< HOME  Wednesday, November 09, 2005

Why would you loan money to someone if they were not paying interest?

After all, interest provides incentive for people with money to circulate it.

But, at what COST?

Interest must be examined for its REAL COSTS and not just its PERCEIVED BENEFITS.

And, its real costs are devastating because interest by definition derives its value from the value of the principal against which it accrues and not from any added value. Remember, governments issue principal, not interest. (Visit The Money Myth Exploded to learn why governments issue money.)

Interest is a NEGATIVE force on the economy.

If you borrow $100 and must pay back $110 absent bankruptcy or death, then you really only have $90 of value the minute you borrow that $100 since you must labor to pay back $110 when you only have the benefit of $100.

Thus, Interest immediately dilutes the value of the money you borrow. So, for the purpose of consumer lending, interest is nothing but inflationary. Lenders add no value to the economy; they simply benefit from someone else’s labor and exploit their need for money.

But, you argue, interest is the cost of the lender's lost opportunity. That is a fallacy that equates lending at interest (which is pernicious) with equity investing (which is entirely wholesome); they are qualitatively different.

When someone invests in a business, they take the risk that they might lose it ALL if the venture fails. This is justified because if the venture succeeds the investor may be greatly enriched.

So, you argue, the lender agrees to a much smaller, fixed return in exchange for being indemnified by the debtor for any risk outside bankruptcy or death. But, this dramatic decrease in risk is precisely the avarice of allowing interest to attach to money.

Profit derives its value from the added value of combining labor and assets in creative ways that yield results that are more valuable than the sum of the labor and assets. So, profit unlike interest does not extract its value from the principal it accrues against, but instead it ADDS value to combined capital, both human and monetary.

The flipside is that there is a risk that the principal may be spent on the labor and assets without yielding any profit. But, this is the mechanism by which capital is steered to its most efficient uses in the economy. People with money look for the brightest entrepreneurs to help them invest their capital; this is a good result because EVERYONE BENEFITS--no one has to lose! These investors profit in return for their unique ability to recognize an opportunity to add value to the economy. And, in every country and every age, these people are applauded for their unique contributions.

In contrast to the risk attendant to investing, the chances that a borrower will go bankrupt or die before repaying principal and interest are actually very slim. This acts as a HUGE incentive for those who don’t know how to invest their money creatively to lend to just about anyone; losses are tolerated, and even encouraged to allow the continued transfer of value from principal to interest—remember, interest can only extract its value from the principal against which it accrues. Lenders do not "profit" because they are especially bright or talented, but simply because they have money. The rich get richer by virtue of being rich!

Thus, unlike investors who invest at risk, those who lend at interest profit most when the person, business, or government to whom they lend money CANNOT pay back the principal. Thus, lenders profit most by exploiting the inability to pay. Their victims continue paying bushels of interest, unable to pay the principal. Thus, those with money only profit BECAUSE those who need the money suffer! 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 it transforms borrowers into slaves.

So, you argue, don't borrow more than you can pay. Too late! Every government on earth already has, and WE have to continue paying the interest!

For thousands of years interest (aka usury) has been recognized for its pernicious effects. I hope that my explanation sheds some light on the virtues of profit and vices of interest. And, I hope that you will spread the word.

If you are still confused, read The Money Myth Exploded, an illustrated parable that demonstrates how interest is merely a false accounting, and not just economically inefficient.


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