Ahsen Mukhtiar

Student & Researcher,

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Can we live without compounding interest rate?

It is an established fact that interest is oppressive in any form to anyone. Individual debtor or government all have to suffer. I am not an expert but to me it seems to be a vicious trap. Compounding rate are always on the rise increasing debt many folds in no time. Some would say that same compounding applies to savings account then why its bad? but time value of money shows that currency depreciates more quickly than other specially in Debt seeking countries.

  • Aug 23 2013: Interest as a concept is crucial for any economy to function.
    Without interest, no one would ever lend any real amount of money; if there's no profit in it, it doesn't get done. While loans can easily become a trap if used irresponsibly, they are also of crucial importance--without them, the only way to get any project off the ground is for one person or group to be able to fully finance it; this comes with severe limitations, of course. The common man simply doesn't have the liquid assets required to be an investor, even in mundane things like opening a small business or buying a house.

    There have been attempts throughout history to outlaw interest rates, usually on religious ground.
    All have ended in people being unable to attain loans at all, which leads to economic stagnation--its either a loan with interest or no loan at all. This typically ends with some manner of work around, like having Jews become money lenders in medieval Europe (which leads to its own problems when money lenders are all of one ethnicity, like a tenancy to organize pogroms instead of paying off debts, but that's another matter entirely).

    I suppose one could argue that instead of interest, one could lend on a fixed rate--return say, 120% of money lent, whether its a been returned after a year or after a day. Problem is, there needs to be some manner of penalty for failing to meet the deadline (otherwise deadlines would be ignored), which in practice, isn't much different from interest.

    Its in the same category as paying taxes, a necessary evil. No one likes it, but much like grease in machinery, sometimes a sticky, ugly, foul smelling mess is precisely what's needed to make the whole system work.
  • Sep 4 2013: Borrowing money at interest is stupid. It only means that you must spend more to have today that which you cannot afford and which will probably be worn out before you get finished paying for it. It is far better to pay for what you can afford when you can afford it.

    That being said, it is none of my business whether other people are stupid or not as long as I don't have to bail them out in the end.
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    Sep 2 2013: Yes, we can.

    PS: Ignore this krisztian guy he is a hopeless troll at his best.
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      Sep 3 2013: Krisztian is not a troll. He knows quite a bit about economics and sometimes, I think, gets impatient while explaining it.

      He has a point of view and background that can add value to threads with an economic dimension to them. I interpret his posts typically as trying to get across a point of view that is often unfamiliar.

      We can learn a lot from each other in a diverse community if we can get used to the different ways people express themselves.
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        Sep 3 2013: Yeah, he gets personal with other posters in his 1st reply, that is some impatience, innit? we call that trolling here where I live.

        I don't care how he expresses, but calling other people 'not open minded' is insulting.
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        Sep 3 2013: i would say that "sometimes" is far from accurate. always.
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          Sep 3 2013: Fine. I was expressing only my impression from how your posts read to me. It bothers me when people label productive members of the community as trolls. I know you don't speak with great attention to tact, but that is not the same to me as trolling.

          I think of a troll as someone who is mostly interested in persistently disrupting productive discourse on a venue, typically for his own pleasure.
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        Sep 3 2013: actually thanks for the support. we agree on the definition of troll, and it would be stupid of me to claim any form of tact on my part :)

        (i'm supportive of those that search for answers though. i just can't stand people that claim to have the answers, but they bring misinformation only. it gets on my nerves. like "It is an established fact that interest is oppressive".)
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          Sep 3 2013: Perhaps if you kept a small container of chocolates by your computer you would use more tact?

          Just a thought :D
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          Sep 3 2013: Come on Mr Krisztian .... It would be much more humble to get your view in line with majority of Population of the world (As they follow major religions like Islam or Christianity) These two major religions which supports my statement "It is an established fact that interest is oppressive" and don't get distracted by my young :P
          Now i wont enlist links for Usury and its prohibition in Christianity because again this would make you name theists as Narrow minded.
          Dear I value your views but why cant they appeal me because the more i got for its favor the more i have bear its (interest) bitter flavor.
          I hope your quest to convince majority about wonders of Interest particularly compounding interest would require a hectic workout.
          Best of Luck and don't take anything personal. We are here to share and learn from each other.
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        Sep 3 2013: mary, definitely, but it would also hurt my belly circumference, and it is already getting problematic!
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      Sep 3 2013: Mr Kareem .. I am also of the view and If some one blasts out the notion just on the Religious grounds then their intellect and vision is a question mark. Initially i quoted negation from Islamic perspective with links for my claim because i am Muslim. Now Christianity seconds view on usury of Islam. Some people don't follow these two religions and they are distincting themselves from majority.
      So who stands alone and confines thoughts ..... Majority or distinctive minority.
      Take your Pick and correct me if i am wrong.
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    Aug 6 2013: Interest is a double edge sword that organically governs the economy without any need for central bank.

    It indicates when a saver should save or when they should consume, it indicated when a business should invest in the future. If rates are high a saver will save and get a better return. If rates are low a business will take out a loan and invest in the future of the business.

    In the U.S. consumers have been taught to have debt. Buying a house is sold as buying home the reality is that they have indebted themselves for 30yr. Granted with mortgage interest deductible it skews the incentive as does all government meddling. The reality is that debt leaves people financially enslaved.

    Without central banks there would be no depreciation of money (inflation) in fact left to it's own devices money appreciates in value (deflation). A dollar in the U.S. in 1776 would buy the same amount of goods in 1912.

    Unfortunately people have been trained to conduct their financial activities according to the influence of the central bank, they instinctively know to buy goods in times of high inflation or to keep their money in times of deflation.
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      Aug 7 2013: In US mortgage living pattern is common because of many reasons and its becoming a norm to take products on loans. US is much lucky to finance their debt by $ which is universally accepted as a currency for foreign business settlements. US debt is not big problem if its not too much to bail out.
      Problem lies which nations which have huge debt obligations and struggling economy (due to multiple reasons of course). If i set precedence of my country then Government is bluffing poor illiterate masses .
      See a local newspaper clearly say but our Minister proudly brags about clearing circular debt.
      This discussion raises many other questions in my mind and most important one is if we know something is more bad than doing little good then why not abolish it?? for greater good for humanity.
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        Aug 7 2013: the ignorance is not peculiar to Pakistan it is prevalent in this country is well

        the overlords are masters at PR and that is why they're able to do what they do

        US dollar is the reserve currency of the world and that does definitely give more borrowing power which is going to lead to even bigger debt which will eventually leave to the demise of the country because it'll just be too much debt to possibly dig out from
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          Aug 7 2013: So Americans are also fooled by their government? Yes that is my point debt servicing itself makes the principle impossible to settle. man invented paper, transformed into currency, modernized it with monetary tools of finance to increase wealth but ultimately fell prey to the same paper.
          Paper now rules humanity and mankind.
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        Aug 7 2013: You do understand that the way small business becomes big business is through loans?

        And that small business is what creates jobs?

        Without loans small business does not grow, without interest there are no loans. The very standard of living of the world has been raised by this mechanism.

        Interest is a double edge sword and very necessary.
  • Sep 1 2013: There is no need for debt in business; It is my opinion equity is better for both investor and business. Bonds have a place in the long term funding of a countries infra-structure (roads, bridges etc.).

    To understand why business uses debt you must look at the current short term focus of business returns and how they affect share prices. A share price is the “Present Value of Growth Opportunities” or put another way todays value of future profits. Because this measure uses the present value is favors short term profits (90 Days) over long term profits (5 years).

    Short term profits are assisted greatly by debt because the return is measured against the equity portion of the business so debt creates a leverage effect on the return on equity. The problem is that leverage cuts both ways because if the business strategy does not produce a return greater than the interest cost the business goes bust or the bank takes a “hair cut” if the business is large or has lots of equity.

    So debt is a high return – high risk strategy and we as society need to decide if the risk taken by our businesses is reasonable.

    It is my opinion that business, investors and nations are better off with very high levels of equity and that debt to equity ratios should be regulated. There is an argument for 100% equity for all business other than banks.

    We most certainly don’t need derivatives (other than Interbank FX and Futures), I traded them for years, and they are just a con that banks suck business into.
  • Aug 28 2013: Don't go into debt.
    Problem solved.
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    Aug 26 2013: I wish i could many thumbs up to your response. You cleared some of my doubts about fixed rate. Last two paragraphs clearly pointed out new aspect for me. Id rate would be fixed them people would not adhere to commitments seriously.
  • Aug 13 2013: Limited energy supply will fix all of this.
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      Aug 23 2013: Mr Brian can you elaborate your view please.
      • Aug 26 2013: Well besides governments being overzealous with the printing press, interest expands the money supply. This growth is only legitimate if there is more corresponding goods or services in the economy. Goods and services require energy. More things can be made or done with a plentiful cheap supply of energy.
  • Aug 7 2013: Hola que tal soy nueva quisiera aprender ingles me ayudan por favor
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      Aug 23 2013: Apologies Gonzalez, i couldn't understand this language.
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    Aug 7 2013: I think of the interest rate as what you receive in return for letting someone use resources that are yours rather than your using them yourself or what you give others in compensation for using their resources so they cannot use them.

    For example, if I borrow one hundred dollars from you that you could have invested in your business fruitfully, I need to compensate you for as long as I am using that money. It pays you back for what you have actually missed out on earning from it in your business or however you would have used it.
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      Aug 23 2013: Okay your opinion is that interest is actually the opportunity cost of lending your money but it should be fixed for a period not in multiple rate. This would not create burden on borrower and satisfy the lender as well. When the initial time of loan expires then both parties could settle and if required enter into a new agreement.
      What i say that compounding makes debt servicing a burden on borrower in present practices.
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        Aug 23 2013: Are you arguing that fixed interest rates are better than contracts in which the interest rate varies over time? So, for example, are you arguing against the sort of loans that used to be common in which the rate of interest starts small and then grows?

        This would be unrelated to compounding.
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          Aug 23 2013: Yes i am suggesting this fixed interest rate.
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    Aug 7 2013: for those that actually care, and not blinded by religion, here is the actual reason behind interest rates:

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      Aug 7 2013: Human behaviors is the most complex study to take and economics sidelines by cetrius paribus. Money is a medium of exchange. lets say person wants ice in next summer and saves for it but rate of return falls. then what would he do? as you as well production couldn't be enhanced many folds due to scarce resources and many other factors. Paper rules lives. is this dignity of mankind? Just wanted to make world free from digits Shackles.
      I hope you have gone through the Statistical proof mentioned earlier.
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        Aug 7 2013: this link was not for you. you are not enough open minded to approach the topic in a non-dismissive way. i have no links for you. dismissive people can not be convinced.
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    Aug 7 2013: "It is an established fact that interest is oppressive in any form to anyone."

    oh. then it seems my views are outdated, and i need to go read ... what exactly?
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      Aug 7 2013: with due respect can you quote an example of any country saving its skin from compounding interest debt trap??? . Why financial markets are so much fragile and crises hit us quite often??? any ways
      Just have a look at statistical justification of this scholarly paper (you could ignore religious limitations if you want to)
      just have a look at page 5-8 ignore religious foundations

      I wish i could share more but If you want to study more then i have books to offer based on Christianity and Islam but Interest is more bad then
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        Aug 7 2013: tl;dr

        care to summarize?
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          Aug 7 2013: Simply Interest is oppressive and that is why wealth is accumulating with few and Africa is starving to death.
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        Aug 7 2013: voluntary interaction is by definition not oppressive. banning interest is oppressive. it is not surprising that you are confused when it comes to oppression. your religion is oppressive.
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          Aug 7 2013: My religion is not oppressive and never ever give any one right to harm anyone in any matter. This discussion has nothing to do with religious affiliations because if this was so then Riba (Interest) is forbidden in Islam. Why would i question then?? Its the freedom i have so let yourself free from the spell of Capitalism. Dear I have asked so many question from you earlier in this thread and one more why people in America protest against wall street atrocities?? When G8 summits are announced why people get angry, they are from G8. They are leading Interest based economies.
          Interest is showing its evil side and you are wise enough to study it.
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          Aug 7 2013: Okay banning interest is oppressive ?? how can you say that .. If this system is so good then why we are facing problems??
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        Aug 7 2013: i call the readers attention to the fact that i wrote 4 sentences, and you replied one of them. is this a sign of an honest approach?

        or for example my original lament about the opening statement, which starts with calling a rather arbitrary claim an "established fact". is this a sign of honest approach?
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          Aug 7 2013: Calm down I am here to learn so you guys are adding knowledge to me. I claimed on the basis of the reads i got and few are shared with you as well. Prove me wrong or them.
          My query remains can we live without interest system in present world or not? how or why not?
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        Aug 7 2013: let me use the tool of an example.

        what if (!) i say "islam is bad, therefore we should ban it".
        you would reply: "this is oppression"
        then i say: "if it is good, how would that be oppressive??"

        see the problem in this reasoning? oppression is the action of banning a voluntary activity. like living according to the teachings of islam. even if i think it is wrong, i can not push my views on other people. that is oppression. whether islam or a variant of it is good or bad is another question.

        hence my statement: banning interest rate is oppression. regardless of interest being good or bad. voluntary transactions can not possibly be oppressive.

        you are so much used to have oppression, you don't even notice it anymore. it became a part of your life.
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          Aug 27 2013: Generally speaking you are right Krisztian, but I would not blame nor meddle religion into it. By doing so you are only antagonizing people and making them stick to their opinions even more.

          What I suggest is the promotion of observations instead of opinions. It is much better to have observations than opinions for the sake of accuracy. To illustrate this it is enough to imagine any kind of emergency. Does anyone stick to their opinions in a state of emergency? Not really. Action based on observations seems to be more accurate and true to fact.

          People can afford to have opinions only when they are 100% right, but then, who is like that?
  • Aug 7 2013: Isn't this recognizing time and the passage of time.
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      Aug 7 2013: It is recognition of time but it is making future time much more vulnerable to chaos and anarchy