Lending at Interest: Economic Implosion?

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Lending at Interest: Economic Implosion?

#1  Postby lpetrich » Feb 09, 2017 12:58 am

Lending at interest is the practice of the creditor (lender) wanting some additional money back (the interest) and not just the original money (the principal) from the debtor (lendee, one lent to).

There is a problem, however. From their getting back more than they lend, one might expect the lenders to end up with all a society's money, thus causing an economic implosion.

But that clearly does not happen, at least not most of the time. What might keep it from happening? There are several possible mechanisms, most of which are not mutually exclusive.
  • The lenders spend their interest income.
  • The lenders forgive or write off loans.
  • The debtors become unable or unwilling to pay back their debts.
  • A government decrees the cancellation of debts, something done in some societies early in recorded history.
  • A government gives bankruptcy protection.
  • A government restricts how much interest a lender may charge.
  • A government prints lots of money, causing lots of inflation and reducing the effective value of debts.
  • Would-be debtors refuse to take out loans.
I don't know if anyone has ever addressed this issue.

In any case, I think that this hypothesis about lending at interest makes more sense than banker conspiracy theories. Especially theories involving Jewish bankers trying to take over the world.
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Re: Lending at Interest: Economic Implosion?

#2  Postby Thommo » Feb 09, 2017 1:26 am

  • People don't live forever.
  • Economies grow.

The first one is the key. Companies that lend distribute profits to people. Any person who accrues a lot of wealth by judicious lending will die within a generation or two, at which point their estate is taxed and what's left is divided up among beneficiaries, of which there is frequently more than one.

If humans lived forever the loss of this safety valve would be a serious concern (and not just regarding lending, any profitable economic activity that uses capital investment is subject to the same feature) and the system would tend towards the steady states, which will be all the wealth being in the hands of few (or ultimately one) individuals. As long as there's a safety valve of inheritance taxes/estate division the dynamics of the system are different though.

In theory the "live forever" concern would apply to an institution which simply functioned to accumulate capital (say a nation state using an exponentially growing sovereign wealth fund), but in practice political solutions would no doubt be found if such a case were to arise - along the lines you suggest of default.
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Re: Lending at Interest: Economic Implosion?

#3  Postby Macdoc » Feb 09, 2017 3:32 am

Not many nations have estate taxes

https://taxfoundation.org/estate-and-in ... und-world/

And there are numerous ways around it .....dynasties tend to keep it going for many generations ....the richest families in Genoa in the 1400s are still the richest families today ....it's not hard to see the accelerating concentration of wealth.

The problem in the banking community is the abuse of fractional lending.
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Re: Lending at Interest: Economic Implosion?

#4  Postby lpetrich » Feb 09, 2017 3:51 am

Macdoc wrote:The problem in the banking community is the abuse of fractional lending.

What do you mean by that?
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Re: Lending at Interest: Economic Implosion?

#5  Postby Thommo » Feb 09, 2017 4:17 am

I think this is probably heading rapidly away from the OP, but before it does I would like to elaborate on my previous point.

If you only look at lending, then the total market for borrowing is likely to be restricted by the size of the economy in areas outside of finance. That is to say that if the lenders did start to "swallow up" all capital, then the amount of money they could make by lending would be inverse to the total market share of the lending sector. After a while the only loans left to be made are unprofitable ones that result in default. Combined with anti-monopoly laws and the presence of large market players who are publicly listed (so anyone can share in their profits by investment) this is probably sufficient to ensure a stable state that is not the accrual of all wealth to few (or one) individuals. Obviously the danger would then be that individuals would corner the loan market, and then make inroads into other markets as well (which is the scenario I cut directly to in my first response).

I don't think it's at all accurate to dismiss the number of countries that have either direct estate taxes or CGT on gains from inheritance (it's not actually small), but this is something of a misunderstanding of what I said about assets being divided on death by a combination of taxes and split inheritances (from the point of view of preventing wealth monopolisation the latter at an average of just 2 beneficiaries has as much effect as a 50% tax would) anyway.
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Re: Lending at Interest: Economic Implosion?

#6  Postby VazScep » Feb 09, 2017 5:23 am

Thommo wrote:
  • Economies grow.
I'd like to spend some time on this one. If the money supply is mostly debt lent at interest, and we don't implode because the economy grows, then is growth mandated? Is that a recipe for disaster (the naive argument is that, even with efficiency savings, exponential growth eventually means the planet's surface temperature will be over a hundred degrees). Or is growth itself a bit of a fiction, since, as Ipetrich says, we can do stuff like inflate?
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Re: Lending at Interest: Economic Implosion?

#7  Postby Thommo » Feb 09, 2017 5:44 am

VazScep wrote:
Thommo wrote:
  • Economies grow.
I'd like to spend some time on this one. If the money supply is mostly debt lent at interest, and we don't implode because the economy grows, then is growth mandated? Is that a recipe for disaster (the naive argument is that, even with efficiency savings, exponential growth eventually means the planet's surface temperature will be over a hundred degrees). Or is growth itself a bit of a fiction, since, as Ipetrich says, we can do stuff like inflate?


Sounds like a question of definitions, what does "at interest" mean? Are we going to allow zero and negative rates to be considered debt lent at interest? What do we want to do with inflation - net it off the interest rate?

We probably would need to separate out carefully what we're talking about as well, because when I was saying that the economy doesn't implode (because people's accumulated wealth gets divvied up at frequent intervals and the size of the economy as a whole increases), I meant implode in this particular fashion of all the wealth accumulating to individuals profiting in one area of endeavour. We could equally ask the question of people who make televisions: If you can make profit by making and selling televisions, then why don't the people who sell televisions end up with all the money? The answer being that there's limited (profitable) demand for televisions in exchange for money, just as there's limited (profitable) demand for capital in exchange for money.

Obviously if people did live forever and individuals accumulated more and more wealth (which some feel is already happening too much) by monopolizing more and more markets, then you could alter the properties of the system by progressive wealth taxes instead of relying on deaths, which obviously you can (in theory, if you had a world government or whatever) tailor to ensure that any particular level of wealth accumulation becomes the absolute limit (by 100% or super 100% rates at some level of wealth).

I think the question of "is growth a fiction?" is a separate one, and I've always felt the only reasonable answer is "no". Clearly we have created value in the sense of digging up usable minerals that were not previously accessible, and developing knowledge that was not previously known. The wealth of the average bronze age individual is pretty incomparable to the wealth of an average modern day individual.

A fun analogy is with a game of tournament poker. Games are random, skill based and over time almost inevitably end up with a single "winner who takes all" - those are the steady economic states of the game. Having more capital is an inherent advantage, and once you're out, you're out, you can't ever get capital back. But we could deliberately change the rules to make the game perpetual quite easily with various analogues. E.g. Every 80 rounds your assets are taxed 40% and distributed among all the other players, including eliminated ones (this is like inheritance taxes), or everyone pays 10% of their chips into the pot every 10th round instead of playing for standard stakes (this is like redistribution via various social security tax schemes), or the more chips you have the longer your odds are to bet on a pot (this is like wealth taxes), etc.
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Re: Lending at Interest: Economic Implosion?

#8  Postby VazScep » Feb 10, 2017 9:54 am

Thommo wrote:Sounds like a question of definitions, what does "at interest" mean? Are we going to allow zero and negative rates to be considered debt lent at interest? What do we want to do with inflation - net it off the interest rate?
I wouldn't call negative rates "at interest" for the purposes of this discussion. I would say that devaluation of a currency is a way for the government to decrease its debt burden.

We probably would need to separate out carefully what we're talking about as well, because when I was saying that the economy doesn't implode (because people's accumulated wealth gets divvied up at frequent intervals and the size of the economy as a whole increases), I meant implode in this particular fashion of all the wealth accumulating to individuals profiting in one area of endeavour. We could equally ask the question of people who make televisions: If you can make profit by making and selling televisions, then why don't the people who sell televisions end up with all the money? The answer being that there's limited (profitable) demand for televisions in exchange for money, just as there's limited (profitable) demand for capital in exchange for money.
I might have misunderstood the OP. To me, the question isn't "why hasn't this happened?" but "given the way we're doing things, isn't this inevitable?" It appeals to my inner doomsdayer.

Now I'm not sure there's a limited demand for capital. Every floated company is legally mandated to increase the value of its shares, and that might mean doing more business, which means having more capital. Moreover, those companies normally have debts to pay, and a debt lent at interest comes with an expectation that you'll have more capital in the future. You can get further in debt to pay off your debt, and consumers were introduced to this wonderful idea in the form of loan consolidation. But if we really do have a debt based economy, where the majority of the money in circulation is just a debt on a balance sheet, it wouldn't surprise me if this was inevitable.

Obviously if people did live forever and individuals accumulated more and more wealth (which some feel is already happening too much) by monopolizing more and more markets, then you could alter the properties of the system by progressive wealth taxes instead of relying on deaths, which obviously you can (in theory, if you had a world government or whatever) tailor to ensure that any particular level of wealth accumulation becomes the absolute limit (by 100% or super 100% rates at some level of wealth).
Cool. This sounds like a good counter to me.

I think the question of "is growth a fiction?" is a separate one, and I've always felt the only reasonable answer is "no". Clearly we have created value in the sense of digging up usable minerals that were not previously accessible, and developing knowledge that was not previously known. The wealth of the average bronze age individual is pretty incomparable to the wealth of an average modern day individual.
I'm not suggesting that growth is a fiction. Far from it. For a single point, we're more energy intensive than ever before, and that means something awesome.

Again, I'm not talking about the way things are. I'm wondering if the way things are is myopic, which climate scientists would suggest about our energy intensity.

We're told that recessions are terrible, and so perpetual growth is a must. This is impossible. So what do we do? Can we rely instead on fake growth?

A fun analogy is with a game of tournament poker. Games are random, skill based and over time almost inevitably end up with a single "winner who takes all" - those are the steady economic states of the game. Having more capital is an inherent advantage, and once you're out, you're out, you can't ever get capital back. But we could deliberately change the rules to make the game perpetual quite easily with various analogues. E.g. Every 80 rounds your assets are taxed 40% and distributed among all the other players, including eliminated ones (this is like inheritance taxes), or everyone pays 10% of their chips into the pot every 10th round instead of playing for standard stakes (this is like redistribution via various social security tax schemes), or the more chips you have the longer your odds are to bet on a pot (this is like wealth taxes), etc.
Hmm...that sounds like an interesting way to play poke and indoctrinate people. I love it!
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Re: Lending at Interest: Economic Implosion?

#9  Postby Thommo » Feb 10, 2017 10:18 am

Don't have time to give a full and proper answer, hopefully I'll remember to circle back later.

Couple of things shouted out at me though, that I'd like to quickly touch on.

VazScep wrote:I might have misunderstood the OP. To me, the question isn't "why hasn't this happened?" but "given the way we're doing things, isn't this inevitable?" It appeals to my inner doomsdayer.


Might be me that put the wrong spin on the question. I'm not sure it matters though, I think the answer is essentially the same, since we already have mechanisms that reduce or prevent this kind of implosion happening.

VazScep wrote:Now I'm not sure there's a limited demand for capital. Every floated company is legally mandated to increase the value of its shares, and that might mean doing more business, which means having more capital. Moreover, those companies normally have debts to pay, and a debt lent at interest comes with an expectation that you'll have more capital in the future. You can get further in debt to pay off your debt, and consumers were introduced to this wonderful idea in the form of loan consolidation. But if we really do have a debt based economy, where the majority of the money in circulation is just a debt on a balance sheet, it wouldn't surprise me if this was inevitable.


Are companies mandated to increase their share price, or just maximise it? For this discussion, the distinction seems important.

What I'm suggesting about there being a limited demand for capital is that it's only worth paying to borrow money if you have a more profitable way of investing that money available. This is dependent on the size of the total market outside of finance - if that market is completely (and probably near optimally) filled then there are no investment opportunities to exploit. In this hypothetical situation where all wealth is being subsumed by lenders, that's exactly what's happened, isn't it?
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Re: Lending at Interest: Economic Implosion?

#10  Postby Macdoc » Feb 10, 2017 10:28 am

We're told that recessions are terrible, and so perpetual growth is a must. This is impossible. So what do we do? Can we rely instead on fake growth?


Better is not more ....you can have sustainable society based on ever improving products and services without mining the planet.

A major issue is that economic metrics by which we currently measure progress and success are very wrong and based on a frontier mind set instead of a sustainable mindset.
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Re: Lending at Interest: Economic Implosion?

#11  Postby Thommo » Feb 10, 2017 10:33 am

To state the obvious I'm not taking that literally anyway. Clearly exponential growth is impossible, but asymptotic growth isn't. I don't think either is worth overthinking though.
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Re: Lending at Interest: Economic Implosion?

#12  Postby Blackadder » Feb 10, 2017 1:22 pm

The main reasons that lenders don't end up with all of society's money.

1. The money supply is not fixed. It grows with economic activity.
2. Changes in consumption vs saving will impact the amount of money available in the economy and who has ownership of it.
3. Lenders can and do sustain losses, sometimes very large losses which results in a transfer of wealth from creditors to debtors.
4. Profits from lending can be redistributed in the form of dividends.

There are other reasons but the above are the most obvious.
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Re: Lending at Interest: Economic Implosion?

#13  Postby Macdoc » Feb 10, 2017 1:49 pm

1. The money supply is not fixed. It grows with economic activity.


It is GROWN ....that's what happens when fractional lending works properly.

When debt is retired wealth remains.

There is far more to wealth than money.
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Re: Lending at Interest: Economic Implosion?

#14  Postby Blackadder » Feb 10, 2017 7:15 pm

Macdoc wrote:
1. The money supply is not fixed. It grows with economic activity.


It is GROWN ....that's what happens when fractional lending works properly.

When debt is retired wealth remains.

There is far more to wealth than money.


I'm aware that it is grown. It is something I have some academic and practical experience of. With all due respect, the OP's question was about money, not wealth.
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Re: Lending at Interest: Economic Implosion?

#15  Postby The_Metatron » Feb 10, 2017 7:44 pm

Your problem assumes everyone carries consumer debt.
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Re: Lending at Interest: Economic Implosion?

#16  Postby Thommo » Feb 10, 2017 9:37 pm

Blackadder wrote:I'm aware that it is grown. It is something I have some academic and practical experience of. With all due respect, the OP's question was about money, not wealth.


I'm going to have to hold up my hands that I didn't properly account for this either. I should have done and appreciate the correction.
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Re: Lending at Interest: Economic Implosion?

#17  Postby VazScep » Feb 12, 2017 8:46 am

Thommo wrote:Are companies mandated to increase their share price, or just maximise it? For this discussion, the distinction seems important.
Increase? Shareholders are investors.

What I'm suggesting about there being a limited demand for capital is that it's only worth paying to borrow money if you have a more profitable way of investing that money available. This is dependent on the size of the total market outside of finance - if that market is completely (and probably near optimally) filled then there are no investment opportunities to exploit. In this hypothetical situation where all wealth is being subsumed by lenders, that's exactly what's happened, isn't it?
I don't know.

What I've been told (and I'm grossly ignorant on economics and expect to be for the rest of my life) is that things like fractional reserve banking already mitigate against the sort of scenario in the OP, though I'm also told that money created by banks in this way is a small fraction of the actual money supply, which is mostly in the form of derivatives. Nevertheless, as I understand, all this money supply still has some sort of interest or premium due on it, which gives it an incentive to grow, and thus the economy with it. The argument from some people (such as UE on this forum) is that having an economy which has an incentive to grow built into it isn't sustainable. Then again, we get to have financial crashes from time to time.
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Re: Lending at Interest: Economic Implosion?

#18  Postby Thommo » Feb 12, 2017 9:14 am

VazScep wrote:
Thommo wrote:Are companies mandated to increase their share price, or just maximise it? For this discussion, the distinction seems important.
Increase? Shareholders are investors.


For dividends. Share prices don't need to go up for shareholders to profit.

I think these are the explanatory notes for the relevant section of UK law (obviously other countries will have comparable but different statutes relating to duty to shareholders) http://www.legislation.gov.uk/ukpga/200 ... vision/6/2
This duty codifies the current law and enshrines in statute what is commonly referred to as the principle of “enlightened shareholder value”. The duty requires a director to act in the way he or she considers, in good faith, would be most likely to promote the success of the company for the benefit of its members as a whole and, in doing so, have regard to the factors listed.


Essentially directors are charged with acting in the interests of shareholders, there's no duty to even maximise share price per se.
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