1 An ignored problem
2 Terms in a fast pass
3 Schizophrenic money
4 Hard cash smiles: The preference of liquidity
5 The liquidity-premium
6 Interest and yield: The dispute on the surplus
7 Rentability and unemployment
8 Noiseless redistribution
9 Exponential growth
10 Economic growth and ecology
11 Down-discounting the future
12 Liquidity and safety
13 The projection of the eternal and endless
14 The fat years are over: Gradual decompensation
15 The balloon bursts: Destruction of assets
16 Reasons instead symptoms
17 Neutral Liquidity substantiated
18 An economy of fulfilment of demand
19 Reactions of evasion
20 Practical experiments
21 The blind spot
There are many aberrations. We only have to turn on the TV and are already besieged with them. Why should there exist any connection between many of the known aberrations and the fact that money is normally lent out against interest?
It appears already at a first comparison that the financial and interest-caused factors "outrun" the remainder of the economy, that they posess seemingly a dynamics on their own which is not or only very limitedly bound on outer proportions. The financial sector disconnects itself always further and finally takes off. But on an a bit closer look it also shows that this process has indeed effects into the other direction. The exploding monetary capitals, debts and burdens of interest do not pass the remaining society without a trace, but leave traces behind, which normally - one is inclined to say: nearly always - are underestimated. A small, at first glance inconspicuous, construction error of our monetary system is responsible for this self-dynamics, and the errors consequences merely become obvious little by little.
The sense of this report consists in the endeavour to unmask this construction error and to depict his most important effects. Last but not least approaches to solve the issue shall be presented, which act beyond many concrete problems, and which could be carried out relatively easy.
This may seem very bold within the limits of this small booklet, but one must pay attention to the fact, that this is solely something like a matter of a summary which can not replace literature. Most of the thoughts stated here were taken from various sources, compiled and shortened to the essence. Herewith I want to give the reader a succinct synopsis and, simultaneously, to initiate further absorption. Naturally, a claim on completeness is excluded; also the many quotations shall not arouse the impression that the respective authors share the same opinion in all points, since many aspects can be treated indeed controversial.
So let us regard this booklet as a little "journey" through an important, albeit faded out, topic, which unfortunately becomes more urgent day by day.
The sums which are linked to the interest calculation of capitals are no peanuts. Hence it will be sensible to start with some plain facts to get an overview about the orders of magnitude and their relevance.
So in 1995 the sum of monetary capitals in the FRG added up to 7703 billion DM1 & 200 which gained an interest of 365 billion DM2. On the other hand they were opposed by 7694 billion DM debts, which divided theirself to about two thirds on the commerce and to one short third on the state. The consumer credits only added up to 5% of the total sum. The expenses on interest which were to be generated for the entire debts totalled to 499 billion DM.
In 1995, these burdens of interest were from the amounts view a bit more than the whole Federal Budget (493 billion3) or almost twice as much like all in the FRG in the same time span paid health insurance fees including employers contribution201 (256 billion DM4), or even 35 times (!) as much as the full amount of the assessed income tax (14 billion DM5) for 1995. These burdens of interest augment itself all the time; since 1990, the increase alone added up to 164 billion DM, whereas however this increase normally also increases all the time6.
The interests booked to the savings account of the one or other person originate in the strict sense just as little from the bank like the credit for the freehold flat. The commercial banks should be understood rather like a kind of intermediation agency which search new debtors for the deposits of their creditors and, at the same time, take the risks for the creditors. The risks will be charged to the debitors as interest surcharge. The bank keeps from the money only a cash reserve and from the interests only the so-called bank margin, that is the difference between debt- and balance-interests.
Facing these phenomenal financial currents one should guess that this would cast a spell to whole hordes of economy-scientists who build avidly analyses and statistics to throw light on the causes of this weird trend. Unfortunately that is not the case. The reasons for fading out this issue remain largely in the dark and can only induce to speculations. One reason could be e.g. in the fact that interests are "only" a matter of a redistribution which has no (direct) influence on the gross national product (GNP) or the national income. There is even repeatedly argued by economists that the above cited dimensions must be wholly farcical, because they can not be found in the national accounting (NACC)7. Sure enough they are not allowed to be found there since the NACC only itemises the GNP and the interests are computed away at creation of the NACC8.
This report shall not be content with computing away these factors but enlight some of the correlations. But before some terms have to be resolved to prevent later misunderstandings.
Since there are met many different imaginations among experts about what to understand in fact of money, some definitions should be preceded which prove to be appropriate. In style of Creutz money shall be defined as cash, that is banknotes and coins. All outstanding debits to be payable in money (e.g. bank savings, time deposits, etc.) shall be designated as balances. Money and balances together shall be referred as monetary capital. For facilitation of the sections following, money and demand funds9 (balances on giro accounts) will be subsumed as exchange money.
A little fast pass into our currency system follows.
The money will be brought into circulation by the German Federal Bank. It buys for that purpose bonds paying them with new money, or deals in short-term credits, or discounts drafts, for which it issues money in return10. In all cases the issuing is chained with a relatively short-termed following revocation. Of course, in reality, the money will not be revoked completely, but day-to-day quasi "restructured". So the Federal Bank keeps the possibility to act on an alteration of the cash amount to adapt it to the performance of economy.
This possibility is also urgently needed, since if the money amount would be increased heavier than the performance of economy, an inflation would occur. The too big money amount would be "absorbed" by increasing prices until the prices swing into a higher level now complying again to the bigger money amount. The result would be a depreciation of the monetary capital, since one could buy only still less for a certain sum than before.202 The inverted case is imaginable alike, but would have still more severe effects. When the money amount decreases the prices would have to fall because money has now become too short. But this is not possible that easily since many costs in the enterprises are fixed and can not be promptly adjusted. Besides the nevertheless occuring decline in prices, the economy suffers from sales slowdowns, decreases in volumes, layoffs, increasing bankruptcies, shortly: Its a crisis due a deflation.
The sequences described above are not just hypothetical games of very thought, but were validated many a time by experience. One should think actually that the Federal Bank meanwhile masters everything definitely, but unfortunately there is a "little" problem.
The above description acts on the implied assumption that the issued money in fact circulates. If it does not do so, it behaves to the economy as if it would not exist.
For a better overview it would be good at this place to change the perspective and observe the economic area "from above". There below are now all the little economic subjects who deliver goods and services to other economic subjects and receive exchange money in return. The direction of transmission is always reversely for both. It just swarms and teems with exchanging economic subjects. The exchange money circulates. A part of the exchange money is saved by some people and deposed at a bank from which it reappears on the other side as credit. It leaves at each pass a trace behind in form of a balance at the entry and a debt on the exit. On a redemption the operation is reversed. A prices' level emerges which is accommodated to the amount of circulating exchange money. The amount of exchange money is limited as a matter of principle, and there is a compensating pump (the Federal Bank) which can add or drain a bit by a valve. Now some economic subjects get the idea that they also - for reasons with which will be dealed later - can keep their exchange money with them, to carry it liquid. Little "heaplets" form there. The circulating amount decreases in the degree how parts of the exchange money are immobilised and blocked. A deflation threatens. The compensating pump has simply the problem that it does not know how big the circulating amount of exchange money is at all, and, facing the threatening deflation, turns up its valve always rather a bit more than in fact needed. Thus it creates a sneaking inflation. Nevertheless it may happen that the retention of the exchange money increases very rapidly under certain conditions and the compensation strategy of the pump is overstrained. Then the money becomes short, although there exists possibly as much exchange money (including bank savings) as never before. The swarming receives a slowdown and the pump turns up its valve in order to remedy the shortcoming. Afterwards, the retained assets are brought in part to circulation again and provide a drive to the inflation. The swarming fortifies itself again and swings into a higher price level.
Admittedly, the functions of the Federal Bank are not really comparable with the ones of a pump because it reacts within certain limits to the demand of the economy. Within the perspective above the economic subjects are able too to "ingest". And also otherwise much is roughly simplified, anyhow this image seems to be suited to regard some correlations simultaneously.
To bring it to the spot: Our conventional money shall fulfill
multiple functions resp. tasks simultaneously. The here especially
concerned tasks consist in the fact that it shall serve as
a) medium of exchange
b) object of capital
and furthermore as prices' standard. Of course, it is very important too as prices' standard, but here most notably the first two functions will be examined since they cause an "unresolvable" contradiction, a dilemma.
A medium of exchange is characterised in that way that it will be passed on; but an object of capital right in that way that it will not be passed on. To use money as medium of exchange means consequently to dismiss it as object of capital, whereas it as object of capital can not be used at the same time as medium of exchange (neither by oneself nor by all those which would have received it subsequently if one had used it).
A pure medium of exchange would have to be a public utility at everyones disposal who takes part on exchange processes. An object of capital however is a downright private property which excludes all other participants from its use.
This dilemma is not secondary. It shall be revealed in about the first half of this booklet why not. The sometimes heard opinion that money would be only an insignificant "veil" over the real economy is here denied. Money in its function of exchange medium shall be understood rather as imperative requirement of each society based on division of labour: without medium of exchange no exchange, no division of labour.203
Once more it shall be stressed that exchange money means only liquid assets in the above defined sense. Though other savings are also objects of capital they can not be used as medium of exchange anyway and do not fall into this issue.
Why should economic subjects carry their monetary capital in part liquidely? The answer is so close that it sounds at first glance very trivial though it is not that: One may (!) buy with it! (Even if one doesnt do so at the moment)11.
While the above described two functions of the money exclude mutually at the same time they may be switched everytime. And this at will, regionally and temporally unattached, without commitment, but always with the possibility to use the best opportunities.
"The money is the general (universalised) representative of all exchange objects. As such it is the wildcard under all products, services and risks, which are traded in the market game: As the wildcard in the card game trumps each other card, so the money matches in the market game every product, every service, every risk. As the wildcard in a card game can be drawn in this turn or in the next or in the next but one, according to requirements and chance, so the money can also realise the most advantageous chance in the market today, tomorrow or the day after tomorrow. As the wildcard in the card game can be played towards this or that player, so also the money can act as demand towards this or that market participant."12
The advantages associated therewith will become clear too if one considers that the disposition about money stands for being solvent. The alternative to it is insolvency! It is left to the reader to think through the unpleasant consequences from this alternative at concrete examples, but it should have become clear that liquidity owns an economic relevance: Liquidity has a value.
Liquidity is the cushion compensating the negative insecurities of the future, and simultaneously it is the spring amplifying the positive possibilities to the personal benefit.
Keynes introduced for this purpose the term of the liquidity-premium, a "virtual" premium flowing not directly in the form of revenues but being present obviously in the form of other advantages and having a certain value. His theory shall still help us on our way in a little while.
But what is the common denominator of wildcard advantage resp. liquidity-premium, solvency, cushion and spring? The above temporal references anticipate the answer: It is the uncertainty of the future. Liquidity is the insurance against uncertainty, consequently the insurance of the uninsurable, which can not be calculated anymore as risk.13
The term of liquidity has been used already some times and shall be specified too: "Liquidity shall be defined here as the degree of the direct or indirect availability of arbitrary goods"14.
How nice that one can fetch that much from simple definitions at this topic. The "degree" of availability allows to extend with the liquidity the previous definition of money by the temporal dimension. Hard cash is current, ultimate liquidity. To carry it liquidely has as result to be able to dispose about it without any effort and simultaneously to block it by 100% for other economic subjects. Demand funds are still high-liquide, but not anymore that liquide like hard cash. The commercial banks can on their part lend out the deposits, but are very constrained in the usage. On a short-term time deposit the liquidity has been relinquished a bit further, the cash reserves to be held in the bank are still noticeable. And so through all the remain of it, as long-termlier the liquidity will be relinquished, the less it will be blocked for others.15.
Now it is possible to return to the initial problem, the interests. Keynes has provided the tool to establish the correlation of liquidity-premium (wildcard advantage) and interest. The thread turns out, spoken roughly, so16:
In a free market various objects of capital are at the choice of the economic subjects on which they can divide their capital, as e.g. money, short-term investments, bonds, shares, factories, residential houses, land, etc. It is possible to make subtitutions of the objects of capital via the market.
The total advantages (intrinsic interest rates) accruing the economic subjects from the respective objects of capital tend to become equally high at all objects17!
As soon as they are not equally high regroupings occur which restore again the old homogeneity. If e.g. the property of office buildings offers greater advantages than the one of certain bonds, in the long term as many investors will sell their bonds and invest the revenues into office buildings until the price of the bonds sunk and the one for office buildings raised accordingly (It would be a different thing if new office buildings would be about to be constructed: The creation of the new buildings would come to a hold when the yields of them would have dropped to the level of the yields of the bonds). A similar sequence arises also at the compensation of interest differences between comparable investments.
The intrinsic interest of an object of capital equals his revenues minus its costs and again plus its liquidity-premium. The following image arises for some showcase objects18:
|Object of capital||Revenue resp. interest||Costs||Liq.-premium (Wildcard)||Intrinsic interest (Total advantage)|
|Share XY plc.||6%||0%||0%||6%|
Risk surcharges, brokerages and the like were disregarded at this table. The percentage values correspond always with the capital expenditure. They are thought only for clarification of the order of magnitude but are not exact.204
Concrete differences in the rating of the respective objects of capital exist of course for the single person, according to strategy of investment, objective target or risk estimation. But it remains also sensible for the single person to heighten the more advantageous positions in charge of the less advantageous ones ongoingly that much until the respective total advantages have been adjusted.
The liquidity-premium resp. the wildcard advantage is to be understood as such advantage which adheres the respective object by the given legal framework (currency arrangement, laws), by its being-that-way-it-just-is resp. also by established human needs. For this reason the apartment in the table has also a minor liquidity-premium since residing is an absolute basic necessity. One can let apartments even when in crisis times, or one can live within on oneself when appropriate. Living space is a safe investment of capital! This effect occurs even more intense on property of land since usage of land is prerequisite for each human activity. Nevertheless it can not become accreted and thus remains always short; it can not even become destroyed. Land is the traditional and safest kind of investment of capital. In return the revenue (the rent) is less than on other objects of capital. In this respect the property of land is "liquidely"19 even if this is contrary to other classifications.
If one keeps in mind that there occur perpetual regroupings according to the table which compensate possible imbalances one sees instantly that the liquidity-premium of the most liquide object establishes the minimum for all other total advantages20. It will be determined by this object which revenues all those objects of capital have to yield at least which are not anymore liquidely on their own.
Due to that the interest remains always positively under the given conditions since the liquidity-premium of money sets the standard below which the interest can not sink. If the interest sinks to this limit, the so-called preference of liquidity rises. Long-term money investments will become redeployed to ever short-term ones, demand funds will become inflated and even the hard cash inventory rises. Speculations in shares and currencies increase. It becomes ever more rentable to realise the advantages of liquidity instead to collect too low interests. The amount of exchange money will increasingly become blocked and the offer of liquidity decreases. The drop of interests will be stopped by this and capsizes at some time into a rise.
Thus the level of the interest resulting out of the capital market is also not a "price for the money" or the with it connected purchasing power since that buying power will be indeed restored again later. The interest is the refund for the advantages of liquidity per time unit. Instead of speaking about "Lending out the money" it would be more accurate to talk of "Lease of temporal liquidity"21.
It was said above that the interest can not fall below a lowest limit. This inconspicuous fact has far-reaching consequences.
On his part the interest sets, that is to say, the standard below which the yields of the capital in kind can not drop. If they eventually do once in a short period, the capital in kind is not profitable anymore, and an economic crisis happens during which the most unprofitable capital in kind will be decimated. A shortage of the present capital in kind results. Companies go bankrupt or close the most unremunerative locations, additional and also substitutional investments will be left undone since they would now return less yield than the interest which one gains on a money investment.205 After all, the capital in kind is nothing else for an investor than an interest-bearing investment, since the money will be given away in the same manner. It has to compare itself by the interest.
This mechanism guarantees the remaining capital in kind again an "adequate" yield. "So the crisis creates the prerequisites for the next boom, since the due the shortage of the capital in kind again risen interest of the capital in kind channels the money again into investments of capital in kind."23. In the majority of cases only the weakest economic areas (Companies with poor yield or such with low equity-to-assets ratio) are concretely affected during the crisis, so that it often appears that the individual reason would result from wrong decisions and incompetence.
Such fine words like "Market adjustment" or "Downsizing" serve as euphemisms for this event. Accompanying, an "adjustment" or "downsizing" also occurs on the employment.
It would be a bit too simple wanting to assure that the conventional interest-bearing money introduces the reason for yields of capital by all means. It is "only" the cause for the unability of the yields to drop below a certain limit, at least not overall-economically and long-termly. Of course, the discussion about the "yield by all means" can not become treated extensively but some comments shall be still mentioned.
The wildcard advantage of the money is a power agent allowing to implement an interest. There are truly many power agents. Also the property of means of production (capital in kind) is a power agent in an economy of scarcity. The power accrues out of the covetedness of the produced goods; if they are not coveted "the capitalist" can - rakishly said - nail himself the means of production onto his knee. But economy of scarcity means nothing else than shortage.
Hence Marx was not entirely wrong to search the reason for the "surplus" during an objectively present shortage in the production. Undoubtly a surplus can also only be produced in the production (thus by labour). The question is rather whereby it will be enforced permanently!
It has been shown above that the money resp. the liquidity available to the economy can be shortened "artificially" (preference of liquidity). The shortage does not originate at all a conspiracy and also not the evil will of "the capitalists" but is rational for each money owner who wants to use the offered advantages. The shortage of money resp. liquidity transmits itself into the real economy since a shortage of liquidity leads inevitably to a shortage of capital in kind. So the liquidity-premium of the money sets the limit beyond which the capital in kind can not become accreted. Thereby an interest-based economy preserves in the long term also the yields of the (remaining) capital in kind since the shortage can never become eliminated.
The capital is under the given conditions always the shortest production agent no matter how much of it already exists. It is rather the most urgent task of state and society to take care, by demand stimulation, "need-creation", national thriftless projects, export augmentation etc., that this also remains that way, because otherwise we get a crisis which restores the shortage coercively.
In contrast an (ideal, not interest-forged) economy acts ongoingly as eliminator of yield and interest. It is both a theoretical and practical commonplace that yields drop with increasing accumulation of capital. The descent of the yields occurs by the competition: The more concurrents exist, the more products appear on the market, the further the demand becomes fulfilled, the more difficult it will become to keep some yield left.
Our "capitalistic economy" is a hybrid24 whose one side pushes to a compensation and whose other side enforces an enduring imbalance. The up to now preferred "solution" of this dilemma is the economic growth at any cost. This topic will be dealt with in more detail later.
No investment will be carried out and in the long term no production facility will be run when it does not yield interest, hence when it is not rentable. It is obvious that one can undertake leveraged investments only if they are rentable when one doesnt want to go bankrupt. Likewise obviously one will invest also the own money only into rentable ventures since otherwise one could deposit it on a bank and get the liquidity-premium assuredly. In case the interest dropped also (temporarily) below this one does not do anything for some time and keeps the money liquidely.
Hence unrentable ventures will not happen, even if they could be conducted economically without interest charges. But the possibilities for rentability are not endless. The one side of our hybrid "capitalistic economy" tends towards fulfilment of demand. On the other hand the demand can not be fulfilled, since then the yield would drop below the interest gains (and by that the crisis arrives).
Well, it is difficult to find the matching terms for something what just does not happen. Maybe one can express it like that: In the degree how the rentable areas within the economy become exhausted the volume of the fall-through raises on the other side. That are the investments and ventures which would not be rentably anymore in face of the already occurred accumulation of capital. Unemployment can be viewed as an indicator for the volume of this fall-through. One should become reflective about the fact that, with a delay of one to two years, the amount of unemployment is directly proportional to the interest gains of the banks26.
Until now e. g. the "ecologic reconstruction" (of our economy), the "energy-use change", the refurbishment of an important part of the east-german building fabric, apartments for thousands of derelicts etc. has fallen through. The apprehension that the labour will run out appears like a sarcastic joke. As if there would be nothing to do anymore. Labour would actually exist but it would not be rentable, it would not yield interest. Unemployment is a problem of rentability!
Of course measures of qualification, further training, etc. are desirable and lead to an increase of chances in single cases. But under the given conditions they have mainly one effect: The enhance the qualification level of the unemployed27. So the shortening of the jobs hits the weakest first. But the problem will not become solved by a fortification of the weakest, as worthwile it may be, since others take their place.
Our market-/interest-based economic hybrid decreases constantly the external given shortage and creates itself an internal shortage as compensation. It forces the economy and ultimately the society to leave a growing portion of their possibilities unused, and that for the sake of the relative shortage, for the sake of the yield which can not tolerate plentifulness, and finally for the sake of the interest.
The question arises who stands Sam. On the direct way that are at first the debtors, thus the economy and the state. "The economy" means concretely the indebted enterprises. Although in fact the income of the entrepreneurs drop during a phase of high interests and only increase afterwards28; the transfer of interest becomes quasi "elastic". But in the long term the enterprises have no other possibility than to pass all the costs, to which also the interests belong, on the prices. The interest gain of the equity capital will become ensured by the mechanism decribed above (provided that the enterprise does not become victim of a capital shortage). With the state the passing becomes even clearer, since he meets its expenses by the biggest part from taxes.
So the consuments and tax payers pay the interests according their spendings and taxes. However, interest incomes result from the size of the monetary capital and, additionally, often become subject to "tax avoidance" on remunerative amounts.
Hence it seems legitimately for a rough calculation of the total burden to reference the burdens of interest to the national income29 and to assign the interest gains according the monetary capitals. In 1995, the national income added-up to 2615 billion DM30, the burdens on interest to 499 billion DM, whereas however one has to pay attention that the level of the interest rate sets also the standard for the yield of the capital in kind. Even if it is assumed that the debt-free, economically used capital in kind (ca. 4400 billion DM) would realise still a profit also without interests and there are only assessed 4% (= 176 billion DM) as "real" interest gain of equity capital, a total charge of 499 + 176 = 675 billion DM results.
That are more than 25% of the national income which were smartly, noiseless and effectively diverged in 1995 without anyone being upset about it! One might dispute about several percentage points, but the order of magnitude is not made of thin air. There would exist still several different modes for evaluation yielding in part even higher values, but for which it is to be referred to literature31.
The personal burden of interest becomes quickly calculated in approximation when one multiplies the own expenses per year inclusively taxes by 0.2532; interest gains and interest-related incomes from capital in kind have to be deducted from it. The probability speaks for the fact that the addicted reader belongs to the 80-85% of the population whose face falls knowing this evaluation.
The burden of interest is very different in specific spendings and depends in the essence on the intensity of the capital expenditure. At the rent the burden amounts up to 80%, at the haircutter service it will become rather small. Concerning the whole society the "phenomenon" results that the monetary capital is distributed very unequally. In the FRG the wealthier half of all households owns 96% of the monetary capital whereas the poorer half accounts for only 4%33. Creutz has undertaken a netting out of the burden and gain of interest on the basis of ten groups of households, and has shown that the hidden interest payments of the poorer 80% of the population accumulate at the richest 10%. For the remaining 10% the computation is approximately balanced34.
"This explains exemplarily simple a mechanism - possibly the most important - which lets become the rich always richer and the poor always poorer. ... With the interest in our system a redistribution of money is connected which is not based upon effort but finally thereon that someone can hinder the free-market economy, that means the exchange of goods and services, and can enforce an interest for the abandonment of this hindrance."35
From a functional perspective one could also say: "The chitchat about the capitalistic "Performance society" emerges consequently as ideology if it becomes visible that the functional distribution of the national income does not result by the performance but by the shortage criterion."36
Of course, the interest has to be paid also on the parts of balances formerly created by interest gains. One names that as the compound interest effect. Sure enough it only comes into effect when the interest revenues do not become used otherwise, e.g. for consumption. However we will still see that the latter is the case increasingly more rare. Also investments carried out directly by the recipient of the interests do not change anything at the principle provided they are rentable.
The compound interest effect causes an exponential accretion of the respective balances. That means, expressed more clearly, that the time in which the balance doubles is constant (provided there is a constant interest rate). For example, the doubling takes about 7.2 years at a rate of 10%.
Maybe that does not sound exceedingly exciting but the principle is that of an explosion. A striking example for that is a nuclear bomb: By the emission which is set free at the fission of an atom the fission of two more atoms will be caused, then four, then eight, then 16, 32, 64... How many might it be after 50 cycles of disintegration? It are about 5.629.499.500.000.000.
Another example is the story of the inventor of the chess game: "The enthusiastic king grants the clever inventor twice as much grains (wheat grains, the author) for each chess field as on the field before: On the first field one grain, on the second field two grains, on the third 4, then 8, 16 ..., at some time 240, that are already whole storehouses, 241, 242, always twice as much as before. Eventually between 245 and 247, the king capitulates without means, although he promised indeed the supply and doubling of grains for all 64 fields = 263 (totalling to 264-1). Of course, the king is obliged by mathematics and by law, but due some other reasons he is not able to comply with this obligation: From some certain amount, it is simply impossible to double once again."37
The king would have to ante up 440 of todays world cereal harvests (which had to consist of only wheat) for that.38
It would not be admissible to transfer such anecdotes implicitly onto our currency system. Let us rather look at some concrete counts. For the whole monetary capitals and debts of the FRG the following trend appears39:
|Year||Monetary capital||Debts (in billion DM)|
Of course, one can not deduce an exponential function in the strict mathematical sense, but the trend is obvious: The increase accelerates itself. Interest incomes resulting from the monetary capital surpass the whole savings accumulation since long (1995: 276 billion DM40), whereby the savings are tendentially accruing always less out of the earned income. By that the consumption is also less since the interest incomes become "saved" just by those who could lend out their surplus before. The result: The monetary capitals take off.
An obvious counterargument says that this would not be a problem at all if the indebtedness would not increase too. Ultimately, the debtors should be to blame for all that?
Sixty-four dollar question: What happens if, at the currently (1995) "circulating" cash amount in a height of 238 billion DM41 (+579 billion DM demand funds), the interest incomes of a year equalling 365 billion DM do not become feed back into the economy and also not become spent for comsumption?
The posessors of the monetary capitals would have blocked in addition nearly the half of the total exchange money amount (with hard cash alone that deal could not become carried out at all)42. They would be extremely liquide but the economy would crash. Of course, that will not happen because before that the process described in chapter 6 starts and shortens the capital in kind that much (and creates that many liquidity bottlenecks) that someone will be found who takes the offered money for an "appropriate" interest payment and as the case may be also invests.
The growing monetary capitals do not only enable a further indebtedness, they enforce it!
At this place many a person will shake its head and say himself that this is completely farcical because that can not work in the long term. You got it! Just that shall have been shown.
That mechanism has also never worked stable in the past43. Why it should do so of all things and against all logic in the future? The explosion taking place here occurs just not in fractions of a second but in decades.
It is a legitimate question why our economic performance has to grow constantly if the social problems shall not increase (thus we must become richer to not become poorer?). Although the topic is technically blurred, it is not difficult in principle. The explosive evolution of the monetary capitals does not become a problem as long as the economic performance explodes together with it in the same degree. The risen economic performance videlicet enables the transfer of the interests without occurence of income losses for the working ones. There remains a "relative impoverishment" of the working ones who, meanwhile, hardly take part anymore on the increase of the economic performance but also after all do not become pauperised ultimately. An exception constituted surely enough very strong boom phases in which the economic growth were above the interest rates and thus enabled income increases also for the working ones.
As it is generally known, one can eat a cake only once. However, the
piece of interest which becomes cut out before the cake will be shared
among the working ones increases permanently. There are in principle
three directions which the development can take:
a) Impoverishment (of parts) of the population (the remainder of the cake becomes smaller)
b) Economic growth (the cake becomes bigger altogether)
c) Inflation (the cake becomes inflated)
The debt rescheduling can be regarded as a fourth possibility for a very limited time, that is the payment of the old credits by new debts. But this possibility reaches very fast its limits due the diminishing creditworthiness of the debtor and hence is no alternative for the economy. Only the state in its nature as exceptional credit-worthy debtor can make use of debt rescheduling for some time, before also it becomes insolvent.
The debt rescheduling and inflation cease to apply at the moment (one must say: until they become unavoidably45) as possibility to be taken seriously. The redistribution at the expense of the working ones, that is the absolute impoverishment, entails heavy social tensions, so only the economic growth remains. In this respect, the interest-based economy imposes an exigence of permanent growth, a "growth enforcement", whereas however this enforcement is to be understood as social and political enforcement. Growth is necessary to avoid or at least attenuate crises and to delay the social collapse.
So also the demand of many economic scientists and politicians becomes understandable who mean that an everlasting economic growth of 3% would be categorically needed to avoid otherwise unevitable crises.206 Because the reason of this demand is hardly ever explained, the ecologic movement sees itself confronted by a killing argument which unfortunately hits the bull's-eye as long as the established relationships do not become questioned.46
Indeed, the demanded economic growth would be likewise exponential growth as also the growth of the monetary capitals if it could take place at all. In the long term, it would have to lead to wholly farcical orders of magnitude. Here the "sustainers of our society" in politics and science reveal a total lack of simple mathematical basics. One could also phrase it handier:
"It is the categorical declaration of bankruptcy of the entire official national economy that it can not or does not want to recognise the growth as problem but declares it as prerequisite of prosperity."47
A growing economy causes a growing resource consumption. An exponential growing economy would in the long term negate all endeavours of retrenchment and environmental protection. Well, there is the often voiced demand of a so-called "qualitative" growth, whereupon it remains in the dark how this shall look exactly. Furthermore, the gross national product is an out-and-out quantitative term, and only an economic growth which itself condenses in Euro and Cent can enable to defuse the above described distribution difficulty at times. Thus the growth of the service sector is understood by the "quantitative" growth.
"Indeed, the portion of this sector on the GNP has risen considerably. This is however not a solution of the dilemma since the service sector can only grow when it serves a growing production sector, just in order that this one can grow still better. Moreover, one can notice also in the service sector a forever increasing capital expenditure and resource consumption."48
How one may also turn it, as long as the growth does not become recognised as problem the measures on environmental protection resp. repair, and the unsuccessful search of the system-compliant sustainability remains a Sisyphean task which can not stuff the old holes as fast as, on other places, new ones rip open.
The compound interest effect occurs also inversely. Just as a certain revenue is "more worth" today than in one year (since it can become invested interest-bearingly in the meantime), so also a certain expense is a bigger burden today than in one year (since also the amount not being spent can become invested resp. does not need to become funded). The doubling of an amount by the compound interest effect has as counterpart a halving of a burden on the expenses side.
Likely that sounds a bit out of touch with reality. One can remedy that when one tries in short to reconstruct the presumable train of thought of a politician standing before the decision to either finance today an environment protection measure for 1 million by 7.2% or to postpone it still 10 years (in case he then still holds his office). The costs of interests sum up over 10 years to exactly the same sum as the measure itself. So the total costs aggregate to 2 million if the measure is carried out today. The costs aggregate to only 1 million on a shift of the measure by 10 years, thus the half. If the measure would be met by own resources the circumstance is also not different since the interest incomes in the mean time diminuish the later burden.207
The argumentation is always the same in such cases: Today the cash boxes are empty, except that there are more important things; investments into the future are only possible if they are rentable; first we need growth, then we can protect the nature from our growth and similar. Unfortunately in doing so hardly someone notices that the situation never changes and under the given conditions also can not change. In an interest-based economy it remains always rewarding to postpone costs to later.
But the down-discounting takes effect not only at costs but also at investments. A qualitatively high grade commodity (lets say a machine) with a high lifetime and a high price has compared to a cheap model, which costs only the half and must be replaced after the half time, blatant disadvantages. Trash is simply more rentably.
The author want to let himself carry away to the statement that the exponential growth of the monetary capitals stands accordingly vis-à-vis of a logarithmic devaluation of the real future. With that it is also not anymore a problem to pass costs to later generations since down-discounted hardly something remains!
This should not mean that someone creates consciously payment sequences up to the year 2100 to blandish todays environmental damages. Many people have already tremendous arduousness to adapt to this weird mechanism and are very happy if they finally managed after many years of scool, education, studies etc. to find their way economically in the interest-based economy. Of course, the reasons of many exigences remain often in the dark. Except that, surely a lot of psychological motives and the exasperating convenience come into play at the problem of passing the costs to later. Only the regrettable fact should have been shown here that by our monetary order not only a relative shortage of capital (regardless of all economic growth) and a divergence of the incomes is determined but also a systematical down-discount of the future.
"A positive interest rate represents the signal: "Shortage dominates, you are doing badly. Look that you remove this shortage in a push of force. Temporarily you may do this even at the cost of future generations." But exactly only temporarily. So wise the allocating effect of this market signal is, so fatal it takes effect in conjunction with the capitalistic interest mechanism: The interest becomes perpetuated by the liquidity premium of the money - and with that also the signal of shortage and a positive "social discount rate". Thus life is not only temporarily at cost of future generations but permanently. This sacrifice of future generation does not still even make sense since the shortage can not become eliminated in the capitalism."50
The liquidity premium can be understood as the advantage of ensurance against the uncertainty. Its existence presumes consequently that the world is unsafe. In that sense, the liquidity premium gives also a professional investor or speculant the possibility to react fast on yield fluctuations (which are uncertain in advance) and thus to act profit-maximisingly. Hereby it becomes visible that the previously "virtual" liquidity premium can make an impact crabwise as measurable revenue. Of course, the investor resp. speculant knows this and likes to rather remain liquidely on low interests (traditionally: he "hoards" money).
But also from a general point of view, the uncertainty will never vanish entirely (Welfare and constitutional state to and fro), wherefore always a liquidity premium will exist. It remains always sensible for the single person to protect himself by liquidity from the "Remainder of uncertainty" as long as the possibility for that exists. Nevertheless the level of the liquidity premium is no fixed factor since it depends of many general conditions51, especially by the safety of the economically and social environment in broadest sense, thus of the confidence into the stability of the currency, of the reliability of the legal system etc.
However in this context is decisive: The liquidity premium is and remains always positively.52
The insurance of the individual uncertainty by means of liquidity means finally to pass this uncertainty onto the society. The safety of the investor and and the increased collective uncertainty have their reason similarly in the (not-) use of liquidity in a extremely flexible way resp. in a way of other purposes than indended. The concrete effects of the increasing collective uncertainty have already been dealt with in the sections 1 and 2. Deflationary break-ins on the one, inflationary impulses on the other side, a permanently raised level of interest with increasing concentration of capital in always fewer hands and, quite generally, a recurring change between boom and recession occur, whereas the last ones intensify in the long term until finally the social problems escalate and/or the financial superstructure collapses.
Under the given circumstances, the individual pursuit to maximally possible safety leads inevitably to an increasingly collective unsafety. We are stuck herewith in a "prisoners dilemma"53. The collective unsafety becomes abided on a high resp. raising level under the conditions of a not neutral liquidity54.
In this respect, broad parts of history can be understood as a struggle of humans against the uncertainty without adapting the money, which increases the general uncertainty, to it. Meant are here e.g. human rights, constitutions, democraties, separation of powers etc. Doubtless the safety, the freedom, the productivity as well as the fulfilment of demand increased indeed and the uncertainty and the level of interest dropped. But simply never lasting and also never above respectively below certain limits.
Hopefully is has now become clearer why so much stress is being put on the money in this report. The real economic, cultural and politic aspects of safety shall not be brushed aside through this as unimportant. It is only so that the money as liquide item is also the one on which one can apply in the most effective way (and also has to apply if the increasing collective unsafety in form of economic and social problems shall not strike disastrously anew).
The money has long adopted the attributes of a strong addictive drug. Overall-economically the problem of interest accounts above all for a necessity: The dose has to increase. The vehicle to increase of the dose are the economic growth or, in the advanced stage, the inflation56. If these vehicles fail, withdrawal syndromes occur in form of an impoverishment of parts of the population or, at a complete commitment to the medium of inflation, a total crash.
As liquide object of capital and speculation, the money loses its reference to real world.57 The by all means sensible attribute as medium of exchange for real goods and services becomes increasingly usurped by the rising significance as means of accumulation of might. This might is not subject to any "falling marginal utility"; the might over the compound interest mechanism can be build up without expense beyond every limit. So the aura of the eternal and endless adheres to the money. It is carried off from the world and offers itself as projection screen for suppressed anxieties and desires.
It is not more amazing if the overall-economic addictive character of the money rubs off on the individuum. One also needs not a special sensibility to notice that the money has become enultimated and elevated as fetish.
The enultimaltion of worths and things leads in reality to their destruction. That means that the enultimation of worths produces always a fetish to make itself dependend from it without noticing that. ... Although noone wants to admit it, magic reigns our entire economic life since this relies on the contradiction that growth without limits happens in a limited world. But this is only possible by the enultimation of the money which increases itself by magic effect."58
In turn that shall not mean that the interest represents the single reason for projections (in economic contexts). But it shall mean that this form of projection suggests itself in an interest-based economy, downright obtrudes itself and stabilizes the existing circumstances.
Obviously our society gets problems with the interest-caused redistribution mechanism already for some time. How will things continue now? Besides a psychological enultimation, there are still some systematical activities with which the interest-based economy stabilizes - for the time being - itself.
Of course, first and foremost there is the economic growth caused by the additional investments with which the "saved" interest incomes can (resp. must) be lead back into the economy. Except that, the growth permits the payment of the risen burdens of interest without income losses at the working ones (supposed the growth has been big enough what however is always more rarely the case).
But also the economic side of our market/interest-based economic hybrid becomes active with the economic growth. The Economy tends to the fulfilment of demand, and the yields of the capital in kind drop. If they drop below the level of the interest of the money, the capital in kind is (partially) not rentable anymore, whereby a recession occurs. At some time the yield drops inevitably below the interest, since the interest can never fall below a lower limit.
With each recession a destruction of capital in kind (by insolvencies, liquidation of companies, omission of investments) and jobs is accompagnied. The yields raise again a bit, investments become rentable again. However, the employment remains on the route which becomes reduced at every recession and becomes substituted by capital-intensive methods of production at the next boom. So the recessions are not to be regarded as a phenomenon of decay of the capitalism but - in the opposite - as a stabiliser of the required (relative) shortage without which the interests and yields would not be permanently possible.
The task to compensate the increasing social disparity by "back-distribution" behooves to the social system, but also again at cost of the remaining working ones59. The distribution runs from below to ultimately below to arrange the system-inherent concentration to above reasonably tolerable.
Another flashy phenomenon settled in the financial sector is the speculation with shares and foreign currencies60.
The emperor is naked, and everyone can see it! One merely must not look the other way.
1 For monetary capitals and debts cp. Deutsche Bundesbank,
Finanzierungsrechnung 1990 bis 1996, p. 40. All sums were rounded
to whole billion DM.
2 Regarding interest returns and expenses cp. Deutsche Bundesbank, Monatsbericht August 1997, p. 54.
200 1 DM = 0.51 Euro. 1 billion = 109.
201 The health insurance in the FRG is enforced by law, and paid half from the employees official wage and, additionally, half by the employer.
202 See the quantity equation, or e.g. the example of the french Assignates where a hyperinflation due overemission occurred. Cp. Karl Walker: Das Geld in der Geschichte, chapter about Die Assignaten.
203 Of course there is a minor direct exchange possible, but the transaction costs in regard to time and search of matching offers are too high to establish direct exchange as real alternative in all respects.
204 The level of the liquidity-premium for cash determining the total advantage of all other objects seems to be dependend on the overall economic circumstances. Other sources state a limit of down to 2% for this liquidity-premium. But whatever level it may be, it is not negligible, and will not drop to zero.
205 The reader shall be reminded on the possibility of keeping the money liquidely, excluding many risks and thus equalling a premium, as mentioned shortly before.
206 From a cybernetics point of view, interest can be regarded as positive feedback in the economic system. Then the economic growth is the negative feedback which is tried to become implemented by governmental politics to get the system stable.
207 For a better explanation cp. Bernard Lietaer: Das Geld der Zukunft, Pößneck 2002, pg. 368-376.
2xx I want to point the reader on two historical examples of demurrage money having become known after writing of this report. The first is of ancient egypt where a demurrage money based on grain ostraca was in use from about 1900 resp. 1600 BC until roman invasion in about 200 BC. The second is of the medieval times in central europe from about 1075 until about 1400, where special coins ("Bracteats") were demonetised on a regular basis ranging from 4 times a year until every 7 years and exchanged into new ones with a discharge from 15-40%. This was a main reason for construction of cathedrals which came to a long halt after that time. In both cases a demurrage and a permanent money coexisted, and after abandonment of the demurrage money the common economic prosperity declined. Cp. Bernard Lietaer, Mysterium Geld, München 2000, pg. 146-246.
The translator wants to point at Bernard Lietaers proposals of regional money which is more likely to realise. However, this paper describes the problems very accurately.
The translator transfers all rights on this translation to the INWO.