Posted by: graemebird | May 3, 2013

Economics Paradox: Banning Compound Interest Leads To A Higher Nationwide Return On Total Assets.

Modified from elsewhere:

Great work you are doing. I’ve been putting in a lot of thought in to how superior capital allocation would be, in practice, if it were a fees-only arrangement and compound interest were banned.

With both Usury and fractional reserve the bankers get lazy. Unless you had absolutely perfect policy settings (including “growth-deflation”) and unless your starting point is the best of all competitive situations, without one group of oligarchs controlling the system ….. Well what will happen is the banks will create new money (ie they will pyramid more on the available cash) on the basis of SURE THINGS.
And on top of this there will be interest-rate Apartheid when it comes to these sure things. Punitive rates of interest on small amounts of personal, non-tax-deductible debt will sit besides the lowest rates of interest on the sure thing of Bain capital trashing a manufacturing outfit and sending most of the jobs overseas.

This is entirely different from the assumptions of the Austrian-British Classical integration. I mention these two schools because; though they are one-eyed with regards with the concerns of you and I, they are the only two rational schools of economic thought. But like the neo-classicals; these two schools blandly assume that the banks will lend for capital creation, and allocate resources to the very best areas on that basis. I want to make the argument, as paradoxical as it may seem, that excellence in capital allocation will only come when compound interest is banned and when the rate of payback is, for the most part, voluntary.
>>>>>>>>>>>>>>>>>>>>>

Well we know what the banks lend for right? They lend for debt-peonage, land value inflation, for firms that have achieved some form of monopoly ….. they will lend with their best interest rate, which will be a subsidy given inflation and at the right time of the cycle …. they will lend for sure things.

Personal debt that is non-tax deductible they will lend up to a certain limit and at exploitive interest rates. This may even be to the advantage of a minority of those who get sucked into this. But since this lending destroys rather then creates wealth …….. it would be right to outlaw it, and design social welfare partly around compensating for this reduction in liberty. Because on a society-wide level, lending for consumption is a massively negative-sum game.

So if we outlawed lending at interest for consumption, and had welfare such that no-one really got in the worst of trouble …. this done properly could be a net gain. We ought to outlaw lending (at interest or with high fees) for take-overs, for buying land (in most cases), for buying derivatives including shares …… And so forth until we have all loanable funds going for wealth-creation.

Now how about a world without compound interest? Done well this could be absolutely superior. Because in general, wealth-creating loans are loans that increase the cash-flow of the borrower NET OF REPAYMENTS TO THAT SAME LOAN.

So if the banker makes a loan and the persons cash-flow massively increases (net of repayments) its because he has bought some sort of capital goods which have reduced his costs or increased his revenues. But if he borrows to buy land in the hope of land appreciation …. If companies borrow for takeovers, or to buy shares (except those shares where high dividends are assured) or derivatives, or all sorts of Jive …………. then these are wealth-destroying loans because they either divert loanable funds away from wealth-creation, or they pump up the interest (or competitive fees) on the remaining loans.

>>>>>>>>>>>>>>>>>>>>>>

Now supposing if compound interest were banned, fees were allowable in many cases, and the borrower could fundamentally pay back at a rate of his choosing (within reason). Like payback was more or less voluntary over 5% of ones net income? Or something of this sort. Or perhaps even if payback were ENTIRELY voluntary mandating that the loan was made only to gain on another loan (here I go too far but I’m trying to emphasise a point.)

This would ensure excellence in resources allocation. Because think about it? The financier can only get a good rate of return if he is paid back quickly. This is the big point and I’m sure you’ll grasp it. He’s got to get paid back quickly. But if the borrower isn’t legally required to pay him back quickly then what is the incentive to the borrower?

Its to get another loan on good terms.

And so the lender MUST make wealth-creation loans, in order to get fast-payback, such that he makes a high notional interest rate, and then he must send more resources to the fellow who has used societies funds wisely and chosen to forego consumption and pay back quickly.

So its a real paradox. Because you would think that excellence in resource allocation would go hand in hand with a competitive interest rate. But this isn’t the case. As I think I have successfully explained, resource allocation excellence goes with banning the interest rate and inducing fast payback with the reward of a second loan. Because then fast payback must come as a result of the excellence of both the banker and the borrower allocating the funds to improve cash-flow (net of repayments).

Another point can be made in favour of an egalitarian society. If interest …… (or in this case FEES) are NOT tax deductible ……

Supposing if you have a tax free threshold of 50,000 dollars and 20,000 more for each registered dependent. And suppose taxable income is 50%( here I may be going to far again to make the point). And suppose also that fees and interest are NOT tax deductible.

Where will all these funds go? They’ll go down to the lower levels of society to capitalise those with productive virtue at the lower levels.

So I believe this is a genuine economics paradox. Whereas we think intuitively that the compound interest rate will be matched with excellence in resource allocation, I think it turns out that only perfection in policy would allow this. Whereas a pretty easy to design FEES-ONLY system would almost ensure this excellence.

 

 

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Responses

  1. Lets go over this paradox again.

    If the lender must rely on fast payback to get a decent rate of return …. in a situation where compound interest is banned, and FAST payback is more or less voluntary. In other words the borrower, at any time, has the choice of very slow payback.

    If this is the case the lender must make a loan on the basis that

    1. The first loan created wealth

    2. The lender will incentivise fast payback by the likelihood of a new loan, on good terms, if a new wealth-creation opportunity arises.
    >>>>>>>>>>>>>>

    Whereas if compound interest is allowed then the bankers need only lend on SURE THINGS.

    If compound interest is allowed in combination with fractional reserve banking ….. then there will be interest rate apartheid. Land speculation and takeovers et al, if they are sure things, will get a low interest rate, whereas at the same time its likely that lending for machinery for small business …. in this case a higher interest rate may be extorted.

  2. [...] uncensored on “Economics Paradox: Banning Compound Interest Leads To A Higher Nationwide Return On Total Assets.“ @ A Better World: Graeme Bird For High [...]

  3. From elsewhere:

    I think so many of us were fooled by the notion of compound interest, because we see how the banker must make use of the concept in order to allocate his funds most wisely. Notional compound interest must be there as the bankers score-card……

    ….. Then what the rest of us do is make this large leap to say that compound interest contracts must be sanctioned by the government who will help the usurer enforce such contracts. But looking at the matter objectively this does not follow at all. The banker must be made to work hard to get his excellent rate of return, and he will have to work harder to do so if contracts of this sort are outlawed. We cannot make this leap between the necessity of having the CONCEPT of compound interest as the bankers score-card, and allowing the reality of compound interest as a legally-backed, or tolerated contract.

    I’ll be very intrigued to see your magazine/think-tanks take on this issue, to see if it runs parallel with my thinking.

  4. From Elsewhere:

    You bet it kills charity. I know it in my own life. When I was snowed under in credit card debt, and people would ring me up for money, I’d have to tell them I was snowed under in credit card debt. When I had the idea that I could help my own mothers health, with just a couple of thousand dollars investment …… I hesitated for a few weeks.
    And when I finally moved, I ran out of time.
    But this ponzi-usury that we have today is ten times worse again, because we simply cannot accumulate claims to wealth (as opposed to accumulating WEALTH AS SUCH by increasing the stock of durable producer goods) without getting into all this debt … The only way we get get rich now is to take debt, and to use that debt to buy something that is both tax-deductible, and that has a cash-flow attached to it.
    The entirety of rational economic thought has been made a mockery of today. Because …… think of all the people who have made themselves millionaires ….. not through business, nor through income, but through: ((((sarcasm dimension))))): “the wisdom and prudence of their investments.”
    Those people you and I have witnessed who have gone from being middle class to being millionaires ( primarily through their investments), have simply taken advantage of the other half of the banks money-creation ponzi racket.
    So classical and Austrian economics says that we get rich through profits. Or perhaps through a high return on total assets. In other words, without too much of a leap, by using our assets wisely. For society as a whole the key metric would be return on total assets.
    If people used the assets already in existence WISELY …… in order to get rich ……… the pie would grow larger …….. and from there; general egalitarian policy settings, would be sufficient, to have the wealth flow down to the lower levels.
    But this is not what we see at all. Few who have made 20 million dollars net plus in the last 40 years, from a standing start, have done so through profits. They have all done so by attaching a debt, to a cash-flow, and everything tax deductible. So they haven’t profit-maximised. They have money-creation-benefit maximised.
    The British Classical School and the Austrian school at least show us what is possible. But in the current hypocrisy they seem like this massive bait and switch.
    I want to give you a tip and you being a full-time intellectual you may be able to use it. In the modern era, in my view, the most impressive economic performance came from the South Korean dictator in the 70’s. What he did is he took every dollar of foreign exchange, and every dollar that his banks had of loanable funds, and every dollar he picked up from the tariffs and he just forced all these funds into the accumulation of durable producer goods.
    The result was that, in terms of USD, the South Koreans multiplied their GDP by 5 times, in seven years. Yes its true the dollar weakened during that time. But still there has been nothing like it before or since.
    And I think if your think-tank can prove that loanable funds need to go to durable producer goods, and that welfare ought to be integrated with this requirement …… this would be a major blow to the modern thief-economics and a massive blow against unrestricted ponzi-usury.

  5. My new hero. Stella Trembley of New Hampshire. Note that now the shadow government has been busted, the Boston bombing has gone entirely off the news. Only one month and the media has buried it, because they were fully busted.

  6. Hey Graeme, what’s up with your blog? Looks like you’re abandoning it. You’ve alienated everyone who might have been interested in posting there, including me, and I suspect you’re banned from just about every blog you’d want to be participating in.

    You’ve burned all your bridges and are reduced to peddling your nonsense to random commenters on youtube. You’re just a sad pathetic git.

  7. I’m getting on with life fella. When one sees how brutally the satan-worshipping elite Jews and their hangers-on have us in their genocidal grip there is nothing much to do except issue a few warnings and hunker down.

    In the US it is clear that a real genocide is being planned. One cannot know what will be the fall-out here. But the Jew dominated homeland security is gathering together executioners bullets and the rest of the plan is pretty transparent as well. So this is the Jews doing what they did to gentiles the minute they got hold of the Soviet Union.

  8. From elsewhere:

    GraemeBird
    17 August 2013 10:39am

    Recommend
    0
    Is Graham Readfern a Jew? Judaism is the worst religion ever. Its a conspiracy against humanity proper. Its the only religion based around systematic deception, malicious damage, and enslavement. The science fraud of global warming is all about these things and the frauds appear to be over-represented with Jewish vermin. Is Lewandowsky a Jew? How many of the lying filth at the Hadley centre are Jews? Or the lying filth at Goddard?

  9. The last comment has already been wiped.

    Here is the next:

    GraemeBird
    17 August 2013 10:52am

    Recommend
    0
    Supposing Readfern isn’t a tribal racist Jew doing tribal racist things. Imagine being so retarded, so droolingly stupid, such a dim bulb, that even after the last five years the low-IQ fool hasn’t come to grips with a banking conspiracy? The banking conspiracy is real, unlike global warming, and it has been systematically impoverishing Western Europe and the US PARTICULARLY as of late. What a moron Readfern is if he doesn’t realise that. But supposing he’s a racist Jew? Well then he’d be fine with PRETENDING that there wasn’t a banking conspiracy.


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