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Saturday, July 26, 2008

Ban compound interest to save the planet by John-Paul Flintoff FROM TIMESONLINE

Ban compound interest to save the planet by John-Paul Flintoff FROM TIMESONLINE:

"The governments of rich nations, as Colin Tudge wrote recently in Resurgence magazine, have declared a war on poverty while presiding over an economic system in which the rich are bound to grow inexorably richer while the poor grow poorer.

You might ask: What has this to do with the environment? A great deal - because in order to repay debts businesses and whole economies must grow, and that usually involves consuming ever greater quantities of non-renewable resources. If a moneylender at the time of Christ had lent an ounce of gold at 5% it would today require an amount of bullion weighing several planet Earths in repayment."

If you accept the Austrian School explanation of interest rates (see below), then you won't consider abolishing interest payments as a solution to any economic problem.

In addition, prohibiting the charging of interest will simply result in higher interest rates. This is because lenders will charge a premium for the "service" of pretending not lend at interest just to appease the authorities.

FROM question #3 of the Mises Quiz (short version):

"3. What is the reason for the interest rate, and should it be regulated?"

Answer

"Interest payments reflect the higher value of present goods over future goods. Other things equal, everyone wants to consume sooner rather than later. The current price of a computer might be $1,000, but the price of a claim to a computer delivered in one year would currently sell for less than that, say $900. An entrepreneur might invest $900 in labor and raw materials in order to sell a product next year for $1,000; his implicit interest return is due to the fact that the factors of production represent technological "claims" on future consumption goods, and thus their current price (the $900) is less than their ultimate sale price ($1,000). Obviously the government need not interfere with the market interest rate, since it merely reflects the subjective premium individuals place on a marginal present good over a marginal future good."

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