How Interest Rates Lead to Hoarding and Undermine The Purpose Of Finance

The goal of finance is beneficial resource allocation as a free society.

The legal way we identify and manage resource allocations is through ownership. Without financialization, when you can’t use a resource, it incurs costs without benefits. If you have a lot of stuff you can’t use, then you have to store it, clean it, maintain it, and organize it, etc.

Finance is supposed to allow us to find a better home for resources by facilitating trade. Someone else can use those resources better, and they are able to compensate you using financial assets such as tokens, credit, or some other financial tool.

But finance has become too effective for its own good.

Babirusa boars grow tusks that can curve back and impale their own skull. What would otherwise be a useful and beneficial feature for an animal, ends up killing it.

The same could be said of interest rates. Resource owners seek to gain the most benefit from the things they own, but this is often done by moving costs to someone else, instead of moving resources to someone who can use them.

I lead a minimal lifestyle. I am constantly evaluating the things I own, my relationships, and my goals to ask myself what is really worthwhile. If something isn’t important, it is better to let it go, than to try to hold onto it. Giving things up can be personally and emotionally challenging. Sometimes it takes time and needs to be done gradually or incrementally, but it is better to deal with that than ignore it.

Fortunately there is a simple fix to improve finance. For a while, interest rates have been low. This has facilitated an expansion of lending and credit, which is basically moving resources from an idle owner who can’t use them, to an active project that can use the resource.

Our financial system uses interest rates, through central bank “monetary policy”, to try to manage the total amount of lending and borrowing in the economy. The federal reserve raises its interest rates to “reduce the money supply”. This puts pressure on the resource borrowers and increases benefits for the resource lenders.

But the main problem we have today is not with borrowers poorly utilizing resources, but with owners and lenders hoarding resources.

The main problem we have today is not borrowers poorly utilizing resources, but owners and lenders hoarding resources.

If we have a public debt crisis in the United States, it will be because the federal reserve raises rates, which could increase public interest payments to a socially and politically unsustainable level. Interest payments exacerbate inequality and facilitate hoarding.

The simple fix is getting rid of interest on debt, especially public debt. Interest should only come from equity investment, where people are equal participants in a project, fairly distributing the costs and benefits. We could try to use interest rates to offset inflation, but I think money’s purpose should be for tokenized exchange, not for saving and lending, which should be done with credit accounting.

Tokenization is creating a tangible symbolic form for wealth. Tokenization allows us to transact impersonally. We don’t judge the person or project, we just measure the tokens themselves. But when it comes saving, lending and investment, tokenization is the wrong way to conduct resource management.

Money is tokenized accounting. It works well for private, impersonal, and reliable transactions, but it is a bad way to account for large amounts of savings and long term investment.

Eliminating interest rates on debt is a starting point, but what is really needed is a deescalation of a financial arms race, that is threatening society the way the tusk threatens the boar, or bitcoin’s high price undermines its usefulness.

Steve Keen has presented important insights on why debt(with interest rates) is inherently financially destabilizing, but I disagree with him that debt jubilees are a good choice for addressing this problem. In extreme situations they may be called for, and they were a necessity for earlier societies, but we have better options with modern finance.

Savers only need to be made to bear their fair share of societies risks. We should be using dynamic bond payout within acceptable ranges to offset inflation, and not interest rates. If money is inflating, bond holders should only get 80–90%, unless they roll their bonds over. So why would people buy bonds, if they offer no interest, and they potentially have reduced payouts? Because it’s a protected form of large scale savings. Otherwise their protected reserves and savings should be capped and tightly limited(this bond strategy also puts local polities and the monetary authority on a more level playing field).

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