I have read about the prediction that if things continue as they are going, the interest payments on US foreign debt will soon exceed the GDP of the entire country. Surely, if and when that happens, the global economy will go into meltdown. So, correct me if I'm wrong, but it seems obvious that the very institution of interest itself is the root cause of all this. As interest creates a cost that is not tied to the money supply, this was all just a problem waiting to happen. It was inevitable, so how did so many people not see it coming? In any case, isn't interest an extremely inefficient aspect of the market in a capitalist economy? Shouldn't all lending and borrowing be based on a system of profit returns? Interest provides basically no incentive for the lender to contribute to overall economic development, whereas lending based on profit returns would encourage the financing of only potentially successful businesses. Even loans to households, like mortgages, could be fairly easily tied to future incomes in some way. The whole idea of interest is just to make the rich richer in the short term, at the cost of totally messing up the world economy and destroying the lives of billions as soon as we approach our global economic capacity. I would say that it is something that a lot more people should be a lot more angry about I should say that I am an economics student, by no means an expert, and I am just looking for people to point out why exactly this option seems to be considered by almost everyone to be completely out of the question. Any input greatly appreciated!
What you are describing is the exact way of economy described in Holly Koran. Interest is forbidden and all payments on borrowing is linked to the income of the borrower. Also, interestingly, there is no income tax but everybody over a certain asset size has to pay 1/40th of its assets to poor every year. Read the english version of Koran and you will see. Somehow God knew that an economy or money supply system based on interest has a dead end.
Someone is blowing some phony, idealistic smoke up your skirt. The "problem" isn't "interest" at all... it's deficit spending, money printing, excess credit creation supported by governments and banks/central banks. America will most likely collapse at some point... with interest and debt playing a major role... but without interest, our collapse would have occurred sooner.
Quite possibly.. But wouldn't introducing a stronger chain of risk and reward encourage a more responsible credit creation culture? I mean, if banks are rewarded for lending according to the relative economic growth resulting from that loan, isn't there the basis for an inherently stable system in that? Can you tell me why this is the case? And why you think this is a bad thing?
"The overnight lending rate is the most important benchmark interest rate for many other important rates, including banksâ prime rates, mortgage rates, and consumer loan rates, and therefore the Fed funds rate serves as the âbase rateâ of interest in the economy. In a state money system with flexible exchange rates running a budget deficitâin other words, under the ânormalâ conditions or operations of the specified institutional contextâwithout government intervention either to pay interest on reserves or to offer securities to drain excess reserves to actively support a nonzero, positive interest rate, the natural or normal rate of interest of such a system is zero." http://moslereconomics.com/wp-content/graphs/2009/07/natural-rate-is-zero.PDF
Much of islamic banking which appears to "technically" not be "interest"... is in fact the same thing with a different dance.
Interest IS, in fact, return on investment and is the same thing that you're describing as "profit returns. Just think about a little and it will all become clear, I am sure...
Ways around this are always found, once commerce gets started in any serious way. In Renaissance Europe, one person would give money to another by way of contract with a clause stating that x+ some amount would be returned in a different place at a different time. It was really interest, but in the contract was put down as a fee. See Medieval Bill of Exchange In the case of mortgages, land is valued (when you're not in a stupid bubble, anyway) indirectly by the amount a person buying that land can make, which is why real estate in Manhattan is way more expensive than real estate in the middle of some county in Oklahoma with more coyotes than people.
But it is a return that is not directly linked to the return that the borrower recieves if the loan leads to him increasing his income, for example if his or her new business takes off. I was just theorising that if banks or other lenders are dependent on the efficient use of the money they lend for a return on that loan, then they would be forced to be more responsible with regard to who they lend to and how much they lend. Or is that not a logical conclusion to draw?