What Gary North is not telling you about Interest
So at long last, Gary North has felt the need to say something about interest. Beside, of course, whatever he had to say in his massive 20 volume economic commentary on the Bible.
I’m glad he did.
The fact that Austrian Economists felt they could ignore it, was bad news for the cause.
Next, we’ll look at what he has to say, but first let’s see what he did not deem necessary to discuss.
What he didn’t say
There is the fact that interest is being payed by the poor, to the rich.
Adds up, doesn’t it? The rich have money, the poor don’t. So the rich lend it to the poor and receive interest in return.
In Germany Margrit Kennedy quantified the wealth transfer. It transpires, that the poorest 80% pay more interest than they receive. Only the richest 10% receive more interest than they pay. The next 10% lose nor win through interest.
Predictably, within the top 10% bracket the same process is going on: the poorest 8% pay more than they receive to the richest 1%. Even in the top 1% bracket, the same thing is happening.
A decent explanation for the Rothschilds, wouldn’t you say?
On the other side of the spectrum, we see the same inverted. The poorest 10% lose to all the higher 10% brackets.
The 70% bracket almost receives as much interest from the poorer classes, than he loses to richer 10% brackets.
This shows that the poorer you are, the more you stand to lose with the current system.
So how much money are we talking about?
In Germany it has been established that the poorest 80% lose 1 billion euro’s per day to the richest 10%. That’s about 365 billion euro’s per year.
Extrapolated to the USA, we may expect the poorest 80% pay about a trillion or 1.5 trillion per year to the richest 10%.
That may not even sound that much with a 14 trillion GDP, but remember what percentage the richest 10% take of that GDP and what the poorest 10% earns.
So the system intrinsically greatly favors the rich.
Another major item that Gary North ignores is this:
Even if you have no outstanding debt, you lose 45% of your disposable income to interest, assuming you spend all of your income, which is true for no less than the poorest half of the US.
How come? Producers incur capital costs while producing the stuff we want. This is a no brainer, but nobody ever cared to calculate what these costs really amounted to.
H. Creutz and Margrit Kennedy did and they came up with this astounding number.
The numbers differ per sector. Food prices apparently consist of about 25% interest. Capital intensive industries like construction can see percentages up to an incredible 75%. Imagine that: the figures show that about 75% of the costs of building a home are costs for capital.
Finally, let’s consider the old tale of the mortgage.
You pay 300k interest over thirty years for 200k home. Nowadays this money is just created when you borrow it. This we consider unfair. So now we are led to believe we must have Gold instead?
We should take it a step further. If we can create the money for nothing, we should pay almost nothing for it.
That is the basic case for interest free currency and this is what Gary North ignores, and as we shall see, has done nothing to refute in any other way.
What he did say
Let’s begin with the latter part of his essay. North pens a lengthy litany on how, with a stable money supply, interest rates would automatically go down to almost zero through price deflation.
He’s well known for his predilection for deflation. Declining prices. Wonderful, right?
But he never mentions deflation is pleasant for creditors. Both the value of the outstanding debts and the interest payed over them increase.
As we have seen, there are many more debtors than creditors, so deflation is a nightmare for the vast majority of the people.
Also, because in deflation money is gaining value, there is strong incentive to hoard it instead of spending it. This diminishes the urge to invest. And this harms economic growth.
Next, he ignores the question where the bankers are going to get their Gold from. Or better: he simply states banks attract Gold by taking in deposits in exchange for interest. He claims the free market will eventually force these depositors to accept close to zero interest rates. Because it is so handy for them to store the Gold there.
North assumes that the whole world will immediately run to a newly opened full reserve Gold bank to dump all their gold there as quickly as possible?
Well. Maybe. But theoretically, we must take into account the notion that some parties might be playing the Gold market. The boys at Gata certainly seem to think so.
Gold has been a strategic commodity for a long time. I think it might be a little risky to not consider someone may have cornered the Gold market.
The possibility is, that some powerful parties have amassed a lot of the Gold. They would be able to dominate a Gold market and set interest rates as a Monopoly would.
All this is mere speculation, maybe. But I’m certainly worried about it.
Furthermore, the past does not give much hope for the idea of zero interest rates for Gold. And that was in an era that through fractional reserve lending more liquidity was in circulation than there was Gold.
North concludes his deflation narrative in this way:
“In a capitalist world in which there is no increase in the money supply, there would be low rates of interest in an expanding economy. Banks might offer – probably would offer – loans at zero percent or slightly above to borrowers, and also offer negative rates of interest – charges for depositing gold – to depositors. They would sell gold storage and check-writing services.
Inconceivable? Really? Have you looked at what your bank is paying you to get you to deposit your money? Look at what the U.S. Treasury is paying: one one-hundredth of one percent per annum on 90-day T-bills. If this can happen in this economy, it can surely happen in a full gold coin standard economy with falling prices.”
But this is complete rubbish of course: North (right) should know we live in a banker induced boom/bust cycle. They bring down rates only to bring the whole crowd into debt, then they raise rates again. Expect rising rates at some point this time also.
In the Gold Standard of yesterday, there was never zero percent credit and North knows this well.
So this whole narrative of price deflation automatically making credit cheap is far fetched at best. To be honest: the whole story stinks.
To get to the point
Earlier in the article North comes up with the classic explanation for interest. Time. The creditor cannot use the cash while someone else borrows it.
Personally, I believe this is the basic reason why the bankers want to go back to Gold. Because if you have paper, it all sounds a little strange: the money is based on credit, created the moment the loan is put out. So there is no ‘time’ aspect. The money didn’t exist before it was borrowed. It will cease to exist when it is repaid.
But if you lend out Gold, you have a better story. More people will fall for it. And it is an argument to be reckoned with. It can be defeated, but not merely with economic arguments. That is, if Gold obtains a currency monopoly when we do away with the current ‘system’.
To be honest, considering the horrible implications of interest as discussed above and ignored by North, I think we should be far more diligent in our quest for interest free money. It is far too easy to say ‘people want something back for the time they don’t have their gold’.
The cost is just too high.
An interesting approach is Social Credit, which quite a few populists promote.Dick Eastman (above) is probably it’s most powerful advocate. It is debt free currency printed by the Government, and handed out to the population to spend into circulation. It’s much better to have the people spend it than Government, like the Greenback. It’s their money to begin with, and they know better what they and the country need. Also, the Government has little incentive to inflate: it would gain nothing from it.
The main problem with Social Credit is that it does not allow interest free credit. It would still needs banks for that, including interest.
It is for this reason that Public Banking, introduced by Ellen Brown (above) is so important. It is much better than the Greenback, and probably about as good as Social Credit. By the way, Public Banking and the Greenback are two very different propositions. The way North equates them as one is sloppy at best, reeking of a lack of understanding at worst.
The two real problems with Public Banking are the ones the Austrians detest most: it’s basically a statist approach and it is far from certain that Government is the right place for money creation. However, Public Banking includes the option for individuals to open banks and use them for interest free credit. Privately owned banks with such a goal would face the problem of capitalization. This is a result of the necessity for reserves, even in a fractional reserve banking system.
And of course there is inflation: Public Banks would typically print more money than is necessary, thereby allowing price rises. The fact that the credit would presumably be used for infrastructural projects and the like is not a sufficient safeguard against this.
These are real problems, but considering the horrific costs of interest to the majority of the population, perhaps we should not be overestimating the problem of inflation. Or look for other ways in combating it. Educating the public for instance. Although that has shown to be a daunting task with most matters.
However, The Gold people have realized some time back, that a State sanctioned Gold Standard is probably no better than any other State sanctioned monopoly. It is, at any rate, not consistent with their anti statist approach to life and the economy. An approach I hold very dear as well, by the way.
Also, a currency monopoly, even if it is Gold, is not really consistent with a Free Market ideology.
So nowadays Austrian Economists argue for a free market for currencies, as do the interest free currency people.
They assume Gold (or a bimetal standard) will prevail in such a market.
And this is the crux, making the debate about ‘time’ and it’s price, interest, superfluous.
What units will win in a free market for currencies?
What will happen if Ron Paul gets his way and legal tender laws are revoked?
People will continue to hoard Gold and pay with Federal Reserve Notes.
It’s called Gresham’s law.
Bad money drives out good money. Either the overvalued or depreciating units will circulate, while the better store of value will be hoarded. Gresham’s Law, although needing repair, will always prevail.
However, I don’t reject Paul’s proposals.
It is right that legal tender laws, creating the currency monopoly, should be revoked.
Gold will be irrelevant in any mature currency market. It loses even against the federal reserve notes.
As a means of exchange, that is. Clearly it is a much better store of value than the dollar.
That’s the problem with Gold. Everybody loves to have it, therefore they hate to pay with it. People will only pay with Gold if they don’t have anything else to pay with. Therefore Gold will lose as a means of exchange against almost any opposition. Even as lousy as the Federal Reserve crap.
But in a free currency market, we will see a third way, besides banking currencies and Gold: Interest free credit, provided by Mutual Credit Facilities.
From fractional reserve, to full reserve, to………no reserve ‘banking’.
Although I suggest we do away with that word altogether. Banks stink, always have, since the days they still called themselves ‘Goldsmiths’.
All the units are created as credit, from day one. Zero capitalization is required. No deposits, no savers are required.
It’s the way most barters operate. These barters are already quite successful (in terms of turnover and profitability). There are thousands of them worldwide.
But they are severely handicapped by the fact that none of them are convertible to other units. Most notably dollars or euros. Up to a few years ago, the technology was not available. It is now, but it is not well known. Yet.
Bitcoin is showing the way, but very primitively. It is not created as credit, so there is no interest free credit. However, it does show how free market currencies can be made convertible to other units.
Soon, these currencies will be available. Some of them are being launched as we speak.
What will happen if, besides Gold and Federal Reserve Notes, Mutual Credit Facilities will be offering their units? Convertible to Dollar and also Gold?
They will destroy the dollar and every other ‘national’ currency.
Because nobody is going to a bank for a 5% per year mortgage, either in Gold or in paper, if you can borrow the money at 0% percent at your local regional interest free currency dealer.
But will businesses not demand Gold, you might wonder? Well, businesses who will only accept Gold will face a problem in the face of competitors accepting paper also, won’t they?
But the businesses will not want the money if they can’t save it, will they?
Corporations are not interested in the question what the money will be worth in a year. They want to know where they can spend it usefully tomorrow.
But they lose value, these units, you say?
So what? If I have some of them and I want to save them, I just go buy some Gold and bury it in the back yard.
That’s the difference between a store of value and a means of exchange.
So as long as the credit facility has sufficient takers for it’s units and/or as long as it is convertible to other currencies businesses will always accept them.
The main example is WIR, in Switzerland. These guys turn over 2 billion WIR (1 WIR = 1 CHF) per year. They have existed for 80 years. They have 1 billion outstanding credit. Eighty thousand small and midsized business accept the WIR and it is widely recognized as a major contributor to Switzerland’s diverse and prosperous economy. Many of these businesses say they would not have survived at least one of previous recessions. Because WIR is especially important during downturns.
It’s main limitation is that it is not convertible.
But even this is not the reason it has not destroyed the Swiss Franc. The story is, that the Big Banks have told WIR to stay put to avoid problems. The Banking Maffia is very powerful and that’s just one reason we need a free currency market.
WIR’s great strength is it’s superior management and it’s focus on the common good. Most barters are not quite as successful as they could be, because they are exploited by their owners for their own purposes.
In this day and age, however, when more and more people are waking up to the all importance of money, more players with the right focus will enter the market.
No, Gary North did nothing to dispel the nonsense of interest.
So he was unable to discredit Public Banking and Social Credit.
But yes, we agree that a free market for currencies is the best way.
And again no, Gold will not prevail in such a market.
Gresham’s Law makes it useless as a means of exchange and interest free currencies are much cheaper.
Updated 12/23/2011 2:48
Some minor textual matters and a few details.
Updated 12/23/2011 10:27
Idem, I also improved the title.