Why is credit important in business


The abandonment of interest

Believe it or not, the interest rate is one of the most difficult and controversial areas of the economy. The economists have tried again and again to come up with a convincing interest rate theory, to this day without result. The prevailing opinion in economics is that interest is necessary and has a positive effect on the economy.

On the one hand, it is intended to ensure that the money reaches those companies and people who make the best of it, that is to advance society with their goods and services. On the other hand, the interest is intended to prevent money from being misdirected into nonsensical investment projects. However, there is no empirical evidence for this.

What the interest consists of

The interest is made up of four components. On the one hand, the interest includes the processing fee. In addition, there is the so-called liquidity premium. The banks levy them because they have to secure one percent of the loan amount with central bank money.

They have to borrow this money from the central bank, which charges interest itself. The banks pass these costs on to the borrower with a surcharge.

The third component of the interest rate is the risk premium that the bank uses to protect itself against the downfall of the debtor. Then the fourth is the inflation premium. It is measured from the expected annual inflation rate.

All four components together form the so-called nominal interest rate. If one subtracts the inflation premium, the experts speak of the real interest rate.

The four components of interest are different and can vary from loan to loan. For example, the German state has to pay a lower interest rate when it takes out a loan than the Greek state because the risk premium is lower.

A lower key interest rate at the European Central Bank can also make loans cheaper because the liquidity premium falls. However, banks are not obliged to pass a low central bank rate on to their customers.

How the interest exacerbates material inequality

Interest follows the exponential function. This means that large fortunes grow faster than small ones, just like large debts. Assuming that a financial asset earns interest at 3.5 percent, it has doubled in 20 years thanks to the exponential function.

With assets of 10,000 euros, this results in 20,000 euros. With a fortune of a million, two million. If the interest rate is seven percent, the assets will double in ten years.

At the same time, all people have to pay interest. This also applies if you have not taken out a loan. The reason: The commodity producers and service providers include the interest on their loans in the prices.

The price for drinking water and wastewater includes an average of 15 percent interest costs, and the interest rate for rents is often more than half. On average, every German citizen spends around 30 percent on hidden interest.

If you offset the hidden interest against the interest income from assets and life insurance, the picture is astonishing: the bottom line for most people is a minus.

About 80 percent of the population pay more hidden interest than they get for their savings. At around ten percent, income and expenses are in balance.

Only those with large fortunes benefit from the interest rate principle: around 60 percent of all interest payments end up with them. So it is also due to the interest principle that the super-rich are getting richer and richer and that people in many societies are drifting further and further apart materially.

The interest rate principle is also partly responsible for the distribution of poverty and wealth between states. In the 1970s, many developing and emerging countries experienced that they were getting poorer instead of richer, even though their economic output often grew by up to 20 percent.

The problem: You had financed the investments with loans and the interest charges far exceeded the total economic output.

The European crisis states are also currently groaning under the burden of interest. Even in Germany, their repayment is a problem, because the interest can only be earned through additional growth. However, that is far below the interest rates.

Alternatives to the interest rate model

Most people have become so used to the interest rate principle that they almost consider it to be a given. In fact, there are a surprising number of alternatives to the interest rate principle. One is the Swiss WIR Bank, which provides companies with almost interest-free loans.

Another variant is the Schwundgeld by the Belgian economist Silvio Gesell, which is based on a negative interest rate. That means that money is steadily losing value. Most regional currencies worked according to this principle. There is no interest in Islamic banking either. There, savers participate in the bank's profits.

There are historical reasons for the interest rate debate to be rather cautious. The National Socialists included the "breaking of interest bondage" in their programs.

The demand was never implemented, but it served and fueled anti-Semitic prejudices because many banks were owned by Jews. Today's interest rate critics quickly run the risk of being viewed as anti-Semitic.