How the heck does anyone "pay you 20% interest" when the gold supply is only growing, on an aggregate basis, by 1-2%/year? When you start talking about that fractional reserve stuff, then you're talking about creating debt-based currency. Which, by definition, becomes increasingly less and less gold-backed. You can't just jack the velocity of gold to infinity, and create an environment in which interest exceeds that, on an aggregate basis, of that of the global supply of gold. A very high velocity of money would result in interest rates trending towards 0% (ie: the gold changes hands so many times, and facilitates so much commerce, such that, a saver can make, and have loans repaid many times a year), whereas, a very low velocity of money would push interest rates towards precisely the expansion in the worldwide gold supply, ie: 1-2%/year. This is what we're seeing right now in the economy; money velocity is falling, and with that fall, interest rates are rising dramatically. Government is desperately trying (and failing) to increase velocity, but they are largely being unsuccessful. 20% interest would only work, in a gold based scheme, when lending to an entity that has the ability to manufacture new gold, ie: through alchemy. 20% interest works in a fiat based scheme because new paper money can be printed up on demand from a printing press in the hands of certain entities. Of course, certain types of loans would have different risk premia or discounts. Gold mines (or proxies thereof, in the commodities/mining sector), for instance, because they have the ability of producing new gold, would have a risk discount (they might be able to borrow at a negative rate of interest), while, for instance, the sandwich counter dude might pay a higher rate of interest. But the benchmark 'gold' rate could not sustainably exceed that of expansion in the gold supply.
We let the market decide! If you have the money and I want to borrow it, ultimately it's my decision what the rate is. If I don't like the rate, I don't take the money. I have lived my entire life so far and never taken on a mortgage. I lived with my parents for the first 18 years of my life and rented since. I don't *need* to borrow to buy a house. Hell, I can sleep in my car. Or a tent. Or under the stars. If you let us factor out inflation because you lend in a fixed money supply of gold, and I pay back the mortgage in gold, then it is a simple equation. Let: A = total mortgage payments until house is paid off B = rent from age 18 until death if A > B then rent if A < B then buy Also factor in the difference of mortgage vs rent and what I could earn by investing the extra money. Don't forget about the emotional value of owning a home. Or resale value of the home if I want to move. Or the chance that rent will increase. Or the chance that I will lose my job and not be able to make the mortgage payment, have to move out and sleep in my car anyways.
So according to you then, Since a moneylender (whose product happens to be loans) can not sell his product for more than 1-2% higher than it costs him, then by that reasoning, everyone else in the world can not mark up their products higher. I mean, if I make widgets, I cant sell them for 20% more than it costs me to make them? Not everyone in the world owes money. Maybe if everyone in the world owed money and money lenders NEVER spent any money that they were paid and horded all the extra interest, THEN your little scenario might make sense. Also, a high velocity of money doesnt trend interest rates toward 0%. 0% interest rates create a high velocity of money.
In a normal economy that does not have excess demand, a mortgage should always be a cheaper monthy payment than rent. Only the last 10 years or so its been mostly cheaper to rent than to buy, but that was because of the bubble. In a gold based economy with no inflation, its logical to assume that rents are about 25% higher than mortgages if you are paying 20% in interest to the banks.
10-20% is silly... In a world that you describe, a prevailing interest rate would be equal to the nominal rate of return on a marginal ivestment in your world's imaginary economy. In itself, this nominal rate of return would be a combination of the real rate of return, which would be a function of productivity/population growth, and inflation. If you're describing a relatively mature, Western-style economy, I'd guess the prevailing nominal interest rate should be arnd 3-5%. Apply a reasonable spread to that rate to get a "fair" mtge rate. Should be arnd 4-7% if you ask me.
You can mark them up for whatever you want, but at some point, if you mark them up too high, and your product is in demand, you will exhaust the world's money supply. In a pure gold backed, non-fractional reserve banking system, the only way to repay a loan of gold, is for the borrower to create a good or service that is acceptable in exchange, ultimately, for the gold of a gold producer, or an existing gold owner. (for instance, a farmer might borrow 100 ounces of gold from a bank, but sell 10,000 chickens to a supermarket, which in turn, sells food to gold miners, who, in turn, get paid by the mine in gold) But there's only so much blood that can be milked from the same stone. Hardly. High velocity implies the maximum amount of leverage in an economy, and hence, for a given amount of base money, the maximum in economic activity is facilitated or occurs, upon which, lenders can derive a return. Hence, you get a situation where high velocity has created 0% interest rates (or even lower).
Only if demand keeps up which it wont. Eventually demand will fall and will the prices. The market always corrects itself. Gold is recycled though. The amount of gold pulled out of the ground every year has to do with GDP, not with what interest rates should be. I believe it is the opposite. Look at the housing bubble. Money was moving faster AFTER interest rates were lowered.
You first have to figure out the fair interest rate on savings accounts. Will it be the fictional 5%? If it is 5% then the mortgage rate needs to be over double the savings rate. Otherwise, there would be no gain by risking money in a loan compared to a guaranteed 5% in a savings account. Remember, there is no longer a federal reserve, therefore banks can no longer lend 7 times more than they have. The ratio is now 1:1. The mortgage rate now needs to be higher than 10% to support a 5% savings rate. With a 7:1 ratio, to support a 5% savings rate, the mortgage rate only needs to be 1.43% to get a net gain of 5%. 10-20% is very realistic.
And it would correct a very high rate of interest that exceeds that of gold supply growth as well. Of course, individual credits would have their own interest rates, relative to the supply, demand, and credit fundamentals of each individual type of lending. But in the aggregate, interest cannot exceed gold supply growth. But if interest rates exceed gold supply growth, such will eventually result in a default, as the gold simply does not exist. Ah, the proverbial 'chicken and egg, which came first' problem. No point wasting a lot of time on ET trying to argue that one either way