What is the mechanism whereby interest is charged on borrowing money, in a system with a relatively fixed money supply?
Assume there is $1k in the system. I borrow $100 at 1% interest. Where does the $1 i pay in interest, come from? What if 50% interest?
quick answers appreciated. thanks.
Well let's say you borrowed $100 to start a business. Let's say a lemonade stand. You pay the bank back $101 from your sales. So the interest comes from your production, which came from someone else's production, which came from someone else's production... Does that help?
The only one worth following is the one who leads... not the one who pulls; for it is not the direction that condemns the puller, it is the rope that he holds.
ok, what about taxation in a system with competing currencies? is imposing a gold standard different from imposing a non inflatable fiat currency?
I honestly don't see how those two questions are related. Could you elaborate?
Well I mean it's pretty obvious, the interest repayment just comes from the consumers, which further means that it is detracted from other areas of the economy. The original loan comes from, of course, lenders.
As for your second question, a large part of it depends upon whether or not the money is spent by the government. Because it will be in practically all cases, this will mean that the exchange rates won't change except for in the ways that the government spending directly affects the economy. If in some dream world the money is not spent then this will lead to deflation, and as the amount of the currency on the market decreases then its exchange rate will rise and the currency will appreciate in value.
They're not, it was just another question from someone I was having a conversation with.
>>"Well I mean it's pretty obvious, the interest repayment just comes from the consumers, which further means that it is detracted from other areas of the economy. The original loan comes from, of course, lenders."
So the interest does not actually increase the supply of money, it causes it to be traded "up" the line, for goods and services. Am I correct in assuming it gets traded back "down" the line for the labor to produce those goods and services?
Is there a good visual chart somewhere that demonstrates this?
People don't seem to understand that money circulates. And, unless there 100% required RR's, the supply of money, even in a gold standard, will not be fixed.
"If we wish to preserve a free society, it is essential that we recognize that the desirability of a particular object is not sufficient justification for the use of coercion."
I think replies #3 and #4 by DD5 and Southern in THIS thread will provide you the quickest/best answers.
This is the problem I'm having wrapping my brain around. Assume you are using all the gold, ever, so the quantity of gold cannot increase. With 100% reserve, the interest that is charged on the money comes from some third party that trades with the borrower?
copycat, the money (gold) supply doesn't have to increase. Just read the replies #3 and #4 from the link I gave above and all will be clear. The examples are very simple and easy to understand.
Ah, i'm thinking of gold as fixed in value, as well as quantity. Would the interest come from the decreased value of the gold, relative to the goods that gold can buy? and if the loan defaults, there is no interest anyway?
Sat. 12/06/30 18:08 EDT.post #187 copycat042:... the interest that is charged on the money comes from some third party that trades with the borrower?Yes.The borrower, in order to generate more money than he borrowed (so as to pay back the principle PLUS the interest), ultimately uses the money he borrowed to generate a good or service which he then trades with another person or other persons for more money than what he spent generating that good or service.
copycat042:... the interest that is charged on the money comes from some third party that trades with the borrower?
Edit:So, the "extra money" (the interest) is just money that already existed in the hands of the borrower's customers. The customers willingly gave up some of that money because they wanted the good or service they purchased more than they wanted the money they gave up.
"So the interest does not actually increase the supply of money, it causes it to be traded "up" the line, for goods and services."
If we are assuming a 100% reserve system. If this is not the case then there is inherent money creation. If there is a fractional reserve system then this means that anything loaned out increases the money supply
"Am I correct in assuming it gets traded back "down" the line for the labor to produce those goods and services?"
Yes, the entire reason that interest is needed is because production processes do not pay off instantly, a loan is needed to make it through or else laborers and land owners won't get paid until the final product is sold.
I appreciate everyone's replies. This has allowed me to solidify some concepts that had vexed me.
Wed. 12/07/04 22:14 EDT.post #203 copycat042:I appreciate everyone's replies. This has allowed me to solidify some concepts that had vexed me.Thanks for the acknowledgment and feedback!
copycat042:I appreciate everyone's replies. This has allowed me to solidify some concepts that had vexed me.