Banking has evolved over centuries, but it has always charged interest twice because it claims that the interest it charges is money produced by the loan. The sleight of hand is that interest did not create profit to be repaid. The borrower's use of the money created the profit, not the money itself. Money does NOT increase in value over time, but banks have created an illusion that it does. You put money in a bank, and they will pay you interest and make a good profit themselves. They make it appear it is the money itself that creates it. They do it by creating an illusion that you can see. However, like all illusions, you can see it everywhere throughout the economy once you see how it happens.
Banks have a license from the Government to lend out new government money. Interest is a service fee the bank charges the borrower for the work it has to do to organise the loan and collect the repayments. It is not “money earning more money” but a charge to the borrower to ensure the lender gets their money back. The trick is to get the borrower to pay ALL the service fees and the lender to pay nothing for the service. What should happen is that both parties, the borrower and the lender, share the cost of the bank providing the service. What happens is the borrower pays it all.
They do it by charging interest automatically by extending the borrower's loan by debiting their account. If you have a loan, you will see the bank put in an entry saying Interest is $X every month. When a loan is extended, the bank should give you $X to use as you wish. Instead, the bank gives the money to itself and leaves you to pay the interest again. To you, it looks OK. You should have paid the service fee, which you have done. However, the lender should have paid their share of the service. Instead, you pay it all.
Banks get away with it because the money is new money created for the government, and the cost of new money is zero as the government promises to accept it back again as payment for government services and taxes.
It should have gone into the borrower’s loan account to repay it. The Bank later collects your interest payment, and the other part is repayment of the loan. The Bank has collected its interest fee twice. The lender is not going to complain. They have their money back and haven’t had to pay any service fee. The bank will not complain as they have collected their service fee twice. The government is not going to complain as they have created new money. The borrower will not complain; if they do, they will not get a loan.
I complained to the Australian Financial Complaints Authority (AFCA), and the bank offered me $500 to withdraw my complaint. The AFCA is considering the complaint.
This false claim that money generates money is widespread throughout the finance industry and the economics profession. It directs profits from the use of money to those who did not earn it.
There are many ways to change the accounting, but the simplest is for Banks to acknowledge that interest is a service fee with a second transaction to reduce the loan balance and it should be paid by the lender by reducing the loan.
Figure 2 shows the same $10,000 loan over 5 years with a typical credit card interest rate of 20%. The interest on the double payment is higher than on the single payment because of interest on interest, and the single interest payment saves $6,718 on a $10,000 loan.
Treating Interest as a Service Fee
Halving the interest paid means that the minimum cost of a loan repayment with new money is the interest paid. If the Bank lent existing money, the cost of the loan will be the interest cost, which is normally lower than the capital loaned. It means that lending existing money, rather than new money, should be cheaper than lending new money. The savings can be shared by increasing the returns on savings and reducing the amount of interest because the repayment time is less.
The Reserve Bank will have greater control over money as it can vary the amount of money circulating by limiting the amount of new money allowed for loans in different markets. The single-interest payment change will increase or decrease the circulation rate of money in those markets. That has the same effect of altering the amount of money in the system but without changing interest rates. The Reserve Bank can restrict new money available for home loans and reduce the money needed in the economy. They can increase investment money for areas of the economy the government wishes to encourage by requiring new money.
Changing to a single-interest payment will improve the profitability of all lenders and borrowers and lead to a dynamic, productive economy. Today, countries with high wealth have low productivity because profits go into the financial system. In contrast, in an economy where investment is less costly, productivity will improve because more money is invested in productivity improvements.
Governments can ask banks not to require the repayment of new money bank loans on projects or payments that cannot make sufficient or any profit to repay the loans. This stops the need for governments to collect money from taxes to pay for such investments.
For example, there will be less need for taxation for infrastructure loans and income redistribution. This gives governments greater scope to direct the economy by removing the need to collect money before spending it. However, it requires more control over the accounting of expenditures.
A single interest payment will halve the cost of home loans and credit cards. Banks can increase their interest rates, but they will find it difficult to justify a 40% interest rate on credit card loans. Those banks that do not change their advertising and do not move to a single interest payment will be guilty of fraud.
Some businesses will likely start sharing their profits and using that as a point of difference in the marketplace for goods and services. Legislators will likely require monopolies and oligopolies to share profits as an alternative to regulation.
Markets will likely become localised and better reflect the cost of providing services. Governments can compensate different communities by keeping prices the same and allowing banks to use new money in areas of disadvantage where the loans do not have to be repaid in full.
Insurance will likely be replaced by low-cost loans where the government money does not have to be repaid.
Capital markets will likely disappear as they are no longer necessary.
The distribution of wealth will likely be more like a Poisson distribution with a low mean. That means it is like a normal curve with the top pushed to the left. It means fewer rich or poor people.
It will likely lead to funding for the arts, research, common assets, education, public services, investment, and all the things that we want but are not for sale or that most people cannot afford.
It is likely to dramatically increase the GDP of all countries adopting the approach as less money will be tied up in overpriced assets, and money will circulate rapidly, increasing GDP.
