What really is interest? (Part 2)

My post of 11 January 2011 gave an example from real life of an expression of the ”principle of interest”, as I prefer to call it – not just “interest”, but the principle of… Because it is that principle, being used to motivate so many forms of money-interest, that we need to understand better. The expectation that money ”put to bed” should grow, without being in any way involved in risks, i.e. not participating in the building of life-forms, seems to me to be a risky thought, risky for the Life-side. I believe we need to learn more about the principle of interest in connection to general views on money and/or Life, because we cannot use the concept of interenst in common ways and reveal its true meaning.

Refering to a negative real interest, which is reality in Swedish economy today, I draw the conclusion in my post of 14 February that: to be able to realize what transfer by thinking in terms of interest really is about we need to see, that what is by convention called “interest” really not always manifests the principle, and should thus preferably be called something else. If we are to understand.

The meaning of interest in the dictionary is straight forward: ”money paid for the use of money” (Longman’s Dictionary); usually is added something about the ”money being borrowed”.

In older times it was easier to see how the interest worked. Some people owned money they did not need for a period (or indefinitely) and they lent these money to someone. After some time they got the borrowed sum back and something extra for having given someone the chance to borrow and use the money – it was the lender’s ”interest”. And this was surely in the interest of the lender, and it was easy to see if he was stretching his demands for interest too far – usurer is an old word…

I write this to make a point – the point so obvious in the English language – interest is paid/taken in the interest of a particular person (or group), and in contradistinction to somebody else’s interests. (In other languages, like Swedish, interest money is named differently than the general interest.) So, if something is transferred in the interest of one, distinct from another, my point is that this transfer is separated from the actual sum of money lent/borrowed, i.e. from the flow of money needed for sustenance of life-forms, it is a non-participative stream of money (energy) and is thus not on the Life-side of our two-sided reality – energy/matter vs. Life. Still it it is created by the use of positive feedback!

It is easier to see in the simple money-economies of yesterday what the paying of interest actually was about. In the modern society of today the complexity of the financial systems makes it really hard to see how the principle of interest in many ways impacts the systems and the money transfers resulting, as a total. It has become a blind spot and we have invented diverse constructs and explanations to motivate these systems. Like the explanation that “interest is the price for the use of money”. Meaning that extra energy is needed to use energy. But also demanding that this extra energy be considered a certain category – thought-wise – and should not be confused with other ”friction losses”, i.e. costs for sustaining life-forms. In the next step it is though mixed with these “friction losses” and thus hides our possibility to get an overview of the total paid value of interest, on a systems basis. The first step represents the strengthening of power of the lender and the second step represents the giving up of power by those who borrows, but that is concealed on an ackumulated basis.

Of course, these facts about transaction on one level of life-forms might well be compensated for on a higher level, something we need to treat further on, so this is just a note of fact, not a value statement.

Energy-wise, if we think of the two balancing sides of energy/matter and life-forms, we can describe loans and interest like this: life-form A has gotten the power to control more energy than is needed to sustain the totality of his life-forms. Without returning this excess energy to the great pool of energy/matter, and instead to maintain control over this energy/matter he lends these money to another life-form, B, needing them for his growth/sustenance. This is good thinking because it makes the excess energy available for the Life side. After a while the form built out of this energy/matter (by B) has developed an ability to sustain these life forms and returns the energy/matter lended. Plus interest so that the energy now controlled by A has increased. If energy is constant (which it is in a closed system) it means that the extra energy added in the pay-back of that loan, is taken from somewhere else. If energy is not constant (which is the case in an open system) the extra interest energy needs to be supplied to the system from outside to sustain balance.

I am sorry to oversimplify, but I do need that to make clear what interest is about or ought to be about. In the article cited 11 February it was noted that interest rate minus inflation could well be negative. Well, if that is the case, why call it interest? I believe we call it interest because as a separated concept it is interest in the old sense. But in the compound system other mecahnisms, energywise being similar in their ways of functioning, may well be nullifying och even turning the functions completely backwards.

So the whole is not easily seen for our concerns with the parts. If we want to see why our financial systems cause problems, we need to turn away from using the fragmented ways of description and modeling. They are just misleading… and it is by misleading concepts, misleading models and misleading perspectives, we got so mixed up, so that we cannot see clearly any longer what happens to the whole. We can only see that we are maintaining and even reinforcing our financial systems so that they to a lesser and lesser degree are able to serve Life on this planet, due to their great and growing appetites. We are feeding ”the monsters” not knowing what we need to do to stop them craving more and more.

So, summing up:

• It seems taken for granted, due to the existence at all of the concept of interest, that the use of money (energy) has a cost built into it; i.e. extra energy is needed to use energy;
  A relevant question here would then be: but why is that cost not considered a ”normal” cost, when Life builds its life-forms out of matter/energy? With ”normal” I mean a cost which is comparable to the temporary locking up of energy/matter to make life-forms – all other ”expediture” of energy/matter is of that kind.
• It is not mentioned WHO will administer och collect the interest money; this is a very important issue, for the larger the amount and the larger the interest rate, the more substantial amount of value (= energy) is transferred.
  The most relevant question here is who are those life-forms collecting/binding more energy money than is needed? What are the mechanisms making this happen?
• If an interest rate is lower than something acting against it, like inflation rate, the value of the somenthing using positive feedback (the interest) to grow, it is still depreciated.
• If there are only two sides of change in the universe and they are identified by what feedback mechanisms they are using – Life using positive feedback and energy/matter using negative feedback, it is obvious that interest has to be seen as belonging to the Life side, due to it using positive feedback, although it definitely seems to belong to the money side (energy/matter), due to its non-pariticipation; here is the clue to the missing considerations in designing our financial systems!
• Interest seem to be building on a relationship to others based on separation, or non-participation. It is binary in its actions – it is to the benefit of the one OR the other. To be of benefit to both sides – lender and borrower – it cannot serve, it is then best discarded.

Tags: borrow, feedback, financial systems, lend, loans, non-participation, principle of interest

What really is interest? (Part 1)

”The Quiet Crash” (my translation) is the headline of an article in the biggest daily business/finance paper in Sweden (Svenska Dagbladet/Näringsliv – Swedish Daily Morning Paper–Business/Finance section). Again Andreas Cervenka serves the public with his somewhat self-reliant (which I like) perspectives of the doings of the financial systems. He makes clear that ”too low” an interest rate may infer the opposite results from what is normally expected through our understanding of interest… Those ”in favour” of certain interest-incomes may be poorer with time. He describes how the negative gap between interest rate and inflation rate actually undermines owned property.

You think you sit on some value, but with time it disappears, if you do not use the financial systems in a smart way to preserve your assets. That means that if you do not use the more effective mechanisms in the financial system to make your savings grow, i.e. to use some kind of positive feedback mechanisms to increase your capital, you lose.

In short this lays out the rules for playing the game in today’s finacial systems – you can either be a winner (by speculating), or a loser (by keeping your savings in the bank); it is a dividing system. A systems thinker immediately regognizes one primary quality of such a system: the net effect of all the feedback mechanisms in the system is positive. The system will with time lose its flexibility and be locked at one of its end points, or it will oscillate. It will certainly not funcion in an ordered and balanced way, flexibly and smoothly. It won’t find its balance, thus it will not serve Life well either.

The article about the Quiet Crash reminds me of possible ways to misunderstand what I have sofar been formulating about the problems of interest, and I need to take some space to clarify. I’ll do that here and in a following post.

But, before that, it is interesting to pause for a while and refresh the memory of those who may have studied Swedish economy during the high-inflation period of 1970s and 1980s. This was a period of very high inflation rates in Sweden leading to an unsurpassed transfer of riches to specific groups in Sweden – normally middle class people, living ”beyond one’s means” by borrowing money. To live beyond one’s means is certainly not in any way reprehensible in our society today. On the contrary it is more blameworthy not to live on borrowed money – it is kind of built into the system.

Due to the gap between interest and inflation rates and to Swedish tax regulations for debt deductions, enormous amounts of money were tranferred from the ”earnest” people (in the sense of not living beyond one’s means) to those borrowing money, not only for housing but also for general consumption.

A friend of mine, typical middle class, and being an economist, told me a few years ago that he had cacultated, based on accumulated figures over the years, how much he had actually paid for his house, situated in a typical upper middle-class suburb of Stockholm, with an estimated value of several millions Swedish crowns today. He found that he had actually paid nothing! He even found that he probably had been paid a little for living on borrowed money. So, the millions that today is considered his private property, has been paid, but not by the owner himself. It has been paid by innumerable others due to transference mechanisms in the financial systems, in combination with the tax system and political party tacticts.

So, surely, someone (many) paid for that house, and to understand how this came about, we have to penetrate deeply into the language and concepts of economy, because they are really quite confusing. And to disclose them, we do need to see the whole – the mountain top view again! Otherwise we are drowned in the whirlpoles of economic language and the complexities of the systems being described.

It is also worth mentioning that this unsurpassed transfer of money to the relatively wealthy were happening under mainly social democratic government – a good reminder for those who think of social democracy as an advocate for fairness.

It is also a fact that many of the so-called working class people, i.e. laborers with a steady job, could use these mechanisms, and have so migrated into the middle class lower stratum. It is plausible that that fact was the real motivator behind social democratic policy – they could prove that laborers could become middle class, but due to confused overall understanding of economy and financial systems, that policy created more, and new lower class groups (or those completely excluded from society), and increased the gaps, both regarding income and private capital.

So, interest needs not be the name on the mechanisms manifesting the Principle of Interest. It may even be the reverse… And these insights lays the ground for a discussion of manifestations of the interest principle in today´s financial systems – it is crucial for the discourse on Money or Life, and I stop here, to take the next step in a few days!

Tags: financial systems, inflation, interest rate, transfer mechanisms

How we are dealing with financial crises

I have illustrated common ways of thinking about economy, and specifically about the use of money to primarily make them grow, and how this seems to be against universal principles valid for money (energy/matter) and Life respectively. And although we think we are able to adjust our financial systems to make them work better, we are again and again reminded that they are not measuring up to expected standards.

We have just “recovered” (so it is called) after a deep crisis, which made those in power arrange meetings and conferences about how to solve the problems, and try to avoid similar situations in the future, but to me it seems that these were all to no avail. As soon as the emergency actions (like supporting banks with taxpayers’ money) have stilled the most violent expressions of failing financial systems, those in power returns and seem willing to again use the sand pits to put there heads in. This tendency unfortunately includes reporting media.

Instead of drawing the deeper conclusions from the recent crisis – in several respects still ongoing – media cling to the upgoing trends in the trade cycles, and prefer not to see the increasing inherent problems in the financial systems. We have learnt that the new proposed solutions to the problems build on the same prescription as the one which took us into the crisis, i.e. solving the situation by borrowing money, not knowing that future economy will cover the risks and the interest payments.
See for example the article in the Washington Post, in which Timothy Geithner pleads the congress to raise the debt limit, to avoid “catastrophic economic consequences that would last for decades.” The real message in this article is: if USA cannot borrow more money, they will be bankrupt, but this shocking news was not reported according to its weight in the Swedish press, it was even hard to find, weaved into other more general analyses. This is really shocking news, talking about the number one economy of the world. But it did not make any headlines! Heads buried in sand…

This focus on financing by borrowing money to further the amount of future interest payments seems due to unclear thinking and lack of understanding for what the huge, complex systems of Life on the one side, and money (financial systems) on the other, are really about. It is easy to see, from a system point of view, that the use of positive feedback for existsing capital leads to increasing problems, and the “solutions” to borrow more just increase the overall impact of the positive feedback!

The economic science of today need to step out of their ruts and start seeing things from the perspective of what is often claimed to be its task – to understand and describe how householding with resources best be accomplished. The principle of interest is accepted a priori and built into its models, thus making them blind to the higher principles of money and Life. Some brave professors need to take the first steps towards seeing economic models as only parts of more general laws and principles of universal order. These brave professors need to try to climb to the mountain top to find completely new, and fresh, perspectives. I do believe that some are really doing this already, but they are not as yet heard down in the valleys where people toil…

Tags: bankruptcy, debt ceiling, financial crises, financial system, massmedia

Example from current reality

The other day I attended an information meeting arranged by one big investment fund company in the Nordic countries (Scandinavia and Finland). It was aimed at presenting the economic situation today, and the prospective  developments in the year to come.  There were about 500-600 people in the audience, I believe most of them being private investors. The arrangement included food and drink and mingling, and also some music entertainment, so the participants were feeling well treated.

At the beginning of the information session I was surprised to hear the opening speaker (CEO) present his personal view, of course with some humour and symbolism, but obviously meant to make the investors feel nice and secure: he said he had himself difficulties in accepting the American way of looking at money – that they let the money go out there and work for them. It did not feel safe enough for him, but instead he presented the view of letting the money rest and be protected. He wanted the money to lie there “in bed”, being wrapped up in blankets and resting on pillows, and while doing that he expected them to grow.

It grew obvious during the evening that behind this somewhat humourous vision of his were to be found a real attitude that good capital management and stock broking should keep the money safely protected while making them grow. This is exactly a manifestation of the interest principle. No risk, only gain. But if we look at it closely it seems really against the ways of the universe.

Let’s go back to the basis again: money is energy, it is there to sustain life in the most effective ways, this really means that energy is ”working” when life-forms are built and nourished. The ideal of letting money ”rest” – even on pillows – reveals the idea that they should not even work, i.e. without contributing to life sustenance and thus being tied up, but they should still grow.

Well, well… wasn’t it the life-forms that should grow, and not the energy? Energy cannot be created and it cannot “grow” – it can only be moved and transformed. Growth in one place can only be brought about by removing energy/money from another place. This is what Life does, and not the energy as such. So the brokers’ view of protecting the money and still making them grow, is actually a non-participative way of gathering more energy from another place – there aimed at building and sustaining other life-forms, but thus being “withdrawn” from that.

Along with the different speakers’ presentations during the evening, some analyzing what has happened during the world financial crises and the recovery after that (which has really not happened), while others were looking forward, it got obvious that to the investors, buying shares in the different funds, should be safe and sound as the filling in of energy from other places seemed to be secured. Be it money/energy taken from the tax payers, or from disproportionately raised rents caused by speculative forces acting on the property markets. It did not seem to matter or raise any hesitation. Personally I believe that this attitude – gaining from non-participation in Life is the saddest expression of the prinicple of interest. And it is very, very common. It is even taken for granted.

One of the consequences of this attitude, combined with the increasing strength and power of the fund-keeping, stock-broking functions within the financial systems, making them more and more invincible att crises (tax fill-ins, or other transfers) and increasing their hunger when recurring after crisis was commented upon in one of Swedens most influential business and financial paper SvD/Näringsliv under the headline “The market has become a monster” – see this. (My translation – I am sorry the article is only available in Swedish.)

Tags: financial system, fund savings, interest, investment fund, money growth, speculation

Basis for the money-life discourse

The very basis for the money-life discourse

I am starting off in considering diverse findings by different disciplines within science, beginning with thermodynamics, occuring in the mid-1800′s and the decades following, and one of its most commonly known constructs – the concept of the “heat death”. Creating this concept, thermodynamics thus instilled in human awarenes the unavoidable stilling of everything into No Life – a somewhat tragic perspective, but not frightening due to its extremely long-term perspective.

Skipping a period of about 100 years to get into the second half of the 20^th century, we find radically new views within science, aided by the then relatively new systems thinking. New concepts were created, as research advanced. Parallel to the heat death were found other principles, the principle of self-structuring, of “dissipative” structures. These concepts displayed the other side of the coin, and could be tied to what we would call forms of “life”, the sum of which would represent Life – the “principle of living” behind all life forms.

So, energy/matter is dispersed over time, ending up in an even distribution called heat death. This could also be described as a complete evenness – everything completely evenly distributed. Energy/matter as available everywhere, although with very low density.

When Life comes in, we get the reverse, it “uses” energy/matter to create structure, to appear in diverse forms. So it gathers energy/matter and contributes to make it unevenly distributed again, but only “locally”. Both are needed – life feeds on energy/matter and energy/matter is expressed in form via life, via its structuring processes. The one cannot do without the other – this seems to be the delicate balance keeping the universe going – at least if we look at the living aspects of the universe.
This is very simplified, of course, but simplification is here needed to see the whole.

Two opposite directions

If we can accept these two different principles or “directions” as the basic duality in which “everything knowable” takes place, it would be very interesting to study the interplay between them, the “rules” for that interplay and how different scenarios lead to different end-states. In this duality we have the energy/matter serving as fuel and material for Life, and Life’s structuring principles needing to concentrate matter to express itself. There is great facility in matter being evenly distributed so that, wherever Life’s structuring happens, energy/matter is available.  And there is great functionality in the non-evenness resulting from the buidling processes of Life into life-forms, creating space for the forms to express. But already here, we can see the role and functions of competition in the creation of life-forms. Life-forms cannot be created where there is no energy/matter left, due to it being consumed by other life-forms. IF new energy is not supplied by new distribution to the competing life-forms.

Feedback – positive and negative

I won’t take this aspect further here, but instead I want to focus on two basic mechanisms: positive and negative feedback. Positive feedback is what Life uses. It amplifies whatever process is ongoing and leads to concentration, to structure, to form building. Negative feedback is what is behind heat death. Whenever anything tries to stand out, negative feedback acts upon it to dampen the expression, to flatten it out again into evenness.

Thus negative feedback is the inherent process of energy/matter and makes it evenly distributed, so that “everyone” can use it, while positive feedback is the process behind creation of life-forms. And in this factual distinction we find the connection to the title of this blog.

Money as energy/matter

To make the reasoning complete, we need to add one more postulate: money is energy/matter. That is, due to analogy money represents energy/matter in the human world. We can come back to this if needed, but to me it is obvious that money acts as energy and brings in matter in whatever human enterprises we could think of, at least as long as we stick to the material living.

So, the great conclusion to make out of this is – money needs to obey the rules for energy/matter, to optimally serve and help building the many different life-forms that make up our societies, be they companies, families, children, associations, buildings, machinery, transport systems, service functions, whatever.

Financial systems using wrong feedback

What we can see today is that man has not been able to follow the rules for energy/matter in the creation of the financial systems of the world. These financial systems are the main distributors of energy/matter and they are needed to sustain Life in the many corners of the world. Recent crises have shown us that they fulfil these funtions with considerable dysfunctioning today, and it seems that our current solutions does not go to the very basic reason for these dysfuntions.

The principle of interest is definitly an example of positive feedback and should be used by Life only, while energy/matter should be guided by negative feedback. On this point something got wrong on our common journey towards sound householding of  world resources, and we got feedback loops using positive feedback within the money system itself (energy/matter). This means that energy gathers but supports no “real” life-forms, only what the financial systems “emulate” as life-forms.

By no means I say that we do not need the financial systems, but we need to reconsider their functioning. If we allow for positive feedback in connection to them it should be for the building and sustaining of functional distribution systems, and these should be considered real life forms, and they should get the energy/matter that they need to fulfil their functions. The “automatic” positive feedback represented by the interest principle need however to be done away with. This will take long time, but we need to begin talking about possible ways to do this transition in our money systems NOW!

This will be the main line of discourse to follow for a while, but some diversions will also be needed, into the different areas mentioned above, and also examples from the real world, before we can start to really discern the more detailed structures and principles of the needed future financial systems, serving on the Life side as specific life-forms with the task of supporting creation, growth and sustainment of other life-forms.  This is not the situation we have today.

 

Tags: financial system, global fairness, inequality, interest, money or life, resources, world economy, world need