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The main reason is not apparent at first. It is hidden by a litany of words and economics, it is a well kept secret. In a closed monetary system, one cannot make a profit that is excessive, this is shown by companies that charge too much or have illegal gains, there are laws against this. This prevents the monetary system from collapsing. Think for a second if Microsoft controlled all the trillions of dollars in the US, there would be a revolution tomorrow, people would starve, war would follow between states and the federal state.Fortunately that won’t happen as no one company can get that monopoly. But, bad news for the originators of the system. They didn’t think that money could be misappropriated or held by anyone else, the justice system would prevail and the country would survive. Well like all rules there are loopholes and languages that confuse.
Banks are in business to make money….the first problem. There is nothing wrong with making a profit, as long as it is legal and above board. True, banks are audited regularly, but they have huge earnings and little overhead, they make the rules as they go along, borrowing, lending and saving.
Little is known on the street level about banking.
Banks take our money and make money with it. Nothing wrong with that as long as it is fair to us. For example they take my money in my account, invest it, get a percentage back and make a profit which they keep. We now know that this profit can be as high as 30 % to 50% and they pay us about 3%. Not really fair, but this is just a door opener. Interest rates are fine if they are simple interest, applied in front of the loan and paid that way, some countries use this technique to this day.
If you go to borrow money from a bank you will find that you will have to make payments over a period of time at a certain interest rate. This rate is different at any given bank, they do have some competition for sales of loans. However loans and mortgages are figured in a different way, using compound interest. Compound interest is interest figured over a period of time, compounded weekly, monthly, yearly etc. This can make a huge difference in the out come of a loan or mortgage.
For instance: A house loan in Canada today, for a 300,000 dollar home, (which is about an average), will cost about a million dollars by payout time. Figured on compound interest with the best rates, fastest payout, bi weekly payments etc, you would be lucky to get by paying less than 750,000 dollars.
There is something wrong with this, it ties up money, gives it to big business, does not put it back into the hands of people at the bottom of the system and forces poverty on home owners, workers and people paying these huge sums.
Our credit system also uses compound interest, it is a travesty of losses and failed credit applications. People not being able to get loans now, as banks prefer large loans, letting credit companies take the business, saving millions in paperwork.
The interesting thing about all of this is that the cost of living (inflation) is locked to compound interest. The cost of living has tripled and peoples wages have not. Why? Simple the cost of producing a product is directly linked to compound interest, stocks, bonds, and loans. The more companies borrow and can’t pay back fast enough to stay solvent, forces them to borrow again, at high rates of interest. The only winners are the banks.
Governments have not enough teeth or moxy to take on the banks and change our system. If it is not done soon we will not have a system. Some other country will buy us out, or we will starve, or worse yet we and our children will owe our huge national debts forever.
Unfortunately, I think greed will win.
Some terms used by Money people
Interest
is the price paid by a borrower for the use of a lender’s money. In other words, interest is the amount paid to “rent” (hire in British English) money for a period of time. The original amount lent is called the principal, and the percentage of the principal which must be paid annually as interest is called the interest rate. Interest rates are crucial indicators in financial markets.
* The time value of money: Most people would choose to have money in the present rather than money in the future. When asked to lend their current money in exchange for a promise to repay that money in the future, most lenders will agree only if they are repaid more than they originally lent. In effect, the interest rate is the payment for the use of money over time.
This includes simple interest and compound interest.
* Alternative investments. The lender has a choice between using his money in different investments. If he chooses one, he forgoes the returns from all the others. In other words, lending incurrs an opportunity cost due to the possible alternative uses of the lent money.
* Inflationary expectations. Most economies generally exhibit inflation, meaning a given amount of money buys fewer goods in the future than it will now. The borrower needs to compensate the lender for this.
* Risks of investment. There is always a risk that the borrower will go bankrupt, abscond, or otherwise default on the loan. This means that a lender generally charges a risk premium to ensure that, across his investments, he is compensated for those that fail.
* Liquidity preference. People prefer to have their resources available in a form that can immediately be exchanged, rather than a form that takes time or money to realise.
* Taxes. Because some of the gains from interest may be subject to taxes, the lender may insist on a higher rate to make up for this loss.
We tend to let others ( usually our judicial system or political system) decide for us. That is not the way it should work.