Interest on a loan

lyzardking

Just a quick question on the Fiat currency. E.G When a person applies for a loan and the loan is accepted, the Bank/Credit Union issue you with the principal. Lets say €100,000, now the agreement is that i pay them back their €100,000 plus an interest charge. All money in circulation is debt based money issued by a Bank etc. So my question is where is the interest supposed to come from?? Is it not true that both you and i are fighting for that very interest to keep on top of our loan. Is it also true to say then that we are involved in a game of musical chairs where there is always a loser..

PureClaas

lyzardking wrote: »

Just a quick question on the Fiat currency. E.G When a person applies for a loan and the loan is accepted, the Bank/Credit Union issue you with the principal. Lets say €100,000, now the agreement is that i pay them back their €100,000 plus an interest charge. All money in circulation is debt based money issued by a Bank etc. So my question is where is the interest supposed to come from?? Is it not true that both you and i are fighting for that very interest to keep on top of our loan. Is it also true to say then that we are involved in a game of musical chairs where there is always a loser..

Dunno if this is the correct thread for this. I see where your coming from.
IMO, the looser is always the individual

Kernel

lyzardking wrote: »

All money in circulation is debt based money issued by a Bank etc.

There seems to be a cycle in capitalism (or the more deadly modern corporatism) whereby loaned money causes booms followed by an inevitable bust (see the Great Depression for amazing similarities to todays credit crunch). However, I have to point out that not all money in circulation is borrowed money, as any money I earn from my capital or labour is my own.

moonshadow

But the person that paid you that money may have borrowed it

If one is to look at a graph of the spending a person will do in their lifetime, we will always see that in their 20's/30's they will be spending much more than they earn in buying a house, car, raising a family etc. But will spend a lot less than they earn in their 40's/50's/60's.

What you are doing with a loan of say 100k is saying I don't have the money now, but I am going to earn that money in the future. Without the bank offering that service you would have to save up the full price of a house before you buy it - a ludicrous idea.

I'm not really getting the problem. How does the individual lose? There aren't banks going around forcing people to take out loans. The individual takes out a loan because it is in their interest to do so. It is in the bank's interest to provide such a loan to a financially stable client. Hence the system we have.

Kernel

moonshadow wrote: »

But the person that paid you that money may have borrowed it

Sure, or they may have generated it by profit.

Rojomcdojo wrote:

I'm not really getting the problem. How does the individual lose? There aren't banks going around forcing people to take out loans. The individual takes out a loan because it is in their interest to do so. It is in the bank's interest to provide such a loan to a financially stable client. Hence the system we have.

I'd say the OP is thinking of the problem of banks not having enough capital to cover all they should, if a bank run were to happen, and everyone demanded the money, it doesn't actually all exist in the bank and then boom! I mean, with the sub prime lending crisis in the US, weren't banks lending ratios to capital something like 9:1? Might be wrong, but they were greater than 6:1 anyway. Theoretically, if 1/6 of the people/corporations etc. were to withdraw their money from such a bank, it would have no capital left at all.

Happened in the 20's, caused the Great Depression. 1 merchant wanted to take his money out of a bank and they tried to dissuade him, he went around telling people they were refusing to pay him the money and there was a bank rush... well, we all know that didn't work out too well. 90 years later however, the greedy bankers cause the same credit problem again!

Kernel

Kernel wrote: »

I'd say the OP is thinking of the problem of banks not having enough capital to cover all they should, if a bank run were to happen, and everyone demanded the money, it doesn't actually all exist in the bank and then boom! I mean, with the sub prime lending crisis in the US, weren't banks lending ratios to capital something like 9:1? Might be wrong, but they were greater than 6:1 anyway. Theoretically, if 1/6 of the people/corporations etc. were to withdraw their money from such a bank, it would have no capital left at all.

Happened in the 20's, caused the Great Depression. 1 merchant wanted to take his money out of a bank and they tried to dissuade him, he went around telling people they were refusing to pay him the money and there was a bank rush... well, we all know that didn't work out too well. 90 years later however, the greedy bankers cause the same credit problem again!

As far as I know the Irish banks were aiming for something like 1/11 for a capital/lending ratio recently, and during the 'subprime' boom in America there were banks closer to 1/mid-30's.

Essentially a bank won't have the capital on hand, mainly because it gets its own loans from a bigger bank who get their loans from a central bank(for simplicity's sake). The whole concept of a loan means the banks will always have a relatively high lending ratio because if a bank was only able to loan what it had on deposits it simply wouldn't work in any sort of efficient manor.

The money is always there though, as it will only exist once a central bank has "printed" it. Value of said money may change, however.

Kernel

Rojomcdojo wrote: »

As far as I know the Irish banks were aiming for something like 1/11 for a capital/lending ratio recently, and during the 'subprime' boom in America there were banks closer to 1/mid-30's.

:eek::eek::eek:

Rojomcdojo wrote: »

Essentially a bank won't have the capital on hand, mainly because it gets its own loans from a bigger bank who get their loans from a central bank(for simplicity's sake). The whole concept of a loan means the banks will always have a relatively high lending ratio because if a bank was only able to loan what it had on deposits it simply wouldn't work in any sort of efficient manor.

The money is always there though, as it will only exist once a central bank has "printed" it. Value of said money may change, however.

Cheers for that, I'm no expert. Are you an economist or could you recommend a good starting-point book? What are your views on Keynesian economics?? I often wonder why our government don't pursue this more aggressively, as it seemed to work for the US in the 20s (Hoover Dam etc.), why don't we heavily invest in wind and coastal power generation, put the money back into the economy on a sustainable cost-neutral (or even profit making) project.

Besides a few first year economics modules and various internet reading I don't know much about it! But I studied many relevant historical periods in college from the industrial revolution in Britain to the Wall St. crash and the 'New Deal'.

Now when you look at the two New Deals as a whole it's certain to say that from a point of view these policies certainly relieved a lot of suffering, but to say that government spending actually made much of a difference to the overall economy is debatable. In fact they didn't fully solve the problem and in 1940 unemployment was still around 14% until the army solved that problem.

Wind and Coastal power generation simply isn't cost effective enough at the moment. The tech simply isn't there to run the country off this kind of energy and when oil and gas are much simpler and cheaper solutions they will always win. That's not to say that there hasn't been massive investment in these technologies from the ESB, who have quite impressive targets relating to renewable energies.

The_Honeybadger

A European super grid is currently at feasibility study stage, which could involve Ireland being linked to the UK and Europe thus allowing us to export any excess energy capacity. For Ireland to really capitalise however this would require staggering amounts of capital investment and advances in technology. We have some of the best wind and tidal resources in the world but the intermittent nature of wind makes it unfeasible to run the country on it, last January for example there was barely any wind at all for an entire month. Other times we have more than we need. In our bankrupt state this is a pipe dream at the moment but we have resources worth developing if the interconnector or super grid becomes a reality and private investment will step in if there is profit to be made. God knows we could do with a good news story, but it's a decade away at least.

No point developing more wind / tidal at the moment on a large scale as it simply would't pay, and certain parts of the country are already at capacity (i.e. our national grid will not be able to connect new developments). We need to be able to export the excess energy at peak times for more than it costs us to produce it. There is also the issue of procuring turbines and other equipment, due to a lack of the raw materials used in their production, and the ability of the factories making them to fulfil orders, it takes years.

Don't know much about the OP's question, I guess most people think about debt on a micro rather than macro level, and there are alot of different theories on what economic model works best.

Torakx

lyzardking wrote: »

Just a quick question on the Fiat currency. E.G When a person applies for a loan and the loan is accepted, the Bank/Credit Union issue you with the principal. Lets say €100,000, now the agreement is that i pay them back their €100,000 plus an interest charge. All money in circulation is debt based money issued by a Bank etc. So my question is where is the interest supposed to come from?? Is it not true that both you and i are fighting for that very interest to keep on top of our loan. Is it also true to say then that we are involved in a game of musical chairs where there is always a loser..

Yes thats true.
And on top of all that your loan of 100k allows the bank to create more funds via a multiplier system so hey can loan another imaginary 100k to the next guy based on a % of created money within that bank.

However i believe the banks themselves are responsible for balancing those books and when they are not correct i presume they give something to someone in power in return for a bail out.
IMF maybe or goldman sach and co etc

Oh and yes also the real sickener in ths monopoly system is any money you earn is at the expsense of some other person in the end.
For you to aquire more debt bonds(money) you must aquire other peoples debts.
The bank has the luxury of setting the dogs(courts) on unsuspecting victims and taking their property in exchange for their debt.

So rich people really are Aholes lol, just alot of them in ignorance.

Jonny7

Torakx wrote: »

Yes thats true.
And on top of all that your loan of 100k allows the bank to create more funds via a multiplier system so hey can loan another imaginary 100k to the next guy based on a % of created money within that bank.

They can "create" more than that.. a lot more.

A bank knows that it's clients will withdraw only let's say 10% of their holdings within that bank.

That means the bank only needs to have 10% of their entire clients holdings in cash form, i.e. liquid.

Now this is where it gets interesting - they can hypothetical take all of their holdings and call that the 10% (risky huh).. and then create another 90% (9 times the holdings) for loans on top of that.

Interest on those loans is pure profit for the bank.

Obviously its much more complex than that in reality, but in a nutshell.. that's how it works.

Hence, when there is a "run" on the bank (everyone wants their cash) - it ain't there and the bank needs to borrow from a bigger bank.

(sorry for my mangled description, you can look up the primary and secondary liquidity ratios for a more indepth explanation)

Pablo Sanchez

So can anyone actually intellegently state what is wrong with fractional reserve banking? I presume those who have decried it as some sort of scam force their employers to pay them in cash, never took a loan etc?

The fact is that this is the system and has been in place for over a thousand years. Nothing could get done if every penny had to be accounted for with a matching amount on the other side of the ledger.

jargon buster

So my question is where is the interest supposed to come from??

Future created funds.
Theres more money in circulation now than there was a hundred years ago so theres no reason to think that wont continue.

bnt

lyzardking wrote: »

So my question is where is the interest supposed to come from?? Is it not true that both you and i are fighting for that very interest to keep on top of our loan. Is it also true to say then that we are involved in a game of musical chairs where there is always a loser..

If you look at the really big picture ... the Earth is not a closed system, since we have a Sun blasting it with energy 24/7. Apart from that ... pardon me if I go on a bit. If you're asking where the money comes from in the most fundamental sense, it helps to remember that the global economic systems work on the assumption of growth. Not growth in the money supply - printing new money devalues the existing money - but growth in total objective value or wealth.

That way, everyone can make money. If I borrow money from a bank to start a business, I will (hopefully) make more than the the interest I have to pay, so it'll be worth it. The bank lends because it makes money on the deal. A mortgages is a loan as well ... house prices only go up - right? You can buy to let, the renter will pay your mortgage for you, and then you'll still have the house to sell later. The renters had a roof over their head, so everyone wins. Right?

Not so fast. The assumption of growth in wealth is a dangerous one to make. We can currently fund expansion by exploitation, because the things we take out of the ground are currently worth more to us than what it costs to extract them. We can "add value" to things by improving them - so that you can sell an iPhone for more than the cost of its components - but when it comes to paying for those things, you're not creating wealth is the most fundamental sense: you're just moving it around. There's an old saying in the economics world: the value of something is whatever someone is willing to pay for it. I tend to add "and able" after "willing". We can say that the iPhone has added value because people are willing, and able, to pay for it, but where do those people get the money? From other people? And so on, down to the ground: exploitation again.

Some people have been trying to look at the future to see whether we can keep this up. Theoretically, it's got to end sometime, leaving us with only the sunlight hitting us from space. There's a blog called Do The Math, written by a physicist at UC San Diego, where he tries to do exactly what it says on the tin. He took a look at economic growth a few months ago, here, and has some sobering words:

Our economic systems rely on growth for investment, loans, and interest to make any sense. If we don’t deliberately put ourselves onto a steady state trajectory, we risk a complete and unchoreographed collapse of our economic institutions.

Another is an author, Richard Heinberg, who wrote a book called The End Of Growth, which I read a few months ago. He summarised some of his arguments in a piece for The Guardian a few months ago, here:

But doubts about growth are no longer theoretical. We seem to have arrived at a moment when further economic expansion is hemmed in by financial as well as natural limits. As extraction industries chewed through the low-hanging fruit of the world's oil, coal, natural gas and other minerals, and turned to lower-grade and thus more expensive ores and fuels, managers of the economy tried to keep growth going by piling up debt in the mistaken belief that it is only money that makes the economy run, not energy and raw materials.

Torakx

Pablo Sanchez wrote: »

So can anyone actually intellegently state what is wrong with fractional reserve banking? I presume those who have decried it as some sort of scam force their employers to pay them in cash, never took a loan etc?

The fact is that this is the system and has been in place for over a thousand years. Nothing could get done if every penny had to be accounted for with a matching amount on the other side of the ledger.

Didnt realize gold reserve policies were over 1k years ago.
Seems the world in general got a lot more stupid since then, with economics in mind.

Pablo Sanchez

Torakx wrote: »

Didnt realize gold reserve policies were over 1k years ago.
Seems the world in general got a lot more stupid since then, with economics in mind.

Yeah your right it wasnt a thousand years ago, it was much much earlier.

The first banks were the merchants of the ancient world that made loans to farmers and traders that carried goods between cities. The first records of such activity dates back to around 2000 BC in Assyria and Babylonia. Later, in ancient Greece and during the Roman Empire, lenders who were based in temples made loans but also added two important innovations: accepting deposits and changing money. During this period, there is similar evidence of the independent development of lending of money in ancient China and separately in ancient India.

http://en.wikipedia.org/wiki/History_of_banking

Excellent post, bnt. I think your argument falls down here though:

Some people have been trying to look at the future to see whether we can keep this up. Theoretically, it's got to end sometime, leaving us with only the sunlight hitting us from space. There's a blog called Do The Math, written by a physicist at UC San Diego, where he tries to do exactly what it says on the tin. He took a look at economic growth a few months ago, here, and has some sobering words:

---

Another is an author, Richard Heinberg, who wrote a book called The End Of Growth, which I read a few months ago. He summarised some of his arguments in a piece for The Guardian a few months ago, here:

We could have said this in the 70's, but then home computers came along. Then the computer boom ran it's course and we once again could have said these same things. The internet came along. And here we are 10 years after the dot com bubble talking as though the world is ending.

I have seen and read lots of fascinating stuff about nano-tech and make no mistake - this will change our lives in this coming century. From curing cancer to making an army of microscopic robots to remake the world into a better place. I've already seen a nano-tech engine that was roughly 50 atoms across - this stuff is real.

Anyway, the point that I'm trying to make throughout all of this incoherent rambling, is that we cannot discount human ingenuity. Don't make the mistake of limiting us as a planet to the technology we are using right now.



Put it this way: In 1990, if I had told you that in 15 years everyone would have a camera on their mobile phone, it might have led you to ask, "But where would they put the film?".