Any interest rate will necessarily cause inflation unless a trade surplus evens it out. The trade surplus is necessary to even out the loss which occurs because a %5 interest loan with an increase of wealth of %4 (or inflation) is a net loss of %1 per year for the country. If a country has a %1 trade surplus at the beginning of this cycle no inflation will occur. This is what happened right after the great depression. If the country does not have a trade surplus or has a deficit it will go into debt which will equal at least %1 per year. On a approx 70 year cycle depending on surpluses, deficits this could add up to a %70 loss minus any increase in the efficiency of production say %20. This will eventually lead to collapse with an exponential increase of debt at the end just like right now. If we do not have massive trade surpluses to pay off this debt right now the result will be massive foreclosures and a default on the massive interest debt. Unless people are refinanced at %0 interest this will happen and already is. After all these massive amount of foreclosures are defaulted on along with the massive amounts of accumulated interest debt prices will drop like a rock. This will result in a situation much like after the Great Depression.
If enough people understand and know about this it will stop! The upcoming and inevitable depression is the time when change will have to be implemented. It is much harder to change the course of a stable system than an unstable one.
"Any interest rate will necessarily cause inflation.." In the current system, it is the other way around. Interest rate is a reflection of inflation, and inflation is a consequence of profits made by not laboring but rather just taking a difference between a borrowing rate and a lending rate (which is a result of labour) which causes a devaluation of the medium of exchange which called money. The savers then require a positiive interest rate. If you do not have the above difference, medium of exchange will not devalue and savers will be happy with zero interest rate.
1. What is the missing function? Note that barter is wider in my understanding than it might be in others minds. Barter is a mean to exchange (past, present and future) result of labor. This does not mean that this exchange should be thought of as is an exchange done on the spot (like cash market), but is also inclusive of transactions across time a-la- futures/forwards market to link present with the future. 2. I will answer the rest once I hear your answer.
The easiest way to understand how interest actually causes inflation is in the example I gave before. If I get a loan on an asset I own that is worth a $1000 with %5 interest then pay the interest off I now have $950 to buy $1000 worth of goods. My money does not buy as much anymore. This is the fundamental cause of inflation. Right now Japan is lending money at %0.5 and their core inflation is steady at %0.1. If the banks did the same thing here the same thing would happen. There economy was in much worse shape than it is here now and they corrected that by lowering interest rates. That should go to show that inflation follows interest not the other way around.
Scary, actually. I've read the Mandrake Mechanism in books. But last night, finally understood. Its like a Trojan Horse in slow motion.
You don't seem to understand what happened in Japan. After the bubble popped, asset prices kept going down and down and down from their lofty heights. Wen consumers realized that what they wanted to buy would become cheaper the longer they waited it created a disincentive to spend and weakened demand. In essence what happened was that paper money became more valuable in relation to assets as time passed. It's the opposite of inflation. It was a deflationary spiral. To combat this and encourage people to spend money the Japanese authorities lowered interest rates to flood the economy with money. It's a radical idea. It should be noted that it is a reaction to the circumstances, not a cause. Look up the term "liquidity trap" for more detailed explanation. In the current situation in the US there is still a danger of inflation, so the advisability of lowering rates is not clear.
My original example was wrong. But the answer remains same for a different reason. The entire outstanding money supply is used to calculate interest owed. So if money supply grows faster than real GDP - IOW, if debt grows faster than the ability to payback - then eventually, interest payments consume all GDP. This is apparently the case. Take FED Funds at 1%, money supply growth at 5% and GDP at 3%. Should work out. First Year Nominal GDP 100 x 1.01 = 1$ interest paid from 103 Real GDP available. 5th Year Nominal GDP 127.62 x 1.01 = 1.27$ interest paid from 115.92 Real GDP available. 10th Year Nominal GDP 166.88 x 1.01 = 1.66 Interest paid from $134.49 Real GDP available. Interest Paid as % of Real GDP 1st Year = 1 / 103 = .0097 5th Year = 1.27 / 115.92 = .0109 10th Year = 1.66 / 134.39 = .0123 That proves it. Holy Shit. Each year, interest paid gets bigger as a percent of Real GDP. Takes a long time. But its exponential. The net effect is the difference from Real GDP and Money Supply Growth. That differential is the exponential multiplier. What the fuck.....?!! Lets use some real numbers next. Average Money Supply Growth since 1913. Average GDP Growth Real since 1913. Average FED Fund Rate since 1913. With that, we could predict when the United States will collapse, financially. More or less.
I understand what happened in Japan. They went through the same credit crunch as is happening here. Their debt load became more than they could sustain so the money supply choked up. After the necessary inflation deflation period they began lending money cheaply. The funny thing is they would be better of to give a small amount of money to everyone a sort of welfare to start the economy. Read some of the works f economist Clifford Hugh Douglas and you will see that our current economy is unsustainable especially the A+B theorem. I do not personally agree with all his ideas but even they are 100 times better than the current economy. As for the interest it is not a good idea yet but if when we go through the inflation then unemployment cycle it will be.
Any numbers like that seem hard to find. Even average cost to average wage over the last 50 years is impossible to find.