Blunderov
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"We think in generalities, we live in details"
  
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RE: virus: The Scourge of Interest Rates
« on: 2005-08-11 14:02:53 » |
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[Blunderov] SANE's Internet-based Community Exchange System is a tonic.
Let's say you are a Dentist. You advertise your consultations at, say, 100
Talents. I am videographer. I charge, say, 300 Talents for a 30 minute Bar
mitzvah video. I make you a video. You do my teeth. The database now
reflects that you have been debited a total of 200 talents which accrue to
me. An increasing number of people here are joining this initiative. Not
only is it convivial, it is also untaxable.
On the subject of interest, one often hears the indoctrinated declaiming
passionately that homosexuality is 'against God, because it says so in the
Bible'. What they don't ever mention is that the Bible is even more against
usury than it is against homosexuality. Sunday after Sunday the faithful
hear the account of Jesus' expulsion the money lenders from the temple
without, apparently, the slightest comprehension its real import. Apparently
some provisions of scripture are less hard and fast than others.
This essay from Jeremy Wakeford suggests to me that those ancients who held
usury to be a grave sin were perhaps wiser than even they knew.
Best Regards.
SANE Views
Vol.5, No.16, 11 August 2005
The Scourge of Interest Rates
by Jeremy Wakeford
Jeremy Wakeford is a lecturer in the School of Economics, University of Cape
Town, and a member of the SANE Board. The views expressed here are his, and
should not necessarily be attributed to either of these organisations.
This week the South African Reserve Bank's monetary policy committee (MPC)
meets to determine short term interest rates. Their decision carries
significant consequences for just about every aspect of the macro-economy
(investment, consumption, savings, the rand exchange rate, inflation,
economic growth and employment). Many people - not just financial
speculators - await the MPC's decision with bated breath. But the role of
interest rates in our individual and collective lives is far more
fundamental and insidious than merely influencing monthly budget
allocations. It goes to the core of whether humanity will achieve
sustainability.
Most of us take for granted the current monetary system and the existence of
interest. Commercial banks create money each time they advance a loan (say
for an individual wanting to purchase a new home or car, or a business
wanting to expand its operations). Contrary to popular perception,
government creates only a tiny fraction (around 3%) of the 'money supply' -
the physical notes and coins in circulation. The remaining 97% of
bank-created money is virtual: it exists merely as numbers on computers. And
while notes and coins are non-interest bearing, bank loans and deposits both
come with interest attached - albeit at differential rates which suit the
banks.
The present money system, and the widespread levying of interest on loans,
actually has a short history relative to human civilisation. From
Aristotle's time (circa 300 B.C.) until the eighteenth century, charging
interest on money loans was considered morally unacceptable 'usury'. Indeed,
some cultures and religions - notably Islam - still outlaw usury today. As
money guru Bernard Lietaer points out, it was only when the Catholic
Church's assets shifted from land to financial capital that it declared
charging interest to be no longer sinful.[1]
Setting aside the moral issue for now, we can ask whether interest is really
'necessary' for the functioning of economies? Mainstream economists have
several justifications for interest (rates).
First and foremost, they say the only effective way to combat inflation is
by manipulating interest rates so as to dampen money supply growth. But only
in recent decades have interest rates been the primary tool of monetary
policy in most countries (when 'Monetarist' ideology came to prominence).
Before then, governments used various 'liquidity controls' to affect
directly the amount of money commercial banks created, and up till 1972 all
currencies were backed by a real commodity - gold. An in-depth discussion of
inflation is beyond the present scope, but suffice it to say that there are
other money systems which have historically not relied on interest rates for
price control.
Second, economists point out that at least one section of society - the
elderly - relies on interest payments on savings for their daily
consumption. True, but only because we live in a highly individualistic
society where we all have to compete for money which is in perpetually
scarce supply. Strong communities take care of their elderly in other ways,
rather than 'pensioning them off'.
A third justification for interest rates is that human beings are innately
short-sighted and impatient; they prefer to consume today rather than in a
year's time. This is undoubtedly true to some extent, but let's consider the
effect of the system on the people. If I live within a system over which I
have no control, then I had better do the best I can within that system,
i.e. respond to the incentives. So if the interest rate is high, I should
cut down and sell all my trees and deposit the money with a bank so as to
earn interest. This simple example illustrates a general principle: positive
interest rates on money incentivise the unsustainable draw-down of natural
resources. Furthermore, interest encourages production and consumption of
short-lived goods. For example, buying a new R50,000 short-lived car every
four years makes more sense than buying one R250,000 car that lasts for 20
years, even if you have the larger amount of cash now - because the balance
can be invested at interest.[2] On a global scale this massively
contributes to unnecessary resource exhaustion and pollution.
Aside from being an immediate threat to the environment, interest rates have
several damaging consequences for society. One is the discounting of future
generations. When economists evaluate an investment prospect, they
implicitly downgrade the importance of long-term costs and benefits (e.g.
environmental and social) because future streams of benefits and costs are
'discounted', i.e. divided by an annually compounding interest rate. An
interest rate of 10% effectively means that any costs or benefits that
accrue in more than 20 years' time are considered irrelevant to the decision
taken today. So much for consideration for our progeny, which is the
hallmark of sustainable development.
Not only intergenerational equity, but also current equity is undermined by
interest. Interest transfers wealth from the poor (generally debtors) to the
rich (generally creditors) - and especially to the commercial financial
institutions and their shareholders. This applies to nations as well as
individuals.
Moreover, the widespread indebtedness of consumers in the modern economy
locks them into wage dependency to pay off the interest on loans and credit.
The majority of people have to work increasingly hard for less as they
compete with others for scarce currency to repay loans and interest. On the
other side of the equation, interest encourages creditors to hoard money in
bank accounts, thereby depriving others of the crucial medium of exchange
and allowing real resources (like labour) to remain needlessly idle.
Finally, and perhaps most importantly, interest-bearing, debt-based money
requires continuous economic growth to avert financial collapse. This is
because real economic activity must always expand to finance interest
payments on loans - more has to be paid back than was originally borrowed.
In sum, a financial system based on debt and interest is completely at odds
with the key principles of sustainable development: sustainable economic
livelihoods, social equity and environmental sustainability. Sadly, given
the astronomical vested 'interest' in the current setup, probably the only
way human society will progress to a sustainable economy is via a major
collapse of the current global and national financial systems - which an
increasing number of informed people regard as inevitable and rapidly
approaching. This will bring pain and suffering to many in the short to
medium term, but is vital for the sustainability of human society in the
long term.
Are there alternatives? Yes, community-based, local currencies such as Local
Economic Trading Systems (LETS), which usually charge zero interest, and
sometimes even include a negative interest rate or 'booster' to encourage
circulation and long-term real investment. There are currently over 7000
such LETS worldwide, albeit mainly in rich countries. Similarly, in previous
economic downturns such as the Great Depression, local currencies have
sprung up spontaneously as the limitations of national currencies became
manifest. And in case you think such local schemes are irrelevant in today's
globalised world economy, think again: SANE's Internet-based Community
Exchange System now has several trading groups operating in various parts of
the country as well as in Australia and New Zealand. Such systems provide
hope for the future.
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