The Problem is not Debt, it’s Interest
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.
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.