Friday, October 7, 2011

The Problem is not Debt, It is Interest

Anthony Migchels
Activist Post

How do we know this?

Consider a mortgage. We borrow $200k, and after 30 years we will have payed about $500k. So we pay $300,000 interest over the loan.

What would happen with our purchasing power if we only needed to repay the principal? It would mean we would have $10,000 per year more purchasing power during the 30 years we repay the mortgage. Our credit would greatly improve, because our liabilities would be much smaller.

Interest is payed to those who have money, and payed by those who don't and therefore need to borrow. Interest is therefore a wealth transfer from poor to rich.

Margrit Kennedy, a German monetarist, has quantified this wealth transfer in Germany. Her conclusions: the 80% poorest Germans pay 1 billion euros per day (365 billion per year) in interest to the richest 10%. The next richest 10% pay about as much interest as they receive.

Also, within the 10% brackets the same wealth transfer is happening, so the poorest 8% of the richest 10% pay interest to the richest 1%.

It stands to reason that the situation is more or less the same everywhere. This means that the poorest 80% Americans pay about 1.5 trillion dollars per year to the richest 10 percent.

This is the key driver centralizing wealth in the hands of the plutocracy.

Another problem with interest is that it is not transparent who pays what. The strange thing is that even if you don't have any debts at all, you will still lose up to 45% of your disposable income through interest.

Producers incur 'capital costs'. They pass these costs on to their customers. The amount of interest they pay on the loans to finance their production differs per sector. But it transpires that on average 45% of the prices we pay can be related to cost for capital.

Now, back to the debt.

Is it reasonable that one should be able to get a mortgage? Is there something intrinsically wrong with the debt?

It is probably quite useful for the large majority of the people to be able to get a mortgage. Most people would not be able to buy their own homes if they were not able to go into debt.

Another important aspect is that in the case of a mortgage the creditor incurs no risk at all; he has the house as collateral.

And who is the creditor? In most cases a bank. A bank basically is a credit facility. However, the bank has made us believe that it is their credit, that we are borrowing their money.

This is not the case. Credit is the result of collateral and future income. A person has about 30 to 40 productive years and in that timespan an average American will make about 1 or 2 million dollars.
 This future income is what makes the bank provide the credit.

But this future income is not the Bank's; it's the individual's income. It is therefore their credit.

So banks capitalize the credit of the population.

We know that in the current construct all this interest is being raked by the banks by creating the money at the time the money is loaned out through Fractional Reserve Banking.

We consider it unfair that the bank has the right to create money. Therefore, a full reserve gold standard is propagated. Not only taking away the iniquity of money creation, but also the nasty habits of banks going broke by overleveraging themselves.

But if we take out a mortgage in a full reserve gold bank, we would still pay $500k for a $200k home. We would still lose 45% of our disposable income through interest passed on in prices.

To further the above points I'll leave you with a little thought experiment.

What would happen if.........

We would nationalize all banks. This would not be unfair; they are all busted and they already needed 16 trillion in Federal Reserve handouts. They are still all under water.

We would weed out all the B.S. Derivatives would all be canceled, all the funny financial products gone.

We would maintain real debts by businesses and consumers, mortgages, and the national debt.
 But we would cancel all interest payments from now on. Of course, savers would also no longer receive interest, but keep in mind that the average American loses far more in debt service than he gains in interest on his savings.

If debts are repaid, the money supply deflates; to maintain a stable money supply we would give out as much new credit as there are loans being payed off.

What would this mean? A direct end to the depression, because enormous purchasing power in the economy would be released. Consumers would be twice as rich, prices would collapse because capital costs are gone.

The credit of the people borrowing from the banks would massively improve, immediately putting an end to solvency problems of these banks. There would be no more bailouts.

The Government would have an immediate windfall of $700 billion per year, which is what it currently loses on debt service. But the Government, too, loses half of its disposable income to capital costs through prices. Not to mention the increased tax income from an exploding economy. So it is likely that without any austerity the deficit would disappear quite soon.

The banks would be reorganized; many people, especially the expensive 'traders' and 'investment bankers' would all be gone. All that would remain are the people running day-to-day banking services. Therefore, the costs of these banks would be much lower. These costs can (and must) be passed on to debtors, but they would be low.

I believe that managing a risk-free loan like a mortgage should cost no more than max. 10% over thirty years, so you would pay maybe $220k for $200k home.

There would be no more bailouts, no more bonuses. The wealth transfer from poor to rich would end overnight.

All these benefits would go to Main Street. It would imply a major decentralization of economic power, which is also a key point.

Of course, it would disown the trillionaires, but, hey; I say enough is enough.

Now, I'm not saying that this is what we should do at this point. This is just a thought experiment.

It shows it is not debt that is the problem, but interest. It shows that it is not a full reserve gold banking system we need, but interest-free credit.

Of course, with this analysis we have not addressed inflation, which is strongly on the minds of most proposing full reserve gold-backed currency. We will deal with that next time.

Anthony Migchels is an Interest-Free Currency activist and founder of the Gelre, the first Regional Currency in the Netherlands. You can read all of his articles on his blog Real Currencies.


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Carl Herman said...

Excellent article; thank you, Anthony. We make this argument in promoting public banks:

Anonymous said...

I don't even think interest is the problem...It's consumerism. Why anyone would finance something like a TV is beyond idiotic. But, still we do it and by we I mean those at the lower end of the economic ladder.

There is "good debt" and there is "bad debt" and until people (and governments) figure out the difference everything else is moot.

Anonymous said...

Usury is a damnable sin.

And if you love them that love you, what thanks are to you? for sinners also love those that love them. And if you do good to them who do good to you, what thanks are to you? for sinners also do this. And if you lend to them of whom you hope to receive, what thanks are to you? for sinners also lend to sinners, for to receive as much. But love ye your enemies: do good, and lend, hoping for nothing thereby: and your reward shall be great, and you shall be the sons of the Highest; for he is kind to the unthankful, and to the evil. Be ye therefore merciful, as your Father also is merciful.—Luke 6:32-36

If thou lend money to any of my people that is poor, that dwelleth with thee, thou shalt not be hard upon them as an extortioner, nor oppress them with usuries.—Exodus 22:25

If thy brother be impoverished, and weak of hand, and thou receive him as a stranger and sojourner, and he live with thee, Take not usury of him nor more than thou gavest: fear thy God, that thy brother may live with thee. Thou shalt not give him thy money upon usury, nor exact of him any increase of fruits.—Leviticus 25:35-37

Thou shalt not lend to thy brother money to usury, nor corn, nor any other thing: But to the stranger. To thy brother thou shalt lend that which he wanteth, without usury: that the Lord thy God may bless thee in all thy works in the land, which thou shalt go in to possess.—Deuteronomy 23:19-20

A psalm of David. Lord, who shall dwell in thy tabernacle? or who shall rest in thy holy hill? He that walketh without blemish, and worketh justice: He that speaketh truth in his heart, who hath not used deceit in his tongue: Nor hath done evil to his neighbour: nor taken up a reproach against his neighbours. In his sight the malignant is brought to nothing: but he glorifieth them that fear the Lord. He that sweareth to his neighbour, and deceiveth not; He that hath not put out his money to usury, nor taken bribes against the innocent: He that doth these things shall not be moved for ever.—Psalms 14:1-5

As I live, saith the Lord God, this parable shall be no more to you a proverb in Israel. Behold all souls are mine: as the soul of the father, so also the soul of the son is mine: the soul that sinneth, the same shall die. And if a man be just, and do judgment and justice, … Hath not lent upon usury, nor taken any increase: hath withdrawn his hand from iniquity, and hath executed true judgment between man and man: Hath walked in my commandments, and kept my judgments, to do truth: he is just, he shall surely live, saith the Lord God. Though he doth not all these things, but … That giveth upon usury, and that taketh an increase: shall such a one live? he shall not live. Seeing he hath done all these detestable things, he shall surely die, his blood shall be upon him.—Ezechiel 18:3-13

Anonymous said...

Muslims are vehemently against usury. They can apply for a muslim home loan in america and avoid interested payments. I bet the banksters freaking hate that! No wonder they are the enemy dujour.

this site is great!

Anonymous said...

Consider the outrageous "capitalized" interest on student loans, or worse the 'interest" and "penalties" (compound interest can total up to 70%) on an IRS debt. I have personally know 2 people who are now bankrupt over a 5,000 tax bill that ballooned to 25K over a period of 18 months. Getting a tax lawyer costs 5000k minimum,just to fight the FEDS.

Student loans? Well, now that universities and colleges are officially for-profit, (900% increase in average state tuition since 1983), it's no wonder that people have to take out loans, then graduate, not find a suitable job, go into deferment,get slapped with outrageous capitalized interest that follows you FOREVER.
What a sick joke.

David Jet said...

Question, given the notion that all value is subjective, and humans are the only source of subjective value, then a Human being is of greatest value. Money, is just a construct humans have created to quantify human value. A dollar bill or any currency is a physical representation of human value. Why have we lost this understanding? Usury is an affront to life, and is a cog in the machine that is leading humanity to it's ruin.

Anonymous said...

It's ironic that once upon a time the Roman Catholic Church outlawed Christians from taking interest on loans supposedly in an attempt to ensure the Church retained complete control over finances.

Instead they handed that control to some Jews who weren't bound by the rules of the Church and could make interest charges and quickly took over the "finance industry".

Some say that was intentional, a joint venture of the "Judeo-Christian order" to share the power - the Christian faction gets the political power and control of our minds while the Jewish faction controlled most of the finances.

Some say that is the primary reason the "Novus Ordo" or New Order churches were formed and splintered off from the Judeo-Christian Roman Catholic Church, and why the Novus Ordo Christian Europe was so prejudiced against the Jews.

I'm not sure about all that myself but mention it as a word of caution - if you try to outlaw interest you better make sure the law/rule applies to everyone, that it is truly universal.

The exceptions to legal and/or moral orders are what give the corrupt so much power in the first place.

Anonymous said...

We either 'stomp on the ants coming from under the fridge but they will come back', as history has shown us, or we 'remove the rotten food entirely and stop the infestation altogether'. We can remove the system entirely and redesign it from the ground up to benefit all people, to raise all peoples standard of living, to ensure human rights are mandatory not optional. To ensure all people can thrive and have access to clean natural food and clean water. To have a home, education, and more.

Good luck to getting agreement on that! It's so caked in to society people see it as normal. It's up to the people to stop supporting this system, peaceful non-compliance, this will speed up the collapse which has already started. Only when people do not have faith in money any more will they look for alternative solutions.

When almost all counties are heavily in debt, when the world is bankrupt in 30,40,50 years, what then? Are we going to shut up shop because there is no money, or are we going to realise that this is all a game to control us, and the Earth still has exactly the same resources as before. I hope this happens much before then. We deserve a future for us not dictated to us by goldman sachs etc.

Jack Mullen said...

Anthony very well reasoned article. I noticed that you read my article also regarding interest payments. Interest payments are key to understanding how the American fiat-banker-script will die. Total debt is meaningless since the debt is fake to begin with - it is the interest payments that siphon wealth away... Interest free currency, and not gold backed currency are part of the solution .. but gold and silver and other monetary metals can and should be free to be used as money. Thank you for the article ... Jack Mullen

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