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Originally Posted by Scipio  Interest is not a "creation of money"--and there is no "problem" with interest. |
Let's imagine economy has $1.
I lend you $1 and I as you $1 million in return.
How much money does economy have before you pay me? $1 or $1 million?
The answer is $1 million.
Interests create money in the accounting books.
However, if you do not pay me, the money in my books becomes ghost wealth or "toxic asset". When you pay me, you had to work in a job that produces value added, so the money you pay me is backed by value added.
Before you pay me, the ghost money is not backed by anything.
Banks use money as inventory, and money can't add value to itself. So the only way banks can make profit is by printing money in accounting books and by extracting money from people's pockets to back their ghost wealth with real assets.
It is hard to understand by people, because people are used to microeconomics, not macroeconomics. The unbalance created by the financial system is macroeconomical.
Quote:
Originally Posted by Scipio You mean the Arab world that has produced literally nothing without the finance and support of Western investors and countries? |
For muslims, charging insterests goes against their religion, just like it happened with christians before 14th century.
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Originally Posted by SmartAlx The way I understand Sharia banking is that it essentially attempts to get around the whole interest issue, but it still effectively acts as interest. |
Sharia banking does not create money in the form of interests, like our western banking model.
Banks act like an investor, so there is no interest, or at least not above market profit levels (which is called Riba, money charged without counterpart). All the money that is paid comes from activities that produce value added.
See
Islamic banking - Wikipedia, the free encyclopedia
The problem of creation of money via interests is that it pushes inflation.
M x V = P x Q
where
M: Money ($)
V: Velocity of flow (how many times it flows)
P: Price ($/unit)
Q: Quantity (units)
So it means that if you have V = 1 and you have $100 (M) and 100 units (Q), the price of goods will be $1 (P).
But banks produce nothing and they create money in their books.
Let's imagine that the bank created $100 in the form of interests.
It means M = $200 and Q = 100 units.
So the price will become $2.
Currently there is enough money already created to cause a global hyperinflation. But banks are holding the money (V is reduced) because they do not want to appear as insolvent. This is why you have deflation, because US economy is based on debt. So you have tons of money, but velocity of flow is low, and it creates the illusion of being in need to create money.
But as soon as they get to back the money they created with real assets, by taking people's homes and having abusive credit card conditions, the ghost money of interests becomes money backed by real assets.
It would be better to let banks to fail and all that ghost money that was created by the banks would disappear, destroying money and reducing the hyperinflationary pressure and making dollar to be not so weak.
Right now Geithner is telling Asia that US is doing everything to keep a strong dollar. But as money is not being destroyed, it is inflating a dangerous bubble of hyperinflation.
Hyperinflation triggered communist revolution in Russia, French revolution, chinese communist revolution, riots by starved people in Argentina in 1989, it fueled the raise of right winger nazis after the hyperinflation of 1923 and the 1930's crisis...