Forum Post: Interest blocks sustainable economic development
Posted 12 years ago on April 23, 2012, 2:45 p.m. EST by niphtrique
(323)
from Sneek, FR
This content is user submitted and not an official statement
When interest on money is charged, money in the future is worth less than money now. This has a major impact on investment choices. Interest promotes investments that are unsustainable and wasteful. If no interest was charged, sustainable investments would be more attractive. The following example comes from Poor because of Money from Strohalm:
Suppose that a cheap house will last 33 years and that it will cost 200,000 Euro to build. The yearly cost will be 6,060 Euro (200,000 divided by 33). A more expensive house costs twice as much (400,000 Euro) but will last a hundred years. This house will cost only 4,000 Euro per year. For two thousand Euro per year less, it is possible to build a house that is not only more pleasant to live in, but will also cost less in energy use.
After going to the bank for a mortgage application the math changes, because the bank calculates interest. If the interest rate is 10% then the expensive house will not only cost 4,000 Euro per year on write-offs, but during the first year there will be an additional interest charge of 40,000.00 Euro (10% of 400,000.00 Euro).
The long lasting house now costs 44,000.00 Euro in the first year. The cheaper house now appears less expensive again. There is the yearly write off of 6,060.00 Euro but during the first year there is only 20,000.00 Euro in interest charges. Total costs for the first year are only 26,060 Euro. During the following years, lower interest charges still make the less durable house cheaper.
This example shows that without interest charges there is a tendency to select long-term solutions while with interest charges short-term solutions will be preferred. Interest charges make long-term solutions uneconomical. This is also true on a larger scale. Natural resources such as rainforests are squandered because of a short term profit. Intelligent forest management could earn a profit for centuries to come but within the present money system it can be more profitable to cut down the rainforest now and put the money in the bank to earn interest.
Who would lend money w/o interest? Interest does 2 things: it protects against inflation, and offers a very small income return.
If interest is lower than inflation you will lose, which is often the case.
Inflation is the consequence of charging interest as money supply needs to expand to avoid a collapse. Explanation:
If someone brought a 1/10 oz gold coin to the bank in the year 1 AD, and the money remained there until the year 2000 AD, collecting a yearly interest of 4%, the amount of gold in the account would have been 3.6 * 10^31 kilograms of gold. This is 6,000,000 times the complete mass of the Earth.
It does not require a rocket scientist to see that this is a problem.
Luckily, if you do not charge interest, you do not need to expand money supply, and economic growth will result in lower prices, and consequently a higher value of money.
So 0% interest gives a superior return.
if we believe in the value of gold