Wednesday, May 27, 2009

Interest-free debt?

Professor Richard Werner at the recent seminar at Southampton University (see this Blog 19 & 23 May) said that ‘the growth bias of modern economic life is destroying the planet’ and is driven by the servicing of interest on debt. The compounding effect of interest payments means that some production is needed merely cover the interest on any debt needed to set up and run the business.

He said the term ‘natural interest rate’ used by economists is not a natural or scientific concept at all, but ultimately is ‘for the convenience of bankers’. Some ancient Greeks thought the natural rate was zero. One reason for interest is that we compensate the lender as they forgo the use of their money for a time. This may sound sense if we have a personal deposit left in the bank which is then lent out to someone else. However this is not how bank lending happens. If someone approaches a bank for a loan the bank creates the credit requested based only on the bank’s small base of reserves. They are thus not ‘forgoing’ anything in the above sense as the new credit comes out of ‘thin air’ and thus the interest paid on the loan is almost pure profit for the bank alone. (See this Blog for Nov 8, 2009). Werner says this is non-sustainable for the planet as some of its resources are being used up just to pay for the all-pervading interest burden. In his book New Paradigm in Macroeconomics he writes (p341): ‘ Interest rates could be kept at very low levels , or abolished entirely, since they create deadweight losses and lead to the inefficient concentration of wealth in the hands of a few’.

Carol Wilcox of the Labour Land Campaign asked why we have to be in thrall to academic economists, surely everyone knows that their solutions are often flawed? Tim Congdon said that their role is very important as they advise governments and sometimes give the wrong answers as illustrated when Philip Snowden (a past Chancellor of Exchequer) was told by academic economists that it was impossible to leave the Gold Standard, which was not true. Today, Treasury economists did not tell Alistair Darling such solutions as he was suggesting.

Further questions covered the use of land value taxation in the interests of fairness and sustainability. More on this and other Qs&As in the next Blog.

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