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In the future there will be no interest on money

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Headlined to H4 9/27/13

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The views of the different economic schools have all merits but solid evidence supporting their views is hard to come by. In a real world economy different issues are at play at the same time. For example, economist Paul Krugman criticised predictions of high inflation made by Austrians in 2011 by stating that the monetary base had tripled without causing a rise in inflation rates [23]. Other factors may have been at work, such as price competition from low wage countries, credit contraction and questionable inflation statistics. In the long run an increase in the monetary base must be inflationary [17].

In economics political agendas may be hidden in the assumptions. Keynesians and monetarists have a vested interest in interventions by governments and central banks. Keynesian economics and monetarism have enjoyed a considerable success because they both propose measures to counteract the effects of compound interest. Those methods have worked in the past. That is the reason why deficit spending and monetary expansion are still very popular with policy makers.

The moral hazard and the inefficient allocation of capital that result from anticipated interventions by governments and central banks seem a lesser evil compared to economic depressions. As a consequence many countries have become dependent on easy credit. At some point their currencies may fall out of grace and their economies may be crushed by significantly higher interest rates. During a crisis Marxist analysis may suddenly attract attention when an impoverished proletariat emerges. Libertarians may argue that the government interventions are to blame, and that if markets had been left alone, the nation would have been more prosperous.

Both interest on money and the moral hazard attached to government interventions and credit not backed by intended savings can be blamed for a breakdown of the financial system and the perceived need for bail outs. Unless interest on money and credit are restricted, new financial crises will probably emerge because compound interest is unsustainable in the long run. Furthermore, when a loan is not backed by someone willing to take the risk of default at the negotiated price, risks in the financial system may escalate and regulation may always lag financial innovations.

The adverse social consequences of international trade and finance are difficult to gauge. Many economists think that reducing trade barriers and a free flow of capital will be beneficial overall because of the law of the comparative advantages. This may not always be the case as central banks can distort currency markets by building up currency reserves. It is also true that many countries like the Asian Tigers were able to build their economies by protecting their home market via trade restrictions.

It seems that Natural Money is only feasible in mature societies with a sufficient level of education, political freedom and economic freedom. Political and economic freedom may sometimes be at odds, but a well educated population is aware of the trade offs that must be made when property rights and economic freedoms are restricted in order to achieve political goals. If a society is not mature, real interest rates above the level of economic growth may be needed to attract capital because of the risks attached to those societies. In that case introducing Natural Money may not work.



The expansion of human activities is hitting the limits of the planet. It may not be possible to increase material wealth in the future. It may nevertheless be possible to preserve a reasonable standard of living if natural resources are used more wisely. Negative nominal interest rates may help in this respect as they attribute a higher value to future income relative to present income, so the economy can adapt to a lower level of material wealth more gracefully.

On the other hand, economic growth with Natural Money may be higher as there will be fewer economic crises. Debt levels cannot grow out of control. The economy may grow at the maximum sustainable growth path. Governments may not need to intervene, making the economy more efficient. There may be less parasitic activities in finance at the expense of the real economy because moral hazard will be reduced. Decision making may be localised so bureaucracy can be reduced.

The improved performance of the economy may attract capital at the expense of economies allowing positive nominal interest rates. As a consequence Natural Money may become the dominant type of money in the future. This is not a matter of desire or preference. Practically nobody wanted capitalism at first, but it emerged as the dominant economic system despite all the resistance, simply because it was more efficient and produced more wealth. The same may apply to Natural Money.


References

1. Laboratory readings: Woergl's Stamp Scrip -- The Threat of a Good Example?, Martin Oliver, Newciv.org, 2002: http://www.newciv.org/nl/newslog.php/_v105/__show_article/_a000105-000002.htm

2. A Strategy for a Convertible Currency, Bernard A. Lietaer, ICIS Forum, Vol. 20, No.3, 1990: click here

3. Ramesses II - Wikipedia: http://en.wikipedia.org/wiki/Ramesses_II

4. This was mentioned on Discovery Channel or National Geographic but I was unable to recover the source

5. A Free Money Miracle?, Jonathan Goodwin, Mises.org, 2013: http://www.mises.org/daily/6336/A-Free-Money-Miracle

6. Economics Second Edition, David R. Kamerschen, Richard B. McKenzie, Clark Nardinelli, 1989, p. 178

7. Economics Second Edition, David R. Kamerschen, Richard B. McKenzie, Clark Nardinelli, 1989, p. 126-128

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I was born in a village in the East of the Netherlands and have lived in this region as a child. I studied Business and Information Technology and Philosophy of Science, Technology and Society in Enschede, which is also in the East of the (more...)
 
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Wow! Interesting concept. I see this as one valid... by Paul Repstock on Saturday, Sep 28, 2013 at 1:05:34 PM
One reader mentioned in a message that the powers ... by Bart Klein Ikink on Sunday, Sep 29, 2013 at 1:33:56 AM
This has almost already happened.  Interest r... by Sorgfelt on Sunday, Sep 29, 2013 at 5:04:43 PM
If you have a mortgage or credit card debt, you st... by Bart Klein Ikink on Monday, Sep 30, 2013 at 2:16:38 AM
During the 1930s Depression, which was a monetary ... by Derryl Hermanutz on Sunday, Sep 29, 2013 at 8:32:29 PM
The main assertion is that the proposed system is ... by Bart Klein Ikink on Monday, Sep 30, 2013 at 2:30:44 AM