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Ahsen Mukhtiar

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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.

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  • 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.

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