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]?
Probably not.
And that comes as no surprise given that during the same period of time the government spent only $6 billion on education.
posted by qrswave @ Monday, November 14, 2005
6 Comments:
Your Risk argument becomes crystal clear when you study mortgages. Mortgages have relatively no risk for the Lender because they are backed by the home. Yet, mortgages amortize future compound interest into the earliest payments and that results in 30 year mortgage payments that send over 90% of the payment to "interest"... which is like calling over 50% of our income "taxes".
I do think there is a fair "tax" and a fair "interest" which we owe; but over 50% of our income should not be taken for "taxes" and over 90% of our mortgage payments should not be stolen a la "interest". The Boston tea party took place because colonists didn't want to pay the tea tax... tax meant 1%. In America today we are splitting our income with the government; it isn't taxes, it's too high to be compared to what the Godfather took from his victims in the old days, so it isn't protection either, it is partnership in crime; the government has drafted us all as partners to commit our lives to killing others and stealing their resources. "Tax" means 1%; these aren't taxes and these aren't dues, these are too big for that.
Of course the cause of the evil that rules the planet is fractional banking. Banks needed cash flow to service their loans and they got it from the slave trade, the opium trade, and from pirating on the open seas. Satan's minions used these to build mega-banks (read corporate) and seized power over whole nations. They then set up central banks of issue for the nations and indebted the entire nation to the central banks. The central banks are owned by the corporate banks and use their power to change all the laws to let banks write loans that charge "interest" at astronomical levels. Einstein was asked what the most powerful force in the Universe is and replied, "compound interest". Compound interest sucks the life out of a nation. Banks now own everything and the mechanisms that were put in place to take everything are impossible to turn off. Hence the mosquito will keep sucking blood until he blows up from too much blood.
Your patient is already dead. That's why he won't listen to what's wrong with him. Once the host dies the parasite is in trouble. Hence, all the problems at the FED.
Thanks for your comment, Daysman!
You are so right about mortgages!
But, I don't think the patient's dead; but he sure is in critical condition!
Those who love liberty and know the truth must do their part; spread the word, and stop trading in DOLLARS!!!
Money is a scarce commodity with a cost determined by supply and demand. Interest is that cost. If I have $50 million to invest, people who want me to lend it to them for mortgages have to compete with my opportunity to build an office building in some booming location, to collect rent, and then sell the building, probably for a handsome profit.
The difficulty comes in on the supply side, where money can be pretty much arbitrarily created (see recent events). For most commodities, an increase in supply should lower the price (interest in this case). But that's not what happens. Instead what you get is inflation, and the cost of money goes up, because inflation adds to lender's cost and also increases the risk of even more inflation.
And conversely when the supply of money is reduced. So instead of having a market which reaches an equilibrium between supply and demand, you actually have an unstable situation that can easily spiral out of control, as has been demonstrated in various countries and times.
One of the primary purposes of the Fed is to control the money supply in such a way that things don't spiral out of control. The problem is that the economy is becoming both increasingly complex and increasingly globalized, so that the Fed simply doesn't have the observability on monetary demand needed to set the supply appropriately. This leads to situations where they may be part of the problem rather than part of the solution.
The short-term way to address this is to try to improve the Fed's observability. Whether and how this can be done is beyond my expertise, but I doubt that it will be enough for a permanent solution. Longer-term I think the money supply will have to be managed by computers, probably using "soft computing" technology such as neural networks and/or genetic algorithms, and also with access to more raw data than humans could interpret.
trenobus: nice try.
but you skirted my entire argument and offered a descriptive definition for interest that not only does not account for the differences in risk you assume when you lend your money as opposed to investing it in that building, but also fails to consider that the "rent" that's collected on it and the "profit" made when selling it is highly dependent on an extremely volatile supply of money, as you yourself admit.
In short, the system is totally untenable, as demonstrated by recent events.
I do think the best way to administer the monetary system is through digitally through computer systems. But, its control should be decentralized across the nation and not monopolized by a handful of greedy usurious bankers.
qrswave:
The differences in risk, while real, are only part of the story. If lending is such a great deal for lenders, why does anyone bother investing? And if you take away interest on lending, why would anyone lend? Kindness? Sure, but those so inclined are perfectly free to make interest-free loans to whomever they please.
My point is that interest on loans is necessary because there is competition for money. What is not necessary is for the government to empower the lender more than the borrower, as the borrower is already at a disadvantage. In particular and especially, private lenders should not be able to create money to lend and then keep the interest.
Some institution(s) must be in charge of creating money, and it seems that the new money must enter the system in the form of loans or as payments for goods and services. The interest on the loans or the good and services purchased ought to benefit all of us, rather than private individuals, as the money supply is essentially a public utility.
Interest from such loans could go towards government expenses, and the goods and services purchased could be part of government's procurements. In the case of the latter, it means in effect that the government directly reduces its revenue requirements by the amount of money that is created. Of course you would not want the same part of government that is creating money to be deciding how much to spend or lend. That is at least the official rationale for the attempt to make the Fed independent.
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