Difference Between Lending-At-Interest And Equity Investing
The ALL TIME favorite argument in support of charging interest on money lent is that it is the same as investing your money and making a profit.
That's like comparing a VULTURE to an EAGLE.
They are totally different animals!
The critical difference between lending and investing is in the RISK-SHARING:
An INVESTOR risks the loss of the ENTIRE investment if the venture doesn't work;
Meanwhile, absent BANKRUPTCY or DEATH, the LENDER is entitled to the principal back IN FULL even if they've collected 10 times its equivalent in interest!
This difference in risk creates a potential conflict of interest between lender and borrower that does not exist between co-investors BECAUSE the most lucrative scenario for lenders is when a borrower can pay interest steadily on a long-term basis, but CANNOT PAY THE PRINCIPAL, leaving it in place to continue accruing interest.
The classic example is a PERPETUAL DEFICIT at the municipal, state, and federal levels of government which results in a continuous transfer of the borrower's earned capital (through taxes: income, sales, real estate; tolls; fares; etc.) to the lender (to pay for interest on money loaned to governments).
The lender's risk is further reduced because his loan is often secured, and while that may not guarantee the full value of the principal loaned, added to the interest already earned, it often allows the lender to break-even or make a profit. (This is besides 'floating liens' which offer infinite security on even small loans.)
If that weren't enough, under bankruptcy, tax, AND corporate law, the lender is entitled to many advantages that an investor is not.
Ultimately, differences in risk encourage those who have money to lend NOT invest! (Shoot, why invest? It's too risky!!!)
This is especially true of people who do not know how to invest their money creatively (i.e., without exploiting others). They lend to just about anyone; losses in the borrower's activities are tolerated, and even encouraged to allow the continued payment of interest. In this context, lenders do not "profit" because they are especially bright or talented, but simply because they have money that borrowers cannot otherwise access. Remember, citizens cannot borrow from the Treasury interest-free; they MUST borrow from banks at interest!
Thus, unlike those who invest at risk, lenders profit most by exploiting the borrower’s inability to pay his debts. This exploitation not only results in massive misallocation of capital to inefficient purposes, but also, because interest grows exponentially when it remains unpaid, over time interest has the potential to transform borrowers into slaves.
If you can stomach the TRUTH, ask how much your local government spends annually on interest.
Do you know that the federal government paid a WHOPPING $335+ BILLION in interest from Jan 1-Aug 1, 2005?
And that interest payments on Treasury Bonds is the third biggest ticket item on the U.S. budget after the Department of Health and Human Services [$520+B] and the Department of Defense [$420+B]?
And that comes as no surprise given that during the same period of time the government spent only $6 billion on education.