Interest is a market participants preference valuation of present goods to future goods. In which one would prefer $10 now rather than $10 in a months time. The monetary unit here ascribes itself to the lenders compensated assurance of placing a premium on present goods, one would prefer $10 now rather than $10 in a months time, though so to does the lender. In order to compensate the lender the borrower with a strong present time preference would be willing to pay interest of say 5%. Therefore, both happily gain and agree on the stated terms.
What if collectively the economy had borrowed so much that the total interest having to be paid back were $1 billion every month. This is Australia’s current situation “[…] every single year we have to find $13 billion just to pay the interest on the debt that they created.” (Kelly, 2016) Interest being the time preference of present goods over future goods means that the premium of $1 billion a month would be the economies collective time preference toward present goods over future goods. It is true the future is uncertain, however if this amount of interest continues then the future becomes less uncertain of the inevitable consequences that lie ahead.
No wonder the cause often argues for banking reforms that tease negative and zero interest rate schemes, proposed on the grounds to decrease risk. However, the economy having achieved a highly astonishing amount of monthly interest repayment amount, one must be mad to argue that central banks must effectively try to increase the spending of market participants, on grounds it would push up economic activity and increase inflation. Though, technically inflation can counter the interest. “[Debt] is actually decreasing in real terms as inflation goes up.” (Kelly, 2016)
“That is something we need keep on eye an to ensure that it does not become an interest-free loan and it does not become a benefit to someone, but that it is an adequate incentive for someone to repay.” (Kelly, 2016) As in the short run, businesses expand as credit expansion is confused for real loanable funds, there is no market for final goods with inflated asset values. “Where that $100 million is borrowed every day, more than 50 per cent of it is borrowed from overseas.” (Kelly, 2016)
“So, we are actually mortgaging parts of this country to borrow that money.” (Kelly, 2016) Also, there is not time materially available to equal the amount of goods (deficiently or excessively supplied and imperfectly employed) to the supply of credit expansion. (Tooke in Marshall, 1920) Therefore, the supplied capital goods/services have not changed in response, as reliant on the unaltered physical capital, human capital, natural resources, and technological knowledge.
Kelly, C. (2016). Social services legislation amendment (interest charge) bill 2016; second reading. OpenAustralia Foundation. Retrieved [25/04/16] from <https://www.openaustralia.org.au/debates/?id=2016-03-17.33.2#g36.1>.
Marshall, A. 1890 (1920). Principles of economics, (8th ed.). London: Macmillan and Co., Ltd.
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Copyright © 2016 Zoë-Marie Beesley