Interest rates have gone down in recent decades and neared zero after the financial crisis of 2008. Many economists believe that interest rates will go up again at some point. But what if that doesn't happen? What if low and negative interest rates become the new normal? Several factors pushed interest rates lower. These factors do not go away when interest rates reach zero.Lower interest rates make more projects economical so that there can be more capital and wealth. In this way lower interest rates can help to end poverty and make the economy sustainable. Lower interest rates are beneficial to most people as they pay more interest than they receive. Interest is hidden in rents, taxes, and the price of everything we buy.
Why do we have interest? Lending and borrowing weren't possible without interest. If you lend out money, you can't use it yourself. People want a compensation for this inconvenience. And the borrower may not repay. People want a compensation for this risk. Finally, if you can make a profit by investing, then why lend out money without interest?
In the meantime a few things have changed. You can lend money to a bank and still use it any time. This is convenient. Banks check the financial condition of borrowers and lend to many different people. This reduces risk. Central banks and governments can help out banks if needed. And so bank deposits are now considered safer than cash.
But what about investments? Throughout history the returns on investments were mostly higher than the economic growth rate. Most of these returns have been reinvested so a growing share of total income was for investors. This cannot go on forever because who is going to buy the goods and services corporations make? A simple example can illuminate that.
The graph above shows how total income and interest income (in red) develop with an economic growth rate of 2% and an interest rate of 5% when interest income starts out as 10% of total income and all interest income is reinvested. After 25 years the economic pie has grown faster than interest income and wages have risen. At some point interest income starts to rise faster than total income, and wages go down. After 80 years there's nothing left for wages. It explains a lot about what is going on in reality. Income inequality can hamper the economy.
This can be called usury for good reason. It also explains why interest rates went down in recent years. In the short run it was possible to prop up business profits and interest rates by letting people go further into debt to buy more goods and services. In the long run, the growth rate of capital income cannot exceed the rate of economic growth. This problem emerged several times already. In the past economic crises and wars destroyed capital and created new room for growth.
There is an alternative to economic crises and wars. It is allowing interest rates to go negative. This is why the era of low and negative interest rates may be upon us. The end of usury could be near. Economists and the public at large should become aware of this. There is a lot of research that needs to be done. Negative interest rates may be the next big thing in economics and an era of peace and prosperity may be upon us.
The End Of Usury was one of two papers I presented at the IV International Conference on Social and Complementary Currencies in Barcelona in 2017. The other one was Feasibility of Interest-Free Demurrage Currency that deals with implementing interest-free money with a holding tax in the global financial system.
Both papers together deal with the following issues:
- financial and economic stability;
- leverage, risk and moral hazard in the financial system;
- income and wealth inequality and the impact on interest rates;
- excess financial-system profits;
Interest-free currency with a holding tax can become the money of the future. The papers together offer a radical new view on the financial system and interest. Or perhaps this view is not so new, because the problem of usury is already with us for thousands of years. The papers are not suitable for a publication in full on OpEdNews because they are lengthy reads. That is for good reason. Audacious assertions require ample explanation.
Already in 2008 I wrote on OpEdNews that a better financial system is possible. A decade of research followed in which I explored the consequences of the idea for the financial system and the economy. Today I am more confident than ever. The end of usury could be near. A financial system without interest can be more efficient. Interest-free money with a holding tax should therefore be on the agenda of economists, central bankers and politicians.
Links to the papers:
The End Of Usury: http://www.naturalmoney.org/endofusury.html
Feasibility Of Interest-free Demurrage Currency: http://www.naturalmoney.org/feasibility.html