It’s charging interest, stupid

30 03 2009

By Economicsfairy

Folks, I think I finally got the basics now. The causes for the current world crisis (which some people already name “The Greater Depression”) are not the usual suspects: subprime mortgages, greedy banksters, neoliberalistic political ideas, corrupt politicians, lax regulation of the financial markets, offshore tax havens and the like. Well, they all come into the picture at some point, but the real trouble lies deeper.

It’s the idea of CHARGING INTEREST.

This is the real problem.

To give you an idea of how the EXPONENTIAL interest rate function works, here is an example to illustrate the problem (Note: I think Albert Einstein came up with it, not an economist): Suppose 2000 years ago, Jesus would have had one cent in his bank account and there would have been an interest rate of 5 %. Today (if he came back 😉 he would possess 187 billion planet earths in gold!!!

Do you get an idea of how this mathematics work and how the physical world can just never keep up with it?

In other words: Our economic system is built on formulas that the real world (the one we live in) CAN NOT AND NEVER satisfy.  Welcome to illusionomics – which is unfortunately taught in every university! You even get nobel prices for thinking and teaching within this utterly ridiculous framework.

And then people wonder why there are bubbles!

Interestingly, all the great religions have addressed the problem. Well, as many of you know, I’m not very fond of the traditional religions (too arrogant, too rigid, too narrow-minded), but this one they got right. I can imagine old whitebearded guys sitting in the desert, drawing mathematical formulas in the sand and finally figuring out the explosive and destructive character of the exponential interest rate function.

Very roughly, the story goes like this: people charge interest for lending money – so you have to make a profit that also covers this cost – but the trouble is that this interest money is always “extra money” that piles up very quickly because of the exponential funcion – so there is always more money to be repaid than is actually there – so banks have to give out more credit to firms, households and states – so these economic actors get even more into debt – a downward spiral starts – also, the profit rate falls because of the high capital costs due to the pressure to rationalize (unfortunately, you need to read Marx to fully understand this, I’m just at the beginning) – and money accumulates in the hands of a few who don’t consume that much – while the consuming masses don’t have enough left to consume as much as is needed to keep the economy going – so you have to look more and more desperately for more and more options to make profit in order to satisfy the lenders – this is where the exploitation of the environment, of labour, of the developing countries, even of children comes in – but it can’t work because you simply can’t have 25% profit rates in a limited world – then, banks just start to create money themselves (see “Money as Debt”) – they lend more than they got from savers to be able to continue this ponzi scheme as long as possible – they also try to come up with “financial products” like subprime mortgages or ideas like CDS because they can’t get their profit from the physical world anymore, so you get speculation instead of production

– and this is where neoliberalism comes in: you just need it in order to have very lax regulations on all your economic actions in order to make as much profit as possible (because the debts have become a real pressure now), but it’s not the root cause for the trouble we’re in. It’s rather a sign for approaching the end, a kind of last straw, and accordingly, in many Western societies you can feel a certain decline since neoliberalistic policies were implemented, since the Seventies or Eighties. (The “booms” in these times were due to the ponzi money, not the free market mechanisms, and they reached less and less people. And we’ll have to pay for them now.)

So the bubble has built up – and at some point (September 2008, for example) it bursts, because no one wants or is able to take on more debts to repay the old debts, and then governments and central banks hysterically pump money into the economy (they become “the debtors of last resort”), but the economy is lost anyway, so after a period of deflation you’ll get inflation, maybe hyperinflation – and if you’re really unlucky, even civil unrest or war. And then (if you are among the survivors) you start again.

This is the great cycle that has repeated itself time and again in history, whereever there were interest and fiat money at work. So it looks as if there is quite something facing us in the next years, only this time on a truely global scale. And I hope the solution will not be war as it very often used to be.

But there is hope, there are people who have tried to come up with alternative economic ideas for ages, but (not surprisingly) were largely ignored by the mainstream – until now.

In my next entry, I’ll tell you more about what these people are thinking and what their proposals are.

In the meantime, you may find it exciting to explore the ideas of Karl Marx (he got the big built-in system failure of capitalism quite right, the old genius!), Silvio Gesell (about the trouble with interest) and Ludwig van Mises (about the trouble with fiat money ponzi schemes). Also, we should have a closer look at the great “Kondratieff-cyles”.

Unfortunately, most of this is not taught in mainstream economics (since it doesn’t support the “system” and the very few who benefit from it, rather exposes its weaknesses), but it’s really important fundamental stuff and should be talked about even in schools. It’s not some theretical nonsense, it’s about the life and death of societies in the end.

I’m quite convinced that we can’t save our economies in the way we did in the Seventies or Eighties. This time, the old recipes won’t work, time has run out.

But we must make sure that we never build a system like this again because then our grandchildren will face exactly the same problems.

P.S. They won’t discuss all this at the G20 summit in London (because that would get their banker buddies into trouble), so all they will do is some cosmetic surgery while the tumour still grows. It will be just a big show and a total timewaste.

Although, whoever happens to be in London this week: Make sure that the white-collar criminals in expensive suits know we’re angry!

P.S.2: Kat made a very good comment – will put it in an extra entry, just the other day I was discussing this with other people.




2 responses

1 04 2009

Great analysis D but the new money created by an interest rate can be supported in the economy if it is constantly expanding and growing exponentially. This is where the imperative for growth in our global economic system comes in. When the economy stops growing at the necessary rate then things get really problematic (as you describe). And we also have to recognise that our earth has limits to the resources that it can supply and the waste that it can assimilate, which means that constant and ever expanding growth is certainly not an option.

A new report by the sustainable development commission in the UK tackles the problem of growth….

In a sustainable, stable state economy, interest rates would be low. and there would inevitably have to be regulatory instruments to ensure that lending was limited. The problem with this is that the cost of borrowing can no longer act as a way of rationing the credit.

We need to find an alternative to our destructive ways and that has to happen now. We watch the deliberations of the G20 with interest today.

1 04 2009

while you are at it you can have a look at this petition on the No10 website. You can only sign it if you are a Uk citizen though

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