Money, Interest, Compound Interest

Thomas Kubo claims that a monetary system with high compound interest will successfully hijack any reasonable effort to pursue social and ecological reforms. The lecture focused on the importance of interest, especially compound interest, in our economic thinking so that we can view problems from a different perspective. The most important question to think about is what money is. Money is a singular asset with specific qualities, it is NOT a neutral facilitator of exchange. The superiority of money enables its owners to charge interest, which is the price of the money.

It is interesting to note how growth is related to interest rates. We work as per the requirement of money to repay any debt. As the interest rates increase, there comes a need to earn more so that the excess interest amount could be repaid. Thus, the higher the interest rate, the higher the growth rate in the economy.

How can we create a sustainable monetary system? According to Kubo, we need to keep the compound interest stable.

Later, we also extensively discussed the functions of money:

  1. Money is a public institution but at the same time a private asset.
  2. Forging money is strictly forbidden, but hoarding money, pulling it out of circulation or even destroying it is allowed.
  3. Using money as a medium of exchange will cancel out the storage function and vice versa
  4. The value of money is affected by various factors such as inflation/deflation. Coupled with compound interest money can lead to exponential growth over time.

Interest rates permeate every area of our society, such as:

Empirical Data:

Blog_Folie Thomas Kubo

Through this graph, it can be noticed that the interest margin (difference between interest cost and interest revenue) is unaffected by both high and low-interest rates.

Kubo also discussed topics such as composition and parts of interest rates, covert interest costs, as well as assets and debts per sector through different graphs.

In conclusion, Kubo proposed two economic reforms:

  1. Negative interest rates: Bank interest rates are going up, which is taking a completely wrong direction as it means that we are dealing with a problem by creating a new problem.
  2. Demurrage fee on cash: Demurrage fee refers to the storage costs for a currency or commodity. It won’t change anything except that interest rates will be pushed around zero. The bank margin will remain the same. People taking long-term loans will have to pay lower interest rates than people taking short-term loans. But the overall trend will push the economy to lower interest rates.

However, some complementary reforms were also proposed:

These proposals triggered a deep discussion at the end of the lecture where many important questions were raised. We found the information quite good as it helped us to form a thought process around interest rates wherein, we can question the reforms taking place in the monetary and banking system. The following questions should be given a thought while moving forward with the reforms in the monetary and banking sectors, aiming at ensuring sustainability.

Q1: Is keeping interest rates negative a good way to move forward? How does it affect the money flow and who benefits from these reforms?

Q2: What are the other ideas to stop the inflation, if not high-interest rates?

Q3: What is wrong with quantitative easing (QE)? How to deal with interest rates and prices in QE?

Based on the lecture "Money, interest, compound interest" by Thomas Kubo during the AEMS 2022.
Written by: Julia Leszczynska and Preeti Sharma

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