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tomandlu

Could Debt-Based Money Work W/o Interest?

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If credit/debt was essentially nationalised and was without interest, could that work? Would it be a better system?

The justification for mortgages and other consumer-based credit/debt eludes me - outside of short-term overdraft facilities - as does the justification for interest on credible business loans.

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I've certainly thought about that for international trade. Where interest free tokens are swapped for goods.

There would be no incentive to hoard and recycle for yield. The encouragement would be to swap said tokens for goods.

ZIRP is aiming to do just that, as does QE.

Its a STATED AIM of both by the CBs to sustain asset prices.

Debt free loans....how much would houses be in a week?

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If credit/debt was essentially nationalised and was without interest, could that work? Would it be a better system?

The justification for mortgages and other consumer-based credit/debt eludes me - outside of short-term overdraft facilities - as does the justification for interest on credible business loans.

No, it cant work.

I am not sure how you could even try to do something like this. But if you manage to organise it, I will be happy to take all the money, and pay zero interest with it. I will then buy up all real assets, and enslave you and never repay the original principle, just the interest.

Doesnt work does it?

Add in a bit of interest, and suddenly my evil scheme doesnt work. The market rate of interest is a measure of the risk of not being repaid, and the difference in the time value of money. A pound today is worth more than a pound next year is it not? The market calculates this value, and it is the rate of interest. If you abolish the market rate of interest, then the amount of resource misallocation would become huge, and in double quick time your system would fall apart.

That doesnt mean that the rate of interest cannot be very low for credit worthy borrowers. Just not zero forever.

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If there is no interest, you can't even cover the risk of default on a loan, let alone have return on your capital so there would be no lending.

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If credit/debt was essentially nationalised and was without interest, could that work? Would it be a better system?

The justification for mortgages and other consumer-based credit/debt eludes me - outside of short-term overdraft facilities - as does the justification for interest on credible business loans.

Nope.

The only way debt based money can work is if you aren't allowed to trade what you borrow.

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If there is no interest, you can't even cover the risk of default on a loan, let alone have return on your capital so there would be no lending.

That isn't true - in the real world all items decay over time. if I give you a fresh apple in 6 months time in exhange for one now, then you have been paid an interest rate - your original apple would now be rotten and gone.

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If there is no interest, you can't even cover the risk of default on a loan, let alone have return on your capital so there would be no lending.

wouldnt matter, yuo just borrow another lot to cover...

funny enough, thats what insolvent bankers are doing right now. At the behest of their own managers...the central banks.

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The market rate of interest is a measure of the risk of not being repaid, and the difference in the time value of money. A pound today is worth more than a pound next year is it not?

I'm going to be pedantic...

The base rate of interest is often called the "risk free rate" and it assumes zero risk of not being repaid. Historically, this has tended to be significantly larger than zero (and significantly larger than today.) You're right that a pound today is worth more than a pound next year, in a sense - but you don't explore why this is the case. I think money has a time-value because we are mortal, and if we don't get the opportunities we want during our lifetime, we don't get them at all. Inheritance and legacies (where these are a motivator) run counter to this argument - but they only extend the value for a small number of generations.

I think the (risk free) interest rate is a measure of how quickly time is set to progress in the context of holding people to economic account. If the rate stays high, bankruptcy aggressively stalks weaker businesses. If the rate stays low, large-scale debtors are given carte blanch to continue as they are - irrespective of profitability. The base rate depicts a bias in civil justice between the indebted with assets and the potential investors with cash funds. Manipulating this base rate affects the real-world relationships between people and the extent to which new profitable enterprises will emerge - versus - how long established (not very profitable, but well resourced) businesses survive.

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If there is no interest, you can't even cover the risk of default on a loan, let alone have return on your capital so there would be no lending.

Unless we had deflation (like Japan)

I might be prepared to lend you 100 pounds at 0% for 5 years if I was convinced that in 5 years those 100 pounds would be worth more than they are now.

The problem with this scenario isn't to do with people not lending, it's to do with people not spending.

Edited by LiveAndLetBuy

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That isn't true - in the real world all items decay over time. if I give you a fresh apple in 6 months time in exhange for one now, then you have been paid an interest rate - your original apple would now be rotten and gone.

Or, you might have dropped the apple on the floor -and it's seeded an apple tree... destined to produce thousands of apples in a few years' time.

This "everything decays" philosophy really gets my goat... Everything changes - but that change is not always decay.

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Unless we had deflation (like Japan)

I might be prepared to lend you 100 pounds at 0% for 5 years if I was convinced that in 5 years those 100 pounds would be worth more than they are now.

The problem with this scenario isn't to do with people not lending, it's to do with people not spending.

people will always spend on what they really need.

Its all the peripherals that suffer in a case where people dont spend.

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Or, you might have dropped the apple on the floor -and it's seeded an apple tree... destined to produce thousands of apples in a few years' time.

And you still owe an apple regardless.

This "everything decays" philosophy really gets my goat... Everything changes - but that change is not always decay.

The borrowed apple has decayed.

If you repay that original apple then you hvae paid an interest rate, even if you could have paid an even higher one by paying back more apples.

In any event i'm going to go on about why debt based system don't work a bit - and it is simply that once you borrow something from someone else you get use of it, but you do not own it. That means you cannot legitimately trade what you have borrowed as it is not yours to give away. A debt based system wants to treat ownership as a airy fairy value - one that can be randomly assigned and taken away but always in the debt issuers favour. Let that sort of thing occur and it's abhuse of power time.

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It wouldn't work because money would be hoarded as there would be no return for lending it.

What would work is a permanently circulating means of exchange and a free market banking system competing for savings on interest rates.

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In any event i'm going to go on about why debt based system don't work a bit - and it is simply that once you borrow something from someone else you get use of it, but you do not own it. That means you cannot legitimately trade what you have borrowed as it is not yours to give away. A debt based system wants to treat ownership as a airy fairy value - one that can be randomly assigned and taken away but always in the debt issuers favour. Let that sort of thing occur and it's abhuse of power time.

I still disagree vehemently with your tone about apples and decay... I feel such talk conveys an underlying message which is both empirically false and socially damaging.

The bit I've quoted above, I have far less trouble agreeing with... though I think "don't work" is a little strong... I recognise all the significant problems you've identified - though I don't accept that the problems are necessarily insurmountable.

One thing I found very interesting is the "Repo" mechanism employed by central banks for their 'lending'... it's a contract that superficially looks exactly like a loan, but does transfer ownership - subject to some other contractual obligations.

To my mind, the problem with our current debt-based monetary system goes deeper. The problem is that when politicians influence the risk free rate of interest, it makes it dramatically more difficult to establish the market price of large assets where value will be retained for many years - including, for example, cars, houses, profitable businesses, brands and equipment. Where the price of these things is uncertain, this massively undermines the real economy... demanding that those who are willing to put in significant effort also risk everything on the roulette wheel of political whims regarding monetary policy. While some will take those risks, and a few might even be successful... a lot more will find themselves too risk adverse... typically, in my limeted experience, those who are willing to work the hardest and have the most productive ideas... and, as a consequence, everyone suffers.

The problem isn't interest itself; the problem isn't even the absolute level of interest - per se. The problem is a combination of the ability of borrowers to establish the rate of interest for the duration of the loan - and the availability of credit on similar terms should they need to dispose of the asset at some point in the future (for example, sell a small factory to buy a larger one.) Where we have a monetary policy to bail-out the otherwise insolvent with cheap short-term loans, we prevent progress and entrench failure.

Debt based money can work - but the details are very, very important.

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That isn't true - in the real world all items decay over time. if I give you a fresh apple in 6 months time in exhange for one now, then you have been paid an interest rate - your original apple would now be rotten and gone.

That's true in a barter based economy where the apple represents calories and nutrients to keep you alive but the apple is not money because its value varies over time depending on when apples are in season and its value is different to each person depending on how much other food they have and the relative desirability of it.

If you are very good at storing apples I might offer you two now (at harvest time because I have a surplus) in exchange for one in 6 months when there are few to be had. I might accept less than a whole apple back if you have turned it into dried apple chips. These have a greater value because the last longer. Before you know it, all this commerce forces us to invent a medium of exchange. Lets call it money.

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I still disagree vehemently with your tone about apples and decay... I feel such talk conveys an underlying message which is both empirically false and socially damaging.

The bit I've quoted above, I have far less trouble agreeing with... though I think "don't work" is a little strong... I recognise all the significant problems you've identified - though I don't accept that the problems are necessarily insurmountable.

One thing I found very interesting is the "Repo" mechanism employed by central banks for their 'lending'... it's a contract that superficially looks exactly like a loan, but does transfer ownership - subject to some other contractual obligations.

To my mind, the problem with our current debt-based monetary system goes deeper. The problem is that when politicians influence the risk free rate of interest, it makes it dramatically more difficult to establish the market price of large assets where value will be retained for many years - including, for example, cars, houses, profitable businesses, brands and equipment. Where the price of these things is uncertain, this massively undermines the real economy... demanding that those who are willing to put in significant effort also risk everything on the roulette wheel of political whims regarding monetary policy. While some will take those risks, and a few might even be successful... a lot more will find themselves too risk adverse... typically, in my limeted experience, those who are willing to work the hardest and have the most productive ideas... and, as a consequence, everyone suffers.

The problem isn't interest itself; the problem isn't even the absolute level of interest - per se. The problem is a combination of the ability of borrowers to establish the rate of interest for the duration of the loan - and the availability of credit on similar terms should they need to dispose of the asset at some point in the future (for example, sell a small factory to buy a larger one.) Where we have a monetary policy to bail-out the otherwise insolvent with cheap short-term loans, we prevent progress and entrench failure.

Debt based money can work - but the details are very, very important.

Debt based money most certainly works. The market creates it spontaneously due to the need for it. It expands and contracts according to the resources available. It has enabled and assisted our civilisation to reach unprecedented levels of wealth and sophistication. I firmly believe that this can go on, though our leaders need to accept that during periods of contraction, money will disappear from existence, and people will become less wealthy as a result, as the markets adjust to changes. It isnt the money that is the problem, it is politicians interfering in the process that causes the problem.

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Unless we had deflation (like Japan)

I might be prepared to lend you 100 pounds at 0% for 5 years if I was convinced that in 5 years those 100 pounds would be worth more than they are now.

The problem with this scenario isn't to do with people not lending, it's to do with people not spending.

True in the case of deflation.

People are not spending because we have reached debt saturation. Don't forget that credit is spendable and has been spent like crazy over the last decade. This has now stopped and left a bg hole with nothing to fill it.

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If money earns no interest then asset prices have to be at their absolute maximum. For example you can't have money earning 0% and real estate yielding 7%! The function of markets is to equalize yields as close as possible subject to the real differences in transaction costs, liquidity, risk and so on.

It wouldn't really matter whether the money was debt based or not, if it earns zero asset prices must maximise. If asset prices were not maximised for some reason you would find I think that the money would attract interest regardless of what one might want or decree.

In the real world, if asset prices (expensive things we generally have to borrow money in order to trade them) are maximised then so must debt be maximised.

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I still disagree vehemently with your tone about apples and decay... I feel such talk conveys an underlying message which is both empirically false and socially damaging.

It's empirically accurate - all things decay and facts don't care how people feel about them.

The bit I've quoted above, I have far less trouble agreeing with... though I think "don't work" is a little strong... I recognise all the significant problems you've identified - though I don't accept that the problems are necessarily insurmountable.

Given the high level of illogicality and abuse required to make them work, they must collapse.

One thing I found very interesting is the "Repo" mechanism employed by central banks for their 'lending'... it's a contract that superficially looks exactly like a loan, but does transfer ownership - subject to some other contractual obligations.

Cake and eat it? yep that's banking for you.

To my mind, the problem with our current debt-based monetary system goes deeper. The problem is that when politicians influence the risk free rate of interest, it makes it dramatically more difficult to establish the market price of large assets where value will be retained for many years - including, for example, cars, houses, profitable businesses, brands and equipment. Where the price of these things is uncertain, this massively undermines the real economy... demanding that those who are willing to put in significant effort also risk everything on the roulette wheel of political whims regarding monetary policy. While some will take those risks, and a few might even be successful... a lot more will find themselves too risk adverse... typically, in my limeted experience, those who are willing to work the hardest and have the most productive ideas... and, as a consequence, everyone suffers.

The problem isn't interest itself; the problem isn't even the absolute level of interest - per se. The problem is a combination of the ability of borrowers to establish the rate of interest for the duration of the loan - and the availability of credit on similar terms should they need to dispose of the asset at some point in the future (for example, sell a small factory to buy a larger one.) Where we have a monetary policy to bail-out the otherwise insolvent with cheap short-term loans, we prevent progress and entrench failure.

Debt based money can work - but the details are very, very important.

I agree there is nothing wrong with interest, I was just pointing out that when we are dealing with real world items over time there is already an interest payments being made.

The issue is this -

I lend you a car.

You give it away in trade.

Point two shouldn't happen - you should have to pick. Did you give away ownership? In which case you aren't owed anything. Did you retain ownership? In that case the trade shouldn't happen. You can't legitimately buy things with someone elses property.

It's the "cake and eat" it inherent in debt based money which is the flaw.

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Debt based money most certainly works. The market creates it spontaneously due to the need for it. It expands and contracts according to the resources available. It has enabled and assisted our civilisation to reach unprecedented levels of wealth and sophistication. I firmly believe that this can go on, though our leaders need to accept that during periods of contraction, money will disappear from existence, and people will become less wealthy as a result, as the markets adjust to changes. It isnt the money that is the problem, it is politicians interfering in the process that causes the problem.

If the market spontanmously creates the debt based money, how come it only happens with a state backed monopoly after the banks who try it in the market collapse?

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The issue is this -

I lend you a car.

You give it away in trade.

Point two shouldn't happen - you should have to pick. Did you give away ownership? In which case you aren't owed anything. Did you retain ownership? In that case the trade shouldn't happen. You can't legitimately buy things with someone elses property.

It's the "cake and eat" it inherent in debt based money which is the flaw.

so you're saying that if you lend me a fiver, I shouldn't be allowed to spend it? eh?

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so you're saying that if you lend me a fiver, I shouldn't be allowed to spend it? eh?

Yes, exactly.

It isn't yours to give away.

Or

It is yours and you therefore don't owe anyone.

Debt based money wants to have things both ways - as long as it benefits the debt issuer.

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Yes, exactly.

It isn't yours to give away.

Or

It is yours and you therefore don't owe anyone.

Debt based money wants to have things both ways - as long as it benefits the debt issuer.

(1) Why else would you borrow some money?

(2) Why else would you lend money?

What you're saying is that lending - of anything - should be outlawed? That you can only give things away?

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If the market spontanmously creates the debt based money, how come it only happens with a state backed monopoly after the banks who try it in the market collapse?

Huh? You say it only happens AFTER those who have tried it collapse. That is self contradictory.

Governments can interfere in the process of course, but independent actors are free to issue debt based credit, and other actors are free to accept or reject it as they see fit.

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  • 333 Brexit, House prices and Summer 2020

    1. 1. Including the effects Brexit, where do you think average UK house prices will be relative to now in June 2020?


      • down 5% +
      • down 2.5%
      • Even
      • up 2.5%
      • up 5%



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