Lordy World – Compound Interest

With time our Bankers notice that often loans aren’t paid back on time. They decide to reflect the different times taken to repay they should charge interest rather than a fixed fee. The depositors hearing of this move demand a cut of the interest. The bankers now make their money from a difference in the rates they charge vs what they pay.

Now merely owning money can create wealth. Slowly many people decide to pursue amassing money as a goal in itself as that money can earn them more money reducing their need to work. Some observers say that greed has entered the system.

Some observations

  • Even more money is now being created out of thin air. The interest on deposits can be just created provided the bank has enough reserves. Note this is now compounding and thus infinite. Anyone just leaving their money there will have it increase in size exponentially.
  • For the bank to indefinitely continue to pay these ever increasing deposits they will need two things – ever increasing lending and ever increasing money supply
  • Increasing money supply requires either reducing reserve requirements (which is ever more risky) or increased availability of the underlying (ie growing population). It should be noted that every bit of interest paid by a borrower is extra PHLs that can be leant out. With the 25% reserve this means every PHL paid in interest increases available credit by three times that amount. The ability to increase the money supply make cease as you can’t force people to deposit time and though in theory you could take the reserve to zero (infinite credit) it clearly wouldn’t work. The only possible solution would be to devalue the PHL ie 1 PHL now represents just 30 minutes. This leads us to the final piece – FIAT currency
  • This requires continued growth to be viable
  • Unravelling this as we did in the previous case is vastly more complicated.
  • Growing population is OK to a point but this community can only support so much population and thus there is a strict limit to growth.

It’s interesting to think how this world would approach it’s limit, what would happen and how they could adjust to it. I am not planning to explore that here.

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