they are indeed denying themselves the use of that money. However, when it is not their money in the first place and the return garnered is injuriously high ...
This effect is magnified the longer the term of the loan becomes. For example, if the mortgage on your house is £100,000 at 5% over 25 years then the amount you repay is £338,636 i.e. knocking on for three and a half times what you borrowed. Now if the lender had to wait until the end of the term to get their return, that might not seem so unreasonable (tho' it is) but the fact that they receive a steady income that they can further invest ... now is it clearer why there are no poor bankers :lol:.
If the interest paid by your bank on savings is compounded too then that is to your good. Tho' you will find that the rate tends to be lower as the banks use your money to invest elsewhere, so the rates they charge borrowers have to be higher than those they grant savers if they are to make money.
In answer to your question, compound interest doesn't work in the interests of the borrower at all, quite the reverse. As I noted, they charge the interest on the amount you borrow before they take off the amount you repay, so most of what you give them merely goes to service the interest rather than paying back the loan. There's a reason that usury used to be a perjorative term
.To answer a couple of other comments above, noone disputes the right of those lending money to garner a decent return on their capital, as they are indeed denying themselves the use of that money. However, when it is not their money in the first place and the return garnered is injuriously high ...
This effect is magnified the longer the term of the loan becomes. For example, if the mortgage on your house is £100,000 at 5% over 25 years then the amount you repay is £338,636 i.e. knocking on for three and a half times what you borrowed. Now if the lender had to wait until the end of the term to get their return, that might not seem so unreasonable (tho' it is
) but the fact that they receive a steady income that they can further invest ... now is it clearer why there are no poor bankers :lol:.If the interest paid by your bank on savings is compounded too then that is to your good. Tho' you will find that the rate tends to be lower as the banks use your money to invest elsewhere, so the rates they charge borrowers have to be higher than those they grant savers if they are to make money.
Is that a serious proposition? A return to non-fiduciary money supply?
If so, then get that man into office as soon as you can - the bankers will never allow it tho'.
I had hoped to watch this and quickly dismiss it with a few quips.
It seems instead that to point out all the errors and subtle misinformation (probably without malice) would take me to going frame by frame.
People need to understand that they do not and cannot (in the space of 45 min) understand the modern economic system. It is however, in principle, simple and elegant - just a bit difficult to explain in 45 mins or less.
I would ask all those who are interested in the modern captial system to put some real effort to educate yourselves with information not provided in cartoons.
I've often said (and I mean it) that when I retire from my career I want to teach High School Economics to help people understand the modern economy better.
If a doctor or engineer told me how the brain works or how a building is constructed I would be a fool to think that I could tell if he were correct or not. Even though I think I am usually able to get a handle on things. The economy and capital markets, though, I have down a bit better.
Have you ever heard someone say, "He knows just enough to be dangerous?"
It seems instead that to point out all the errors and subtle misinformation (probably without malice) would take me to going frame by frame.
People need to understand that they do not and cannot (in the space of 45 min) understand the modern economic system. It is however, in principle, simple and elegant - just a bit difficult to explain in 45 mins or less.
I would ask all those who are interested in the modern captial system to put some real effort to educate yourselves with information not provided in cartoons.
I've often said (and I mean it) that when I retire from my career I want to teach High School Economics to help people understand the modern economy better.
If a doctor or engineer told me how the brain works or how a building is constructed I would be a fool to think that I could tell if he were correct or not. Even though I think I am usually able to get a handle on things. The economy and capital markets, though, I have down a bit better.
Have you ever heard someone say, "He knows just enough to be dangerous?"
Hi Stephen
I'm assuming that you're talking about the linked file that Upnorth pointed too?
In enormous hubris, I haven't watched it yet (thinking that as I spent most of my young adult life training in the field I knew what I was on about).
I'll go and watch it but it won't be until the day after tomorrow probably if it's 45 minutes long (sad isn't it when you're so busy you have to pencil such things into the diary :lol:?!).
I'm assuming that you're talking about the linked file that Upnorth pointed too?
In enormous hubris, I haven't watched it yet (thinking that as I spent most of my young adult life training in the field I knew what I was on about
).I'll go and watch it but it won't be until the day after tomorrow probably if it's 45 minutes long (sad isn't it when you're so busy you have to pencil such things into the diary :lol:?!).
OP
OP
In enormous hubris, I haven't watched it yet (thinking that as I spent most of my young adult life training in the field I knew what I was on about
I'll go and watch it but it won't be until the day after tomorrow probably if it's 45 minutes long (sad isn't it when you're so busy you have to pencil such things into the diary :lol:?!).
I'd like to hear your feedback about that link when you've got a chance to view...
Thanks.
- Ceicei
Empty Hands
Senior Master
Because the seller is assuming a risk without any commensurate benefit. They are giving someone an item they both agree is worth X amount of dollars, and getting nothing in return (to begin with). The buyer could vanish with the item, they could only make a few payments, they could do all sorts of things that would prevent the seller from getting her fair value. In return for assuming this risk, the seller wants something in return - thus the interest. Without a society full of angels, I don't see how interest could be avoided. Even in a society full of angels that always makes all their payments, the seller still won't get the full value of the item since payment received in the future will be worth less than payment received today due to inflation.
Hi Ceicei
I got a chance to watch the "Money as debt" video tonight after all - my meetings took a lot less time to resolve than I thought so I got home early.
I watched it through and the information in it is essentially correct. There's stuff left out, about how the system amplifies fluctuations in the money supply, for example, but what it covers is a decent thumbnail sketch of what I was taught.
The 'Illuminati' bit at the end is speculative in one sense but is also true in actuality i.e. a very few men, who control the money (debt based system), decide the course of an entire economy.
It is also true (and it's something that economists keep very quiet about to non-economists) that the system is inherently doomed because of the simple reasons stated in the vid.
Of course, that is true of capitalism as a whole as it is impossible to endlessly grow when the resource pool is finite.
I got a chance to watch the "Money as debt" video tonight after all - my meetings took a lot less time to resolve than I thought so I got home early
.I watched it through and the information in it is essentially correct. There's stuff left out, about how the system amplifies fluctuations in the money supply, for example, but what it covers is a decent thumbnail sketch of what I was taught.
The 'Illuminati' bit at the end is speculative in one sense but is also true in actuality i.e. a very few men, who control the money (debt based system), decide the course of an entire economy.
It is also true (and it's something that economists keep very quiet about to non-economists
) that the system is inherently doomed because of the simple reasons stated in the vid.Of course, that is true of capitalism as a whole as it is impossible to endlessly grow when the resource pool is finite.
