Interest, Inflation, Money Supply?
-
I have a question about the relation between interest, inflation, and the money supply in this imperfect economy of ours.
In a perfect economy, interest is clearly forbidden in the Qur'an.
However, what about in the imperfect economy we live in? The real value of money decreases constantly due to inflation... would it this be allowable to demand compensation to offset the effect of inflation? That is, demand that an 'interest' equal to the level of inflation be paid? Or maybe it should be linked to the growth in the money supply? As we all know, the money supply increases when the government prints more money... could be demand 'interest' equal to the percentage increase in the money supply?
And which is more correct, linking it to inflation or to the money supply? Or are both fundamentally flawed in some manner? If so, is the lender just supposed to suck up the loss in real value of the money he lends?
-
You have to decide with your own conscious, in real terms I don't think you're getting richer with the paper money you hold in an interest bearing account. If you lent someone a dollar in 1913 before federal reserve was established you'd only be getting 4 cents in value back today. If you leave the interest you're only making the banks richer and yourself poorer. A Turkish sunni scholar called Suleyman Ates has also advocated a similar view defending keeping interest upto inflation. Furthermore, the inflation numbers are bogus, so you still will be losing out. My view is you can keep all of it.
Infact what is unislamic is paper money, in Chapter 17 it tells you to measure correctly and be just. How can a trade be fair when you exchange someone elses liability? Transactions under paper money are not fair but at this point in time there is little that can be done. The liability contracts are clear in the quran with witnesses etc and engages two parties and I have not seen a reference you can trade it away. There is mortgage but no interest over real values.
Finally, the best thing we can do is to err on the side of generosity towards those who are less fortunate, and that does not include the banks ;D
Peace
-
Salam Claurianta
Interest rate is the rate that The Central Bank charges Commercial Banks for Borrowing Money , and in turn These Commercial Banks charge a Margin to the Business/ Consumers ( you , me and others) for any type of Loan we obtain from These banks . Where Inflation Is ....The Upward Movements in Wholesale/Consumer Prices for a given period usually Quarterly or Annual in % . Where the aggregate Money Supply is Controlled by the Government through The Central Bank and treasury. Governments Print , Money every day to Replace damaged currency Notes and Coins and to pay for Debts , Foreign or Domestic.
All 3 ( interest rate, Inflation, and the Money supply Level are all Economic Indeces and they are Inter-locked , so they cannot be separated as each influence the Others.
Contrary to your Assertion That "Interest is Clearly Forbidden in The Qur?n " , This is not the Case . What is forbidden in the Qur?n / Islam Is 'USURY' , or excessive Interest rate Or Excessive Profit taking ( Exploitation ).
The Banks as Other Businesses Exist to make Profit ( They are Not Charitable Organisation ) So , We as a Muslim should Not readily Condemn Banking Practices as 'Haram' . Interest Free Banking Cannot and Will not Exist in the Real World ! There may be some Country where this Practice exist in a smal Scale , But in Reality is Not Possible Or Sustainable.
The Rise and fall of Interest Rate is largely Determine by Demand For Loan , Inflation , Money Supply or The Policy of The Government of the Day. A steep Rise in Interest Rate may be Inflationary so usually the Rise is Incremental and It is used By Government to Implement it's Monetary Policy for It believes Beneficial to the Over-all Economic activity ( Growth ) . Hope this help .
Peace and Cheers
almarhom
"He who Created me, it is He who Guide me".
-
Salam Ash Shuura, all,
......
Infact what is unislamic is paper money, in Chapter 17 it tells you to measure correctly and be just. How can a trade be fair when you exchange someone elses liability? Transactions under paper money are not fair but at this point in time there is little that can be done. The liability contracts are clear in the quran with witnesses etc and engages two parties and I have not seen a reference you can trade it away. There is mortgage but no interest over real values.
......
PeaceIf paper money is unislamic how then would you explain the paper money mentioned in verse 1819? used by the youngs of the cave in Quran?
Thank you. Peace. Myr -
Salam Ash Shuura, all,
......
Infact what is unislamic is paper money, in Chapter 17 it tells you to measure correctly and be just. How can a trade be fair when you exchange someone elses liability? Transactions under paper money are not fair but at this point in time there is little that can be done. The liability contracts are clear in the quran with witnesses etc and engages two parties and I have not seen a reference you can trade it away. There is mortgage but no interest over real values.
......
PeaceIf paper money is unislamic how then would you explain the paper money mentioned in verse 1819? used by the youngs of the cave in Quran?
Thank you. Peace. MyrPeace Myr,
Thank you for the question. By paper money I am referring to the product of the fractional reserve and fiat currency system. The paper money based on the gold standard was backed by gold, which is probably more islamic in my view. However, what made it unjust was the fractional reserve system and was probably the reason why the gold standard seized to exist as it collapsed.
As for the verse, wariq can be silver coins according to my dictionary. I don't know how we can conclude this was definately paper money of today from this verse. Am I missing something here?
Meanwhile, I look at the verse in Chapter 17 and come to the conclusion that a fair exchange is one where we receive something tangible each. Meanwhile, paper money is an "IOU" its is not an asset it is a debt. If the borrower can not make good on its promise we end up with zilch. There are debt contracts elsewhere but these are not mentioned as trading mediums. As false promises build up and collapse the whole system.
If history is a guide, the collapse of the Weimar republic epitomises this point, it is a story of printing paper money out of nothing and the people catching up with that reality...Todays paper money taxes the poor with inflation and wealth flows to the pockets of bankers whom create paper money out of thin air, you and I work hard and they print...
I hope this clarifies my viewpoint.
regards
-
Salam Myr, all
What would be defined as 'Excessive' ? The Test for what is excessive Interest Rate or Profit rest with what would 'a Reasonable Person' Considers Fair Price/ Cost For a Loan of Money . say for example , the Current Rate of Inflation is 4%, and the Reserve bank's Rate is approximately 5.50 % per annum . I think it is Reasonable to expect The Commercial Banks to Lend Out for Morgages and other types of Loan at least 2-3 % points above The Rate charged By the Federal Reserve , This is to Cover Costs and Profit Margin .
Agree with you that , by the Time the House Mortgage is paid off , the amount you have paid would have 'Doubled' or even 'Trebled' or Is Trippled? '( . But do not forget that , the Value/ Price of the House also would have Doubled or Trebled in the same period. You know that buying a House/ real estate is for Most People 'is the Biggest Investment ever in their Life ' . Houses, invariably Appreciate in Value Over Time usually for a House Mortgage of a Term 20 Years , the Value Increases between 300-400 % from the Original Cost Price. However , whatever the End Value/ Price of this House , is Only Equal to The 'Original/ Total Cost you paid for it 'Measured in Constant $$$ ' or Equal to Replacement Value . Cheers
Peace
almarh0m
"He who Created me, It is He who Guide me" .
-
Hi,
If money is used, either as investment or other types of loans etc., it is tied to interest. Let?s say we borrow $100 at 5% interest per year from a bank. When the loan is to be returned to the bank after one year, we have to return $105.
I.e. we have to find additional $5 from somewhere.
Unlike potatoes, money can not be made to multiply; we have to ?put them together? every step of the way. So, in order to find an additional $5, these five dollars have to exist, or be fabricated by ourselves if they don?t exist.The more money we are utilizing, the more extra money is needed in order to cover the interest, i.e. the more money there is in circulation the more money is needed to be made available.
Inflation is mainly driven by the amount of money that governments make available.
When more money is put into circulation, consumers bid up prices of goods and services. This price increase causes loss of purchasing power, and thus inflation.
Therefore inflation is closely tied to interest and so are stocks and bonds, as they again are tied to inflation.
This is an evil circle because the higher the inflation, the more money is needed, and the more money there is in circulation, the higher the inflation.Some types of money are agreed upon, by many separate countries, as a kind of standard currencies, like the USD, Euro etc.
These currencies are used as measures for other currencies, and even though, for instance the USD has been produced in an ever increasing flood, its value is kept up, to a certain extent, as much of the USD is not circulated within the country itself. If countries around the world cease to regard USD as a central currency and decide to rid themselves of it, the US economy will experience a major inflation, as the total number of USD in circulation in the world is extremely much higher than the real values in the country, backing the USD.Differences in the value that various types of goods has for us, will fluctuate, depending on offer and demand, however it will not influence the inflation rate in the same way as money does, as goods and services are real values in their own right. They are ?end?-products, whereas money are only means to make trade easier for us, and without own value, unless we make money out of something that has value in itself.
Large economies built on our present, imaginary, monetary system, are terrified of a situation where ?real? money takes over, as there will be less need for ?paper money?, therefore the monetary authorities around the world can no longer keep producing money at will. But as long as our economic system can keep on implementing interest on money they are relatively safe, as interest requires more money to be made, and if the money are real values, gold or whatever, the money can not just be fabricated out of ?nothing?, Thereby making ?real? money virtually impossible to implement on a larger scale.
Interest is really the key to the vast success of the few controlling the economies, and it will not be given up lightly.I believe that interest mentioned in the qur?an, is the imaginary value that results in the necessity to fabricate more money which decreases the buying power of the money in circulation. I.e. all interest on money is bad and should be avoided. Instead of adding value to a community, interest consumes values.
Regds
Ali Omar