Interest: The root cause of all major finanical problems
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The money supply can, was and is growing exponentially...
As it cost very little and now near zero to issue money.. (as most money now is in electronic form)Your example is quite misleading as there ain't no creditor willing to issue a loan with 100 years time frame and without any scheduled repayment.
Nowadays, the financial industry is tightly governed by the government (i.e. the issuer of money in the first place) to avoid 'misuse' and 'fraud'.Debtor can always declare 'bankruptcy' is he/she/it cannot pay the loan. The interest stop and if the debtor asset cannot make up to the remaining value of the loan.. The creditor need to 'write off' the remaining the debt. This happened recently with the so-called 'Subprime mortgage crisis' in the US.
And if the person is deceased, the interest stop and again if the asset cannot make up to the value of the remaining loan the creditor need to 'write off' the remaining debt.This practice greatly differ than the practice commonly performed in the 7th century middle east...
There's no 'bankruptcy protection'.. If the person cannot pay up his/her debt, he (or his family member, wife, daughter, son) bound to be a slave to the creditor...My example was obviously to show how fast debt can grow with compound interest. It is obvious that in the real world the debtor can declare bankruptcy to get rid of his debts and start from zero again. Although it is very difficult of a country to declare bankruptcy. There are many of developing countries being crippled by debts owed to IMF and World bank.
But did you read the entire thing? I proved that under the current interest based system, bankruptcies are inevitable. Some people must lose everything that they have worked for and start from zero again for this system to go on. Wealth of those who work for money is continuously transferred to those whose money works for them. Bankruptcies help keep the cycle going without affecting the wealth of the 1% and without making it obvious to the vast majority that they are being robbed. The richest 1% win either way under the current interest based system.
You also said the government is issuer of all money. That is a common myth but not true. I think you did not click on the link that I posted originally. Read the article from Bank of England's website in which the central bank of the UK admits that almost all money is created by private banks when they issue loans.
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Salaam,
As a person with some background in economics and finance I can confirm that what mike said about banking system is completely accurate. This is how it really works, the thing is that economic students are taught all those wonders such as money creation, liquidity and international finance in such a technical way, that very rarely they get to really understand how evil the whole idea of interest rate is.
And people who have no idea about international finance then ridicule those who question it as conspiracy theorists, which is a nonsense, it's not a theory. It is clear from how the financial system works but unfortunately, it is ignored by the majority because it is not understood. No wonder, if all the people did understand how the financial system works we would have had revolution by tomorrow, as Henry Ford said once.. Ignorance is a blessing as they say..
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If a family borrowed just 100 dollars in 1915 for a 100 year term at 18% (standard credit card interest rate) Today their children would owe $1.54 Billion. With the so called magic of compound interest just a 100 dollars turns into 1.54 Billion dollars. This is an extreme example but it just shows that interest based system can not work in the long run. The money supply must grow exponentially without which it will be impossible to pay back principal + interest as I am going to explain below.
Salamun alaikum.
I buy 10 kilo of rice at point A for $10. Then I travel 100km and after reaching point B I sell the 10 kilo of rice at 10% profit for $11. Fair deal?
Say with that $11, I again buy 10 kilo of rice and start travelling in hope of making another 10% profit after travelling further 100km. Makes sense?
The circumference of earth is roughly 40,000 km. If I continue the above process I will be able to execute it 400+ times before I come back to my starting position. And at the destination the selling price of my 10 kilo rice would be = $10 x (1.1) ^ 400 = $360,640 Trillion.
Thus I have proved any profit making is bound to result in economic collapse.
Do you see the fallacy of your argument, now?
?Riba = Interest? is one of the many misconceptions that we are carrying as a liability from the so called ?Islamic scholarship? who are stuck in the 8th-9th century in their thinking and reasoning. A critical review of the Qur?an and even Hadith literature does not support this idea. It is my pleasure to share with you thorough analysis of the subject matter based on early Islamic sources
http//www.islamicperspectives.com/RibaIntro.htm
Hope this is helpful.
May Allah guide us all to the straight route.
Regards,
ArmanP.S. In case you want to explore my understanding of Riba you are welcome to explore the following links
http//free-minds.org/forum/index.php?topic=9606569.msg350924#msg350924
http//free-minds.org/forum/index.php?topic=9606569.msg351778#msg351778
http//free-minds.org/forum/index.php?topic=9605358.msg352195#msg352195
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peace Arman,
Thus I have proved any profit making is bound to result in economic collapse.
I do not see how you proved that.
Do you see the fallacy of your argument, now?
Your analogy is not equivalent to the example given by mike789.
Interest is growth based on nothing. In your example, you put in effort (i.e. labour) and hence increased price accordingly.
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Salamun alaikum.
I buy 10 kilo of rice at point A for $10. Then I travel 100km and after reaching point B I sell the 10 kilo of rice at 10% profit for $11. Fair deal?
Say with that $11, I again buy 10 kilo of rice and start travelling in hope of making another 10% profit after travelling further 100km. Makes sense?
The circumference of earth is roughly 40,000 km. If I continue the above process I will be able to execute it 400+ times before I come back to my starting position. And at the destination the selling price of my 10 kilo rice would be = $10 x (1.1) ^ 400 = $360,640 Trillion.
Thus I have proved any profit making is bound to result in economic collapse.
Do you see the fallacy of your argument, now?
Your example is irrational because you are ignoring some basic facts.
When you travel some distance to sell your rice you need to keep in the mind the following- You will need to pay for transportation of your goods including fuel costs
- You need to pay yourself or any workers you hire because they need to eat, drink, sleep and will need accommodation when not working
- You need to factor in supply and demand. What if no one wants your products.
- You need to factor in competition. What if there are other people selling the same thing and your product does not sell well.
I can go on and on but you get the idea. Due to the above facts, you will spend whatever profit you will make back into the economy. If there is any leftover money after you pay all your expenses then you will continue to do it if not you will quit. But after sometime in this business, unless you have clear competitive advantage over the competition, you will not keep making profits and eventually you will be forced to quit if you keep incurring losses.
If I compare your example to interest and how compound interest grows, I would be comparing apples with oranges.
?Riba = Interest? is one of the many misconceptions that we are carrying as a liability from the so called ?Islamic scholarship? who are stuck in the 8th-9th century in their thinking and reasoning. A critical review of the Qur?an and even Hadith literature does not support this idea. It is my pleasure to share with you thorough analysis of the subject matter based on early Islamic sources
http//www.islamicperspectives.com/RibaIntro.htm
Hope this is helpful.
May Allah guide us all to the straight route.
Regards,
ArmanP.S. In case you want to explore my understanding of Riba you are welcome to explore the following links
http//free-minds.org/forum/index.php?topic=9606569.msg350924#msg350924
http//free-minds.org/forum/index.php?topic=9606569.msg351778#msg351778
http//free-minds.org/forum/index.php?topic=9605358.msg352195#msg352195
None of the links you provided talks about interest from a mathematical perspective.
I do not believe in any hadiths so it is irrelevant to me what the Sunnis or Shias says. As I explained in my original post, interest has a mathematical problem. It can not work mathematically over a long period of time from a macroeconomics perspective. It is paid by those who do not have money to those who do have money. It transfers wealth from those who work for money to those whose money works for them. And eventually it leads to a society where 1% of the population end up with all the wealth. The remaining vast majority become debt slaves of the interest collectors.
If Gold was money or currency was backed by Gold, then the effects of this wealth transfer would be so obvious that everyone would notice. Only 1% of the population would collect all the Gold and everyone else would be in debt to them. But under the current fiat monetary system where money is backed by nothing, the effects of this wealth transfer are somewhat obscure. Because the banking system of every nation keeps increasing the money supply (print/create money) so the borrowers can go further in debt and keep paying interest. Since the year 2000, the US government has paid $5.8 Trillion in just interest on its national debt. The interest payments are growing at a rapid rate. At some point in future the US government must increase taxes on the population due to these enormous interest payments. Or it must devalue the currency; either way the majority of the population will be the losers, not the richest interest collectors. Aside from enormous government debts all over the world there are business debts and then personal debts. How many people lost not only their homes but also the initial down payment and all the payments that they had made on their homes over the years during the mortgage crisis in the US? People work hard for years and then when their debts grow too large they have no choice but to declare bankruptcy and lose everything they have worked for. They start all over again from scratch to repeat the same process meanwhile the richest 1% whose money works for them keep enjoying their ever increasing wealth.
If you study the current interest based system from a macroeconomics point of view, you will conclude that it is an unsustainable system which only benefits the richest of the rich and will crash every few decades. But the richest interest collectors as a whole do not lose even if it crashes. They win either way as long as interest is legal.
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Salamun Alaikum.
Your example is irrational because you are ignoring some basic facts.
When you travel some distance to sell your rice you need to keep in the mind the following- You will need to pay for transportation of your goods including fuel costs
- You need to pay yourself or any workers you hire because they need to eat, drink, sleep and will need accommodation when not working
- You need to factor in supply and demand. What if no one wants your products.
- You need to factor in competition. What if there are other people selling the same thing and your product does not sell well.
I can go on and on but you get the idea. Due to the above facts, you will spend whatever profit you will make back into the economy. If there is any leftover money after you pay all your expenses then you will continue to do it if not you will quit. But after sometime in this business, unless you have clear competitive advantage over the competition, you will not keep making profits and eventually you will be forced to quit if you keep incurring losses.
If I compare your example to interest and how compound interest grows, I would be comparing apples with oranges.
My example is just as much irrational as your example was ? and the point of bringing the irrational example was to help you understand how irrational your example was in the first place. ?Profit? and ?Interest? are both returns on factors of production. While profit is the return for entrepreneurship, interest is the return on capital. So, each flaw that you (rightly) identified in my irrational example applies equally to the irrational example that you presented ?
- You will need to pay for transportation of your goods including fuel costs
- In my example these costs were assumed negligible or built into the $10 cost incurred at beginning. JUST LIKE in your example you did not consider that the person who is lending to your hypothetical family @ 18% interest incurred his own cost of financing, cost of book keeping and follow-up on repayment and most importantly the risk of default due to which he might not be very willing to wait 100+ years for the payback.
- You need to pay yourself or any workers you hire because they need to eat, drink, sleep and will need accommodation when not working
JUST LIKE the person who is lending to your hypothetical family @ 18% interest also needs to pay himself or any workers he hired because they need to eat, drink, sleep and will need accommodation when not working
- You need to factor in supply and demand. What if no one wants your products.
SO DO YOU What if in certain years no one wants to borrow at 18% interest? What if no one wants to borrow at all? Demand for loanable fund is just as much dependent upon forces of supply and demand as is the demand for physical goods.
- You need to factor in competition. What if there are other people selling the same thing and your product does not sell well.
SO DO YOU What if there are other people lending to the same family at lower than 18% and the family would rather prefer to refinance the original loan or part of it that they cannot repay?
I AM SO GLAD that you are not brainwashed by the Islamic Clergy who cannot think outside the conclusions proposed by their infallible imams. And I AM SO GLAD that you are not like those who would not spare time to learn, study and investigate Qur?an and wishfully claim ?Since Qur?an says interest (???) is haram, there must be something evil into it.?
If you really believe that there is a mathematical problem in ?interest? form an economic scholarly point of view, then the best thing for you to do would be to set an appointment with a Professor of economics / finance and clarify your confusions. Perhaps you have some points worth looking into which she will help you articulate in a research paper. There are certainly still many loopholes in current banking system? that?s why even the developed countries are continuously tightening their regulatory supervision over the banks. That is why Big banks paying regulatory fines is a common news now-a-days. Let?s work hard to find the hidden Riba (unfair excess) in our banking system and economic system still prevailing today and let?s bring them to the light. Remember the sub-prime mortgage guys who wanted to make (unfair) excess gain (Arabic riba) by hiding the risk attributes of their mortgage products? Or just a few months back the European bankers who were manipulating LIBOR quotes to make (unfair) excess gain (Arabic riba)? Those guys were rightly busted.
However, if you get too easy a result from too simplistic an example, perhaps it is worth going over it critically before jumping up and down and claiming things like the ?earth is flat? or ?interest is mathematically wrong?. Do you know the school athlete who just ran a 100m sprint and found that he has broken the world record? His coach suggested him to consult a watch repairman, first. And that was a wise suggestion indeed.
Best of luck with your research.
Regards,
Arman -
Although I truly despise loans I see some flaws in the descriptions you have given. There are way too many variables which cause the economy to crash from debt.
Due to compound Interest, only 1% of the population ends up with all the wealth, eventually. It is just a matter of time.
Ever since interest has become legal, vast majority of the population have become debt slaves. Productivity keeps increasing yet real incomes do not go up for the majority. Most people have to work harder and compete fiercely among themselves for a shrinking piece of the pie to make ends meet while the income of the 1% keeps rising immensely without much effort on their part. This is all due to interest.
It does not have to happen. Discipline is necessarily. Also it is important to lessen the greed to have what next door neighbor has. Just because someone is offering loan does not mean we should accept it without thinking how we would pay it off. Do note that when US and most of European countries went down the drain of economic crisis, Poland kept flourishing mainly because their people were dependent on internal economy. The magic of discipline saved them
Poland is the only member of the European Union to have avoided recession, meaning that in 2009 Poland created the most GDP growth in the EU. As of December 2009 the Polish economy had not entered recession nor contracted, while its International Monetary Fund (IMF) 2010 GDP growth forecast of 1.9 per cent is expected to be upgraded. In the second quarter of 2010, growth was at least 3.1 per cent. As of 30 August 2010, the EU's GDP growth forecast for Poland in 2010 stands at 2.7 per cent, outperforming the EU average of 1 per cent. Poland has one of the lowest external debt rates in the European Union, at just over 320 billion, 46% of its GDP.
source http//en.wikipedia.org/wiki/Great_Recession_in_EuropeUnder a Gold standard, the effects of interest would be too obvious. And people would revolt against such obvious inequality.
Yuckies, this would mean we Americans invading countries that have gold. Gold standard is far more harmful than what we already have.
It prevents the central bank from fighting recessions by outsourcing monetary policy decisions to how much gold we have -- which, in turn, depends on our trade balance and on how much of the shiny rock we can dig up. When we peg the dollar to gold we have to raise interest rates when gold is scarce, regardless of the state of the economy. This policy inflexibility was the major cause of the Great Depression, as governments were forced to tighten policy at the worst possible moment. It's no coincidence that the sooner a country abandoned the gold standard, the sooner it began recovering.Inflation is actually violent under gold standard
http//cdn.theatlantic.com/static/mt/assets/business/assets_c/2012/08/NewGoldCPI-thumb-615x387-97085.pngInflation under QE
http//cdn.theatlantic.com/static/mt/assets/business/CPIQE.png
Sourcehttp//www.theatlantic.com/business/archive/2012/08/why-the-gold-standard-is-the-worlds-worst-economic-idea-in-2-charts/261552/In today's time Gold standard is dangerous. If the entire world implements it, poorer nations will become poorest and rich nations will become richest. In poor countries, people will die from hunger. Also note that since gold is limited, it is subjected to manipulation and those who are already rich and powerful will do everything to hoard it quicker than the rest.
The central bank of any country only keeps about 3% of the nation's money supply in printed form also known as base money. The other 97% of money exists in electronic form on the computers of banks. All the electronic money (97%) is created from debt by private banks making loans.
Housing boom occurred here in US because private banks were irresponsibility taking loans from central bank misunderstanding the truth about low interest rate. Now thats a business mistake. It was not set in stone. They chose to be irresponsible.
The bank demands that you pay them back this newly created money (the principal) + interest. The government allows this fraud to occur by allowing banks to convert their electronic money that they create from thin air with your promise to pay them back to be converted into paper currency.
In most general sense, loan means buying money with money. By selling the money banks make profit. I dont see any fraud in it. They need to survive. If we hate what they do we should avoid them, right?
Coming back to the interest based economy, the overall money supply must keep increasing, otherwise the system collapses in a deflationary spiral. Hence the central banks always want some inflation. They never want any deflation. You may have noticed that when individuals and business are not borrowing and spending due to perceived weakness in the economy (recession) then the government keeps borrowing and spending instead to keep the money supply from deflating. This is the reason the US government debt is now over $18 Trillion when it was only $12 Trillion few years ago.
We had surplus when Clinton was in power. The reason why we ended up with debt is not included above. Here are the main reasons
Two wars (boosted more spending than necessary)
Outsourced jobs and businesses (ended the American industrial revolution/ we are now left with mostly knowledge based sector)
Mass housing foreclosure (occurred from people's blind love for house loan)
Mass demand for government benefits within the countryI can go on and on about what went wrong with us. But let me end there.
I don't think there is anything wrong with loans. However, we should know the limit we have. This is what most individuals and businesses finally understood. I would also like to add that getting loan in US is no more easy. You can have the best of all credit scores and the most stable bank account, yet most banks will reject you. Its been already spoken about. But no one seems to understand the mystery behind it.
I don't exactly think loan is fully forbidden in Quran. In several verses, Allah tells people about loan in very neutral manner. One example is the verse about inheritance where he tells to pay off all the debt before distributing the properties. He also tells us to pay zakat. He calls it a loan we give to him. He then says that he would pay off this loan with double interest.
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Salamun alaikum.
Perhaps this verse gives more food for thought
2245 Who is the one who will lend Allah a nice loan so He multiplies it for him increasing manifold. And Allah constricts and stretches - and you will be returned to Him.
(My personal translation, cross checking is recommended.)
May Allah guide us all to the straight route.
Regards,
Arman -
People are confused between usury and businesses deal. A loan is a mutual business deal. Borrowing money or items entirely free from a person is unrighteousness is return because the person both lose material possession and possibly income depending on what is borrowed. In our community it is even worse because how the system works since if A lends B money for X months then what A gets back may be worth less than when he lent it even if he gets back the whole sum. And lending someone money may hurt the personal economy because that money may have been invested elsewhere.
Not saying interest must be used, but one has to consider all the circumstances.
The riba that Quran may speak of is when you fool someone to gain income, for example, charging a person more than a product is worth deliberately.
Salaam
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The problem is not money, or banks, or interest.
The tool is not the problem. It is the usage which causes problems. The user is the problem.
The problem is the greed of mankind.
No matter what system is in place, not matter how perfect it is, mankind will find a way to pervert it.So as always, we look in the wrong place.
The problem is internal, not external.
And so is the solution. -
Greed is the problem yes.
Salaam
