T Nation

Interest Rates

Was doing a little thinking about interest.

In some ways, it just seems like a system of making the rich richer and the poor poorer. That is, if you’re rich enough to not have to touch your money, you get paid for having money. If you’re poor enough to need to borrow money, you end up paying back more than you borrowed.

I’m not starting a war on interest or any nonsense like that, just sharing some thoughts on it.

What do you guys think? Do you think interest is bad for the economy? Good for the economy? Could we function without it? Should we?

[quote]CappedAndPlanIt wrote:
Was doing a little thinking about interest.

In some ways, it just seems like a system of making the rich richer and the poor poorer. That is, if you’re rich enough to not have to touch your money, you get paid for having money. If you’re poor enough to need to borrow money, you end up paying back more than you borrowed.

I’m not starting a war on interest or any nonsense like that, just sharing some thoughts on it.

What do you guys think? Do you think interest is bad for the economy? Good for the economy? Could we function without it? Should we?[/quote]

Good and bad. It is all what you make of it.

Interest is the price of borrowing money. We want people to borrow money because it grows the economy.

Interest is merely the price signal that regulates the supply and demand of the resource of “loanable funds”, the same as any resource.

As for “making you rich”, it most certainly does - any mechanism that encourages you to save money you would otherwise spend is going to make you richer, and that is a good thing.

And many users of credit - borrowers - get richer off of borrowing. If you borrow at a 10% to build a factory and it gets you a 12% return on the money, you got richer.

There is abuse of interest, of course, but that doesn’t mean that it isn’t a fantastic economic tool that helps a private economy allocate resources.

Interest is the incentive for people with money to make that money available for productive uses and risk taking. Having an open market for the rates is the best defense borrowers can have against being “abused.”

When it comes to borrowing, people tend to be their own worst enemies.

I work in the mortgage lending industry. I see people with COMBINED household incomes (in California) of $45k stretch their pennies to stay current on the mortgage, raise their kids, and maintain perfect credit WITHOUT abusing credit cards.

Likewise, I see people who make $45k / year, live on their own, but need to drive an Escalade, the payments of which are unmanagable and ‘force’ their credit to dive, their mortgage payments to be late, and their credit to be, umm, sucky.

It’s not a matter of ‘the rich’ abusing ‘the poor’. It’s a matter of people living beyond their means.