Monday, May 18, 2009

Interest and Culture

Storing wealth for a long time in a place where it will be safe is very difficult.

Do not store up for yourselves treasures on earth, where moth and rust destroy, and where thieves break in and steal (Matt 6:19).
Most forms of wealth can be destroyed by moths and rust. Gold is quite safe, as it does not rust, but it is easily stolen buy thieves.
A person who stores his wealth in gold for several years gets back what he started with. No interest is earned.

Many people need to save for their future. Young people save to buy a house. Older people save for their old age. They will be more concerned about security than interest. Most savers will be happy, if they can get their savings back when they need them, with none being lost. These people do not need interest to make them save.

They will need insurance in some form, to deal with the risk of the bank failing or the borrower defaulting. This insurance could be paid for with a fixed fee, or by adding to a risk premium to the interest rate.

In a well functioning economy, inflation might fall to zero. A sound banking system would eliminate inflation, so savers would not need an inflation premium to compensate them for the rampages of rising prices. If investment in capital makes business more efficient, then prices should gradually fall over time. Money in a savings account will be worth more when it is withdrawn than it was when first saved. The real interest rate will be positive, even if the nominal interest rate is zero. Savings will bring a return without positive interest.

We should allow interest rates to be decided by the free market. If funding is scarce, interest rates will rise. If funds are abundant, interest rates will decline. If society has a positive attitude to the future, interest rates should decline to zero.

High interest rates are the sign of a sick culture.

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