Interest rates.

[slider123456]

Quote from Cache Landing:

No, you are paying $550,000 for a house that will be worth about $550,000 when you finish paying it off in 30-years. It's called time value of money. They are chargin you the future price of the house.

Consider the alternative.

Let's say that at current rates the payment on that loan would be about $1500 a month. Instead, you rent a place for $1000/month and save the $500 resulting in $6000 the first year and you increase that each year with a 3% cost of living raise. Let's even say that you invest the savings in a stock market and get 9% yearly return.

You decide not to finance any of the house in order to avoid interest and instead save all the money in order to pay cash. Using average home appreciation numbers of 4% yearly, it will take you 25 years to save up the money for the equivalent house which is now selling for $650K. During that time you'll have paid $500K in rent, so now the house really cost you $1,150,000.

I'd say the bank is doing you a favor by giving it to you for $550K.

%90 of people do not have 2 houses so that does not work out for the majority.
If there were no interest wealth would be gained through efficiencies. Before Ford created the assembly line it probably took twice as many man hours to build a car. If their was no interest then the price of cars would have halved as people began using his ideas and competition set in. If their was no interest the most important thing would be efficiency as every one would lead to more wealth.

 

[wutangfinancial]

can we set up two forums, one for people who live in the middle of nowhere and believe in retarded conspiracy theories, and one for people who are literate and have college (or equivalent) education?

This forum is so divided. You have people with advanced technical degrees and people who don't even understand what interest is. God bless the internet.

 

[slider123456]

Quote from Cache Landing:

I'm not misunderstanding what you are saying. You keep stating a falsehood, insisting that inflation is caused by insterest. It isn't caused by interest, it is caused by more money chasing a proportionately smaller quantity of goods. If your bank prints money to make loans, they have just caused inflation. It doesn't matter whether they charge interest or not.

Price of goods is determined by supply and demand, not interest. If the bank prints money, there is now more money in circulation even though the quantity of goods has not increased. People are now willing to pay more for the same goods because current prices represent a smaller portion of their income. People don't value things in nominal dollars, they value them by what portion of their income they must spend to buy them.

If you increase the quantity of dollars in the system without increasing the quantity of milk proportionately, then the price of milk goes up. Interest had nothing to do with it.

You are wrong I already stated how interest creates inflation.If I got a capital loan on a house worth $100,000 and payed the interest immediately I would have roughly $95,000. My money has just lost %5 of it's purchasing power which is the same as the cost of the good going up.
If there was no interest house prices would change in individual area say if everyone wanted to live there but it would be balanced out by a lowering of cost at the place they moved from. The average inflation would be zero with no interest.

 

[Cache Landing]

Quote from slider123456:

%90 of people do not have 2 houses so that does not work out for the majority.
If there were no interest wealth would be gained through efficiencies. Before Ford created the assembly line it probably took twice as many man hours to build a car. If their was no interest then the price of cars would have halved as people began using his ideas and competition set in. If their was no interest the most important thing would be efficiency as every one would lead to more wealth.

You didn't read my scenario. I wasn't implying that you have two houses, I was implying that you'de have to rent while you saved up to buy your only house.

Interest has nothing to do with the efficiencies you speak of. Greater efficiency creates greater wealth in every system. Interest also has nothing to do with prices. Prices are determined by what people are willing to pay. If you'd ever tried to start a business you'd realize that companies that try to price their product according to how much it cost to produce end up failing in the end. This is because most goods are elastic goods, meaning that changes in price cause an even greater change in quantity demanded.

The producers get to charge whatever the market price is. It is then the resposibility of the producer to reduce cost of production and make higher profit. reducing the amount of interest bearing debt is one way to accomplish this, but paying more interest doesn't mean that they are able to charge more for the product. They just make less profit.

 

[slider123456]

Quote from Cache Landing:

You didn't read my scenario. I wasn't implying that you have two houses, I was implying that you'de have to rent while you saved up to buy your only house.

Interest has nothing to do with the efficiencies you speak of. Greater efficiency creates greater wealth in every system. Interest also has nothing to do with prices. Prices are determined by what people are willing to pay. If you'd ever tried to start a business you'd realize that companies that try to price their product according to how much it cost to produce end up failing in the end. This is because most goods are elastic goods, meaning that changes in price cause an even greater change in quantity demanded.

The producers get to charge whatever the market price is. It is then the resposibility of the producer to reduce cost of production and make higher profit. reducing the amount of interest bearing debt is one way to accomplish this, but paying more interest doesn't mean that they are able to charge more for the product. They just make less profit.

Interest does drive inflation because when you make a loan your money is worth less since you have to pay the interest.

 

[Cache Landing]

Quote from slider123456:

You are wrong I already stated how interest creates inflation.If I got a capital loan on a house worth $100,000 and payed the interest immediately I would have roughly $95,000. My money has just lost %5 of it's purchasing power which is the same as the cost of the good going up.
If there was no interest house prices would change in individual area say if everyone wanted to live there but it would be balanced out by a lowering of cost at the place they moved from. The average inflation would be zero with no interest.

You are making a huge mistake in your examples. You are eliminating time from the equation.

If you got a loan for $100K you wouldn't pay the 5% interest up front. You would pay it after the appropriate amount of time had gone by. During that time it is assumed that you'll have used the money to do one of two things.

1.....Generate a return greater than the $5,000 you'll be paying for the privilege of using the money during that year.

2.....Reduce the cost of the goods you are buying with the borrowed money to an extent that the saved cost is greater than the $5,000 that you'll be paying.

In my house example I showed you that by borrowing $250K for a house now and paying 6% for a total of $600k, you'd be saving about $550K in cost incurred by doing the other alternative of renting and saving.

OTOH, say you weren't wanting to buy a house, but instead wanted to invest in a business. You invest the 100K in the business knowing that at the end of the year you'll be paying $5000 for the privilege of using that money. So, during that year you need the use of that money to generate more than $5,000. If it does, then borrowing the money was a smart thing to do.

 

[sjfan]

Quote from slider123456:

What you are saying is true under the present economic rules but it does not apply if there is no interest since interest drives inflation. There would be set terms and asset seizure or fraud charges for non-payment as we do now.

What are you talking about? In this case, the island economy has NO inflation by definition (since the money supply, the 100 coins will never change). AND, we also assumed that the borrow will give you back the money he lend you. Yet, under this regime, there HAS to be interest or you, the lender, will lose out.

 

[sjfan]

Quote from slider123456:

Interest does drive inflation because when you make a loan your money is worth less since you have to pay the interest.

In my island example, I have shown you how money is worth less WITHOUT inflation! The island economy's money supply (the 100 coins, don't change). The only thing the island has is production (that is, if you plant 1 ear of corn, you might get one or more back at harvest).

Interest might create inflation (under some conditions), but it is not necessary for interest to exist in order for inflation to exist.

 

[slider123456]

Quote from Cache Landing:

You didn't read my scenario. I wasn't implying that you have two houses, I was implying that you'de have to rent while you saved up to buy your only house.

Interest has nothing to do with the efficiencies you speak of. Greater efficiency creates greater wealth in every system. Interest also has nothing to do with prices. Prices are determined by what people are willing to pay. If you'd ever tried to start a business you'd realize that companies that try to price their product according to how much it cost to produce end up failing in the end. This is because most goods are elastic goods, meaning that changes in price cause an even greater change in quantity demanded.

The producers get to charge whatever the market price is. It is then the resposibility of the producer to reduce cost of production and make higher profit. reducing the amount of interest bearing debt is one way to accomplish this, but paying more interest doesn't mean that they are able to charge more for the product. They just make less profit.

Sorry I misread it. Their are ways to make money of interest but on average everyone loses the difference between inflation and interest. If you took all the houses in the country their price would go up go up %4 but they would all pay %5 a net loss of %1. Over around 70 years that starts to cause problems like now. That is why half the population is poor.

 

[slider123456]

Quote from Cache Landing:

You are making a huge mistake in your examples. You are eliminating time from the equation.

If you got a loan for $100K you wouldn't pay the 5% interest up front. You would pay it after the appropriate amount of time had gone by. During that time it is assumed that you'll have used the money to do one of two things.

1.....Generate a return greater than the $5,000 you'll be paying for the privilege of using the money during that year.

2.....Reduce the cost of the goods you are buying with the borrowed money to an extent that the saved cost is greater than the $5,000 that you'll be paying.

In my house example I showed you that by borrowing $250K for a house now and paying 6% for a total of $600k, you'd be saving about $550K in cost incurred by doing the other alternative of renting and saving.

OTOH, say you weren't wanting to buy a house, but instead wanted to invest in a business. You invest the 100K in the business knowing that at the end of the year you'll be paying $5000 for the privilege of using that money. So, during that year you need the use of that money to generate more than $5,000. If it does, then borrowing the money was a smart thing to do.

You are right but as I said in my previous post on average everyone loses the difference between the inflation and interest.