Everything you know about interest is wrong-Part 2
Interest is not natural, and the fact that money exists proves interest is unnecessary.
In part 1 of this series, we talked about credit. I identified 3 main forms of credit “Interest sharing loans”, money creation, and grants. To comment briefly on each of those, conventional interest rates are merely a way to offer a fixed return, in contrast with equity returns which are automatically adjusted to the level of profit. Interest is not competitive for 3 reasons: credit relationships are inter-personal, level of profits varies anyway between endeavors, and money creation has no opportunity cost. Money creation is leveraging a social contract to pay people now, but allow them to spend that money later through the common expectations of exchange among a group of people. Contrary to what MMTers suggest, the defining feature of money is that it is not honored by a specific party, but rather a community of users. This community may all be subject to a common political authority, tax burden, they may simply be like minded individuals, or profit seekers who have adapted to ongoing mutual expectations. In other words, money is not anyone’s liability. I used a quote from Eric Lonergan to support this assertion.
This is in fact the defining feature of money, that it is a token with value accepted in exchanges, not dependent on intrinsic value(although it may have some intrinsic value), but it is not anyone’s liability in particular. The power of money is leveraging a community through social contract to create common expectations for clearing payments and ongoing exchange. Chartalists are completely correct in asserting that tax liabilities and legal authority play a critical role in establishing the preeminence of state sponsored fiat currencies, because that is likely the most robust form of a social contract.
As for grants, a grant is not a gift, because the recipient is expected to do specific things with what they are granted. They may be held accountable to follow through, and have damaged credit if they fail to meet those obligations.
For today’s topic we are going discuss the idea of the “natural” rate of interest, why it is wrong, what people who use the term actually mean, and why it is a bad idea anyway, even when understood correctly.