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The Problem is not Debt, it’s Interest

by on October 7, 2011

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 thousand dollars 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, with in 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 their 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 it 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 in 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 BS. 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 it’s 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 over night.

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 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.

This article was written for Activist Post

Related:
On Interest
Budget of an Interest Slave
Usury: why we don’t build Cathedrals these days….
Debt Repudiation or an Interest Strike?

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37 Comments
  1. the public employees union and the welfare industry spent and borrowed Detroit into oblivion
    Detroit collapsed under the weight of debt, not the interest on it, but the $18,000million of principle
    let this be a real life example to gasbags who babble about principle not being relevant

    • krle permalink

      been thinkin and would have questions about zero interest policy… say we pay off the debt and enter an era of no interest, but debt money… who would control volume? if indeed there was a control of volume, the money could become scarce at one point, and all would not have equal access to it, so hoarding would become a problem, resulting in default.. what would be the duration of zero interest credit? if the volume were not (sufficiently) restricted, debt/money could grow perpetually without incentive to repay it /work.. and there could be, for the first time in history, circulatory hyper inflation.. there also could be deflation, if some were hoarding, and others wouldnt want to take on new debt/ or it would not be extended..

      demurage.. hoarding ofcourse discouraged.. or would it just be mimicking price inflation? if it were losing value, why would anyone lend it out without interest? would the currency be dispensed to everyone equally? everyone might want to capitalize on it immediately, causing hyperinflation in a positive feed-back loop.

      ther would again emerge winners and losers, and wealth/power concentration

      and all of the above would also seem true for a non-debt currency. I fail to see an advantage over the present system.. the holders of means of production win in all cases as they ultimately dictate what any currency is worth.. more so in a non-labour intensive economy

    • krle permalink

      name789, are you the Australian bloke from MPE?

  2. Anthony,

    Do you have a link to the study you cited in your video? Thanks for posting this video. It’s a really interesting idea.

  3. You’re right: the money supply does shrink when loans are repaid but it soon expands when the repaid money, which is the principal, is loaned out again.

    Tell me where this great void is. I want to be there when you pay your 500K.

    Best wishes, I enjoyed our debate. Keep up the good work. I respect the effort you are making for the benefit of us all.

    Thank you.

    Regards
    Roger

    • And thank you Roger, I appreciate it!

  4. Dear Anthony

    Why would the paid principle be taken out of circulation; this is labour-laden real money.

    How do they take it out of circulation?

    The fact still remains you and the rest of society will have paid 500K which was as a result of the banks conjuring it up out of thin air.

    • this is how the system works: the money is created when the loan is taken out, it is retired when payed back.

      Only the interest remains.

      Yes, we pay back the principal, but the principal, while created the minute we lent it, is actually real: it represents the value of the house we bought and the credit we obtained from our brethren, through usurpating middleman, aka the bank.

      Repaying the principal is thus just. The interest is the problem: the 300k we pay just for bookkeeping. Repaying the principal gave us the house.

  5. Dear Anthony
    This is an excellent article—meticulously constructed.

    It was exposed in a recent ‘Independent article that 97% of, so-called ‘money’ is created ‘out of thin air’ with digits on your account, by the high street banks. The other 3% is mainly banknotes, which are loaned by the Bank of England to the high street banks at a small interest rate –point 5% at the moment. With this in mind I comment on your article:

    Before you signed a contract, allowing the bank to steal the principal sum of 200K from you and the working community collectively, they offered you a contract to sign for worthless digits. Upon signature you became the conduit for them to steal yours and the working communities labour because all of us have to work to give the bank, not repay, the principal sum.

    The fraud is not just charging interest on the principal sum—it’s stealing the principal sum as well.
    Did they have the 200K at the time you signed the contract? No, they did not. So it comes from you and the working community when you pay it.

    Am I right? If I am they are not just stealing interest, they are stealing the principal sum as well; a total of 500K.

    Can such contracts be lawful? I think not. The bigger crime is the theft of the principal sum, without which they could not charge interest
    .
    The answer is a community-owned-bank so that, as payments for the principal are made, lending rates to borrowers can be reduced and payments for depositors can be increased.

    Even if you don’t pay the interest, the bank still steals the principal amount of 200K, through you as a conduit to tap the labour value of the working community, which it didn’t have before you signed the contract.

    Fractional reserve lending is ok providing it is collateralized, albeit, in many cases, by the borrowers future income. This is necessary for liquidity
    ,
    Focusing on the interest is a diversion from the bigger crime—stealing the principal sum, by deceptive contracts, from the working community. The interest aspect in the current debate is just a ‘Red herring’

    • well, the interest is 300k, while the principal is 200. So no, it’s not a red herring.

      I do believe you have a real point. For instance, if I go bust, they foreclose, suggesting they actually lost something. But while they don’t, society at large does: it is our neighbors that actually allow us the credit, through the bank as middleman: the principal allowed me to buy the house, so the debt is real.

      Another issue is, that banks routinely securitize the mortgage. This they don’t have our permission for. They don’t share the proceeds of this securitization, which is also illegal.

      • Dear Anthony
        Everything you say in your article needs to be said and your articulation of the facts is superb but would you not agree that if the bank did not conjure up the 200K figure by passing it on as a debt to society at large, with you as the conduit, to gift to it, there could be no interest charged by it?

        The fact does remain that the bank will have received the full 500K from you when it gave you nothing in the first place except, maybe, a cheque book cover.

        The fundamental crime is concealing the truth from the borrower: a contract for anything must have something of ‘good consideration (Something of value)’ from both parties and this must be stated in the contract; maybe the ‘good consideration’ could be a cheque book cover but I doubt that this is explained fully in the contract. Can you imagine the reaction of a borrower when it is made clear to them that they are paying 500k for a cheque book cover?

        • While it indeed begins with the principal it also must be noted the bank retires the principal upon repayment Roger. So after the mortgage is payed off, only 300k remains: the principal is taken out of circulation the sec it’s repayed.

          Thank you for you kind words about the article!

          • Dear Anthony

            I agree that our brethren create the credit and they also create the house by their labour.

            Where is the money retired to? Can you give me a reference for this information?

            • It just goes where it came from Roger: the great void……

              http://en.wikipedia.org/wiki/Monetary_policy_of_the_United_States#Money_creation

              Here’s the sentence: Basic economics also teaches that the money supply shrinks when loans are repaid

              • Dear Anthony

                I checked the website you gave me: nothing is mentioned about the repaid principal on loans. My request for a reference about the retirement of funds is, therefore, still open.

                I made a mistake: it’s only 200K of your 500K that’s going into the great void. Anyway, that’s enough for me!

                Regards

                Roger

                • yes, it’s ‘only’ the 200k returning where it came from.

                  I’m sorry: I have no crystal clear source explaining all the ins and outs of money creation (and deletion on repayment). These things came to me during the years. The link I gave you does mention it, in the sentence I quoted, but I agree it’s not comprehensive analysis: you’ll have to do a little research yourself (and I’d be interested in what you dig up! I write to learn!)

                  • I agree, I’ve been writing about this for a while but i don’t believe we can outlaw usury see profit and interest can be moral http://iwillknow.jesaurai.net/?p=154 and I’ve done a bit of research on money creating and the rise in money supply globally see Can Banks create money out of thin air http://iwillknow.jesaurai.net/?p=1296 and they can’t and don’t. also i suggest as a way to counter the flow up of interest a flow siphon and flat payment which sends the money back again. See How to create a more Fluid society http://iwillknow.jesaurai.net/?p=1238

                    • Another interesting, no pun intended, thing is that Francis Bacon back in the 1500’s when contemplating the sinfulness or otherwise of usury couldn’t imagine mortgages and interest being used to compensate the lenders risk. He thought it should either be one or the other. How wrong he was.

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