Money, interest rates and purchasing power

This week’s The Economist has a column on the implications of high and low interest rates.
One of the problems with money is that we treat it as a commodity – something which has a value of its own. Every time I use the bank’s ATM I told to let the bank put my money to work for me (and the bank).

We would have fewer macro financial problems if we were to think of money as a tool that facilitates the exchange of goods and services.  It is a concept  which represents purchasing power.

One of the things I like about local exchange trading systems (LETS) is that they create money that only facilitates exchange.  It has no value of itself and there is no interest involved.

This is in contrast to fractional reserve money which is based on debt issued by banks and upon which interest is charged.

In a fractional reserve system when we deposit money in a bank or make a loan to somebody we are transferring purchasing power to somebody else.  We do this expecting a return of even more purchasing power.  But this additional purchasing power is an illusion.  It  comes at the expense of somebody else or it  leads to inflation.

When the economy is growing more goods and services are being produced so there is extra to be purchased and the problem is not so obvious.  When the economy is stagnant there are no extra goods and services to be distributed and this is showing up in the form of low interest rates.


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