Phillip Tilley

Outlaw compound interest

November 16, 2010 |  9 comments
Image Credit: sxc.hu Scientists have recently discovered something that destroys humans but leaves their homes and cars standing. No, it is not the Neutron warhead, it is compound interest. When Einstein was asked what the greatest invention of mankind was, he said it was compound interest because it could make you perpetually indebted to the bankers.

Webster’s Dictionary defines interest as: a charge for borrowed money generally a percentage of the amount borrowed. Another way to define interest is the price paid for the use of borrowed money or a fee paid on borrowed assets. In this context, money and assets are positive things that are tangible goods.

Interest is the fee paid to rent the use of money for a period of time. Interest is just compensation to the lender of money for a risk of loss of the loaned assets. The person that borrows money enjoys the benefit of using the asset before the effort to earn it is required. The lender of money gets the benefit of the interest paid by the person who borrowed the asset. The key word here is of course asset.

Compound interest on the other hand is interest added to the principal amount of money borrowed so that from that point forward the interest that has been added also earns interest. This causes the person who borrowed the money to now be paying interest on interest as well as the principal amount of money borrowed. Thus, it is easy to see why Einstein thought it could easily make a person perpetually indebted to bankers. With time the difference becomes considerably larger.

My friend Russel recently asked me if there were one thing I could do to put the economy back on track and make America great again, what would it be? I told Russel if it were only one thing, I would outlaw compound interest.

The State I live in recently outlawed the 400% interest charged by “Payday” loan brokers. The payday loan brokers said they would go out of business if they could charge no more than 36% interest. My wife had an Aunt Thelma that made a million dollars loaning to individuals at a flat rate of 10%. Nobody ever defaulted on a loan with Aunt Thelma because it is far easier to pay off a loan with flat interest. Yet she became a millionaire from it. Either Aunt Thelma was a financial genius, or the payday loan brokers are lying.

Some people will say, “If banks can not charge compound interest they will go out of business.” These same banks were charging high compound interest and they were already going out of business when the government bailed them out. Still, this year alone 139 banks have failed. It is not banks interest rates that determine success or failure, it is good or bad business practices that determine success.

The current model has banks succeeding while the rest of us fail. In a capitalist society, what other business gets a do over when they fail? I know, car companies and insurance companies. If you cannot compete you go out of business. That is how it works. When anyone else fails in business they cannot ask the government for a do over.

As an example of compound interest versus a flat interest rate, if you bought a $150,000 home at 5% compound interest over 30 years, you would pay $498,291 in interest alone. That is really 332% of the amount you originally borrowed. The 5% compound interest looks small, but if you were told for every dollar you borrow you will pay it back plus three dollars and 32 cents you would think they were crazy. Your interest plus the principal over 30 years would be $648,291 at a payment of $1,800 per month.

A flat interest rate of 20% on $150,000 over ten years means you would pay $30,000 in interest. You would repay $180,000 over ten years at monthly payments of only $1,500 per month. That is $300 less than the payments for 5% compound interest over 30 years. Your house would be paid for in ten years instead of 30 years and you would have the use of $468,291 that would have otherwise gone to the banks.

Imagine what you could do with almost half a million dollars, more if you invested even some of it. Would you have money to spend on cars, cloths, trips to Disneyland with the kids, college for the kids when they grow up, washers and refrigerators and many other things that would stimulate the economy? Yes you would, and the country would prosper.

And really why should banks get so much in interest these days anyway? Interest is paid for the privilege of borrowing money. Since there is no money, (see my article “There is no Money”) and since banks stopped loaning money, (see my article “Banks Stop Loaning Money”) the banks are not entitled to large amounts of interest. Banks do not loan money, a positive asset, they extend credit, a negative liability. Why should they be allowed to charge interest three or four times the money they did not lend in the first place?

I think a 20% flat rate for the paper shuffling and punching a few keys on a computer to extend you credit is plenty. They are not risking any money and interest is paid for the risk of losing the money loaned. After all, if nothing is ventured, nothing should be gained. At least not the huge amounts compound interest give the banks to waste on executive bonuses.

It should be noted that some countries have taken steps to eliminate interest from their financial systems altogether. They are Iran, Pakistan and Sudan.

With a flat rate there would be fewer if any defaults because people could pay it off quicker and have currency left to enjoy the rest of their lives like they should. Wake up people, the money matrix has you.

Phillip Tilley is author of The Money Matrix of the New World Order and other articles.[!gad]Scientists have recently discovered something that destroys humans but leaves their homes and cars standing. No, it is not the Neutron warhead, it is compound interest. When Einstein was asked what the greatest invention of mankind was, he said it was compound interest because it could make you perpetually indebted to the bankers.

Webster’s Dictionary defines interest as: a charge for borrowed money generally a percentage of the amount borrowed. Another way to define interest is the price paid for the use of borrowed money or a fee paid on borrowed assets. In this context, money and assets are positive things that are tangible goods.

Interest is the fee paid to rent the use of money for a period of time. Interest is just compensation to the lender of money for a risk of loss of the loaned assets. The person that borrows money enjoys the benefit of using the asset before the effort to earn it is required. The lender of money gets the benefit of the interest paid by the person who borrowed the asset. The key word here is of course asset.

Compound interest on the other hand is interest added to the principal amount of money borrowed so that from that point forward the interest that has been added also earns interest. This causes the person who borrowed the money to now be paying interest on interest as well as the principal amount of money borrowed. Thus, it is easy to see why Einstein thought it could easily make a person perpetually indebted to bankers. With time the difference becomes considerably larger.

My friend Russel recently asked me if there were one thing I could do to put the economy back on track and make America great again, what would it be? I told Russel if it were only one thing, I would outlaw compound interest.

The State I live in recently outlawed the 400% interest charged by “Payday” loan brokers. The payday loan brokers said they would go out of business if they could charge no more than 36% interest. My wife had an Aunt Thelma that made a million dollars loaning to individuals at a flat rate of 10%. Nobody ever defaulted on a loan with Aunt Thelma because it is far easier to pay off a loan with flat interest. Yet she became a millionaire from it. Either Aunt Thelma was a financial genius, or the payday loan brokers are lying.

Some people will say, “If banks can not charge compound interest they will go out of business.” These same banks were charging high compound interest and they were already going out of business when the government bailed them out. Still, this year alone 139 banks have failed. It is not banks interest rates that determine success or failure, it is good or bad business practices that determine success.

The current model has banks succeeding while the rest of us fail. In a capitalist society, what other business gets a do over when they fail? I know, car companies and insurance companies. If you cannot compete you go out of business. That is how it works. When anyone else fails in business they cannot ask the government for a do over.

As an example of compound interest versus a flat interest rate, if you bought a $150,000 home at 5% compound interest over 30 years, you would pay $498,291 in interest alone. That is really 332% of the amount you originally borrowed. The 5% compound interest looks small, but if you were told for every dollar you borrow you will pay it back plus three dollars and 32 cents you would think they were crazy. Your interest plus the principal over 30 years would be $648,291 at a payment of $1,800 per month.

A flat interest rate of 20% on $150,000 over ten years means you would pay $30,000 in interest. You would repay $180,000 over ten years at monthly payments of only $1,500 per month. That is $300 less than the payments for 5% compound interest over 30 years. Your house would be paid for in ten years instead of 30 years and you would have the use of $468,291 that would have otherwise gone to the banks.

Imagine what you could do with almost half a million dollars, more if you invested even some of it. Would you have money to spend on cars, cloths, trips to Disneyland with the kids, college for the kids when they grow up, washers and refrigerators and many other things that would stimulate the economy? Yes you would, and the country would prosper.

And really why should banks get so much in interest these days anyway? Interest is paid for the privilege of borrowing money. Since there is no money, (see my article “There is no Money”) and since banks stopped loaning money, (see my article “Banks Stop Loaning Money”) the banks are not entitled to large amounts of interest. Banks do not loan money, a positive asset, they extend credit, a negative liability. Why should they be allowed to charge interest three or four times the money they did not lend in the first place?

I think a 20% flat rate for the paper shuffling and punching a few keys on a computer to extend you credit is plenty. They are not risking any money and interest is paid for the risk of losing the money loaned. After all, if nothing is ventured, nothing should be gained. At least not the huge amounts compound interest give the banks to waste on executive bonuses.

It should be noted that some countries have taken steps to eliminate interest from their financial systems altogether. They are Iran, Pakistan and Sudan.

With a flat rate there would be fewer if any defaults because people could pay it off quicker and have currency left to enjoy the rest of their lives like they should. Wake up people, the money matrix has you.

Phillip Tilley is author of The Money Matrix of the New World Order and other articles. Comments (9)

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