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Care to share that kool-aid? or at least whatever it was spiked with?
The argument advanced in favor of this point (as in the linked article) is that bank loans must be repaid with interest, hence the money supply must constantly grow. It's a simplistic argument and hardly worth rebutting. If anyone knows of a better one, let me know.
The rebuttal goes like this. A bank makes a loan for, say, $100 and wants to receive $110 in return. Let's suppose the loan is successfully repaid (I'll explain how this works in a moment). Now the bank has $110.
It uses the $100 to make another such loan and retains the $10 as profit. The bank spends this $10 profit on its choice of items, such as beautiful decorations for the bank.
The point is that this $10 profit gets circulated back into the economy. And it is this addition of $10 to the total circulating money that ultimately allows the new $100 loan to be repaid with interest. Since there is $10 more circulating in the economy, the $110 can be repaid without anything having to change.
Then the cycle can repeat. The bank receives the $100 repayment plus the $10 profit, spends the $10 and loans out the $100 again. Meanwhile all other banks are doing the same things, making loans, receiving repayment and spending the profits to keep the money in circulation.
This, then, illustrates the fallacy in the myth that capitalism and banking requires constant growth to allow for the repayment of loans. In fact, loans can be repaid just fine with a stable money supply and economic base.
Capitalism does not depend for it's life on growth, however, a fiat money system featuring interest bearing debt creation does. We should separate the two issues.
The nineteenth century had a very stable money supply (gold) with zero (zilch) inflation. Capitalism thrived. (Of course, there were many boom/bust cycles, a symptom of uncontrolled capitalism, but the money system was not inherently a pyramid scheme as we have today.
Savings is the bedrock of market economies. It began with the first caveman setting aside food and other supplies so he had enough bonus time to not be scavenging every day. This bonus time let the caveman produce other things or find better ways to do certain things. But he had to have the savings to start. His choice when he had a surplus of food or other material was to have a wild party (like modern man) or to save it in order to use it more wisely.
Further, fiat money lets us postpone the savings into the future but you can't continue that Ponzi scheme forever. At some point some players in the game will opt out because they no longer believe that subsequent generations will flagellate themselves so badly to pay for your profligate spending today. When we reach that point, the entire fiat system crashes on its head and we'll see a demand for savings (real collateral) before loans are made on a wish and a whim.
In the meanwhile, the current system is a Ponzi scheme, enabled solely by the "full faith and credit" of the US government. And the current system is dependent on endless growth (but pure capitalism itself is not). As others have noted, this is not pure capitalism, just one particular variant of capitalism and as such it is subject to replacement by other variants as conditions change.
In the face of declining global resources, rising population, and continued inflation of the fiat currency of the day, I'd say you'd be wise to expect change.
The interest came from money already existing in the economy. When you pay interest as part of your car or house payment, you pay it with money which you saved or earned (i.e. money which already exists in the economy). Money doesn't need to be created specifically to pay a certain specific person's interest obligations. If you work for a bank, your salary gets paid from interest earned by the bank, and then you use that to pay the interest on your own mortgage, which the bank then pays to another employee, who uses it to pay interest on his mortgage etc. The selfsame money can pay off hundreds of people's interest debts. When you pay interest to a lender, the money doesn't disappear, it re-emerges into the economy and can then be used by somebody else. Which means that the selfsame $100 can pay off two people's interest debts -- $200 or more of interest can be paid off with the self-same $100 bill. That's the crux of the fallacy. It falsely assumes that a $100 bill can only be used once, to pay off one $100 debt, and then it can't be used anymore.
On the other hand, you could put your money into one of them newfangled banks which loans your money out at interest so they can pay you interest on your deposit. That's obviously a lot more attractive than a safety deposit bank where you have to pay the bank to keep your money. However, the minute they loan out your money, they create fiat money. You can see this clearly because: a) the person who borrowed your money has your money in his account, and b) nevertheless, you still have your money in your account.
So it's just a question of consumer choice. Do you want to eliminate fiat money and pay the bank to keep your savings? Or keep fiat money and get interest on your deposits? The choice is obvious, and that's why regular banks outcompete safety deposit boxes as a way to preserve savings. Fiat money is a better system for everybody. It eliminates the senseless waste of idle money in safety deposit boxes and people's mattresses.
Fiat money does not come from your local banks lending out your money to other people while "retaining" the same amount in your account. They have to keep a percent of TOTAL cash on hand, but if you, the depositer, and your friend, the borrower, were the only customers of the bank and you wanted your money while it was still on loan, the bank would be in a pickle because it (as a local bank) CANNOT create money. However, the Federal Reserve can, and fiat money is what happens when the government puts ink on paper and says it's worth something more than the ink and the paper.
We are so used to the capitalist system that we can't imagine life without it. But there is a reason why the ancient world thought lending money at interest was a terrible sin. And I think it boils down to the difference between a steady-state economy and a growing one. If the economy is not growing, the chances that the borrower will be able to repay the loan are not good.
Capitalism is a great way of quickly exploiting new resources, as when the Americas were "discovered." It's not so great when resources are limited.
And that, I suspect, is why charging interest was so frowned upon in Biblical times. Interest is "unearned income." It's money you get for not working - not producing anything. It's a wealthy society that can afford to support people who don't work. Back then, people did not borrow money for luxuries, or to expand their businesses. In a steady-state economy, it makes no sense to do that. People only borrowed money if they were in desperate straits. Charging interest was not only exploitative, it was likely to drive the borrower into ruin. If he had reached the point where he had to borrow, then he could not afford to pay interest.
However, it is true that the economy must grow in order to function. The reason is this: without growth, increasing productivity will cause massive unemployment.
For example, consider the changes which occurred in U.S. agriculture since the Revolutionary War. The percentage of people working in farming decreased from around 95% or so to today's 2.5%. Those idled hands need jobs, and the only way to provide them is growth in total output of the agricultural sector, or net growth in other sectors.
So "technology (i.e. increasing productivity) makes growth necessary" is a more accurate way to describe the situation than "capitalism depends on growth". Technology is the culprit, not the monetary system.
Growth would not be necessary, even in a capitalist system, if there was no growth in population, or improvement of productivity. In fact, that was basically the steady-state economy which our ancestors lived in before technology changed the equation and made growth necessary.
Usury and Social Justice--Would a Bank Charge Jesus Usury? by Bishop Paul Peter But, please, read the whole thing. Just to get a traditional moral perspective on the question.... These are old questions.
Would Jesus, the greatest social justice advocate, be silent as others were victimized with such an oppressive financial burden?
This is silly. If you don't like the interest rate, don't borrow. People who voluntarily assume such burdens and sign on the dotted line are hardly "victims". Maybe victims of themselves...
People borrow at these usurious interest rates in order to make financial ends meet. Of course, this finally results in complete financial ruin especially given the latest update to the Bankruptcy Laws passed by our Congress and signed by our President.
But blaming the victim is and has been popular for some time now....
I suppose you yourself are doing just fine....
Rick
I think that I agree with you with the caveat that, if the real economy is not growing due to supply constraints, then the process you describe is an inflationary one (the money supply has increased by that $10, but if there are no more goods and services, then the value of money has to degrade correspondingly). In the equation MV = PQ, if Q gets fixed not to grow and M is growing anyway, then it's likely P that will take up the slack, right?
The "framing" power of economics psycho-talk is amazing.
Once we fall into the "frame" of pretending we are economists and we actually know what nonsense phrases like "The Economy" mean, we can further fool ourselves into believing this abstract thing is a human creature and that it experiences "growth" and decline. We can argue that there is a "real" economy and then there is a phony imposter who only pretends to swing the true "invisible hand".
Have you people gone nuts?
Why don't we invent an Invisible Oil Cow and discuss whether her milk output is growing or shrinking and whether her udders are "robust" or undergoing a "recessionary trend" with expectations of recovery?
My prediction for 2006 is that it will be a good year for our Invisible Oil Cow with moderate undulations in her production numbers followed by above average increases in productivity. Fundamentals indicate that our sacred cow will experience sound growth for the foreseeable future.