“Time value of money” is a myth of the parasitic financiers
I believe that banking institutions are more dangerous to our liberties than standing armies – Thomas Jefferson
Laborism would maintain the right of working people to earn 5% interest -more than they have made since the free-money era starting in 2008 - on up to $1,000,0001 of personal savings and $1,000,000 in an IRA. I will explain that mechanism in a later post. This discussion relates to the debt held by financiers.
In my last post I only discussed risk return, the share of profit that an investor deserves for taking the risk that their money would be lost or that they wouldn’t be able to use it when they need it. We have all been trained to also believe in another kind of return, called “the time value of money.” We parrot that phrase and think ourselves wise and educated because we know about it. In reality, that return is an illusion created by the bankers, and it has no right to exist. In a future post, I will go into the history and purpose of money and explain where the myth of time value of money came from. Here it is enough to note that it is a myth, as the recent history of German government bonds proves.
People saved money even in times when they were not allowed to earn interest (which was much of history). They felt that having it to spend later was simply more valuable then spending it now, when they didn’t particularly need anything. There was a positive value to holding off spending. The same is true today for working people saving for retirement, as demonstrated by the fact that they continued to save, and indeed spent less, during the recent long period of negative real interest rates when the value of their money in the bank was falling (with the value being largely transferred to financiers). Having the security of money in the bank is worth more to them than extra current spending. As recently as 2021 German government bond yields were actually negative even before inflation – investors paid money to the government to hold their excess funds, so they paid money for the privilege of not spending their money right now but being able to get it back when they needed it. Investors did this to the tune of many billions of Euros. The propaganda about money having an inherent time value is thus clearly and demonstrably false. If someone mansplains to you with a superior air that money has a time value, you are justified in looking on them with an expression of pity for their foolishness and gullibility.
Today wealthy financiers have more money than they want to spend. They don’t really lend it out at interest based on a mental trade-off between the value of buying their 1,007th pair of shoes now or getting additional interest income. Money only has a time value to them because they can lend it out at interest. If they couldn’t earn interest or dividends or speculative profits, they would still leave it in the bank. But because interest charges are allowed, a selfish rational person wouldn’t let somebody else use their money for a year without getting back at least as much as they would have had if they had deposited it at interest. To say that we must pay interest because there is a time value to money, though, is circular logic, since that is only true if we pay interest. If we don’t pay interest, then money commonly does not have a time value, and so we don’t need to pay interest.
There is no moral tradition holding that it is right or just to make a charge for the “time value of money.” In a later post I will show that, to the contrary, moral tradition opposes such charges. Again, without a right and practice of making such charges money didn’t really have a time value. It just sat there. Governments are free to make laws restricting or prohibiting the charging of interest. They did so at the time of the Revolution, and they generally continued to do so up until the Volker interest rate spike in 1981, when the Fed subjected all of America to previously illegal interest rates and the banks took advantage of the opportunity to get state restrictions repealed. Forbidding interest charges purely for the time value of money would not be a taking of anyone’s property. Rather, for most of history in most of the world, the charging of interest for time value (with that time value being set based on whatever rate of interest the lender might get from borrower B if he didn’t lend to borrower A) has been looked on as a form of theft, a taking from the productive citizen of the rightful product of her labor to put into the pocket of someone who contributed nothing but idle gold. Laborism therefore seeks to eliminate any charge for the so-called time value of money (aside from limited bank deposits and some other lending as described below), as opposed to charges for placing money at risk.
The devil, as always, is in the details. Because we have long tolerated lending at interest, we have an economic system that in many ways is based on lending at interest. We therefore cannot wave a wand and abolish the practice overnight without first creating other ways to make idle money be available where it is properly needed. But that does not mean that laborism is just a Utopian vision. The laborist program has an immediate agenda that will eliminate the bulk of charging for “time value” without hurting the economy, and that will in fact make the economy more stable and productive.
First, as background, it is important to note that Article I of the Constitution provides that “No State shall … pass any … Law impairing the Obligation of Contracts.” There is no equivalent provision applying to the federal government. Therefore, Congress may use the Commerce Clause power or its other powers to provide that certain terms of debt instruments or other agreements should be prohibited or modified. Further, the United States stands in the useful position of being the greatest economic power in the world. Where other countries tend to lack the power to stand up to the international financiers and the governments and armies that do their bidding, America has the practical ability to do what it wants.2
Further, the international financiers are caught in their own trap. They have so much money that it is extremely difficult to dispose of it. US Treasury debt held by the public is currently $29 trillion. Total US GDP – all money spent for all purposes in America – for 2024 was $29 trillion. That included $5 trillion of investment spending. For the holders of US treasuries to cash out and spend their money, then, they would need to buy every good and service in the US market for a year and leave the entire rest of the US population starved in the dark, or they would have to increase all US investment by a factor of 5, which we absolutely lack any capacity to do. There is no place for that much money to go. Like the investors in German government bonds, if interest payments disappear or even if they went negative they would still need a safe source – here the US government – to hold their money.
Therefore, the American government has the Constitutional and practical power to simply declare that federal debt instruments no longer accrue interest. Payments on the debt instruments would still be made as scheduled, but any payments that would otherwise have been interest would then be principal, thus reducing the amount of principal to be paid when the instrument matures.
To protect ordinary American working people who have invested in Treasuries, they would be authorized to exchange their Treasuries for CDs in a federal bank (as described below) of an equivalent term. Total debt securities held by the lower 90% of the population amount to about $1 trillion, including both government and non-government, so this could be absorbed without much difficulty, effectively just paying off those treasury instruments when due.
The law could provide that likewise state and local debt instruments would no longer accrue interest, subject to the requirement that payments continue to be made as scheduled with the principal being repaid accordingly, and with a similar right of exchange for CDs of equivalent terms. The state and local governments whose debt was exchanged for CDs would be expected to repay that principal amount to the federal government on a feasible time schedule, either over the term of the original instruments or, if necessary, longer, but in general the interest savings to the governments should make repayment easier.
That brings us to corporate debt. Corporate debt basically comes in three forms. The first is commercial paper, short-term debt that corporations use to maintain their liquidity when they have uneven seasonal cash flows or hit a bump. Commercial paper is important to the economy. The only market that the federal government really should have protected in 2008 was commercial paper. Laborism would tolerate the continued use of commercial paper at levels equivalent to that in current circulation, though a maximum interest rate might be applied and gradually reduced. Limitations would be applied to prevent corporations from significantly ramping up commercial paper long-term as a means of avoiding the laborist reforms.
The second is bank debt. The banks do their best to fleece the corporations that produce actual goods and services, so corporations do not like bank debt. They use it as temporary funding when they buy another business for cash, or when they run into an unexpected problem, or sometimes for particularly large projects, as with oil platform development. Many corporations are sitting on huge piles of cash within their group, and can move cash around to cover the things that they would use bank debt for. In fact, a lot of bank debt is actually a mechanism that multinationals use to, in effect, move cash around in the group, depositing excess cash in one country and borrowing cash from another branch of the same bank group in another country. Corporations could figure out how to survive without future bank debt if interest charges were made illegal in the US, including through sale of the new-format stock. Corporations could still borrow abroad at interest to fund foreign projects, if they wished. The other laborist reforms would prevent that from hurting anything here in America.
The third is bonds. Corporations use bond debt mostly to finance two things.3 On the one hand, they use it to buy other businesses. Commonly it is undesirable to society for them to buy other businesses. They buy would-be competitors so that they can reduce competition, raise prices, and provide inferior goods and services. They buy innovators and make them less innovative. They buy companies because they have the delusion that when they buy a company from the people who run that company and who are intimately familiar with it, and who think that getting the purchase price is better than continuing to own the company, that the buyer will somehow be getting a good deal; 95% of the time, they aren’t. They buy companies because it makes their financial results harder to follow, so they can hide their failings more easily. If abolishing interest charges made it more difficult to do this, society overall wouldn’t lose anything.
On the other hand, they use bond debt to do stock buy-backs. Stock buy-backs benefit corporate executives by artificially raising the price of their stock compensation. That operates to transfer value from regular shareholders (who otherwise would get more dividends) to the executives, and is basically a form of theft. Stock buy-backs benefit Wall Street by making it appear that stocks are getting more valuable. Rising stock prices make working people feel like they are missing out if they don’t give their money to Wall Street to buy stock. Stock buy-backs don’t benefit regular working people or society. During America’s best years, they were illegal. If they became more difficult because interest charges were banned, that would be a good thing for society. Wall Street pressures corporations to borrow to do buy-backs, up to a certain debt ratio, because the interest payments are deductible and Wall Street likes the Earnings Per Share increases.
How often is bond debt used for actual investment in producing goods and services? Not very often. Start-up companies can’t borrow money because they don’t have the positive cash flows to support the borrowing. IPO companies use equity from all those excited new shareholders. Companies with stable operations generally can just use the cash they generate instead of borrowing and suffering interest charges. If interest charges were banned and corporations had to rely on the new form of equity if and when they needed cash for investment, our economy would do fine, assuming the other changes discussed below. The financiers will deny this and claim it would be the end of America, but that is not true.
Hedge funds and private equity firms (the companies formerly known as corporate raiders before they rebranded) use a lot of debt. Banning interest charges would presumably cut them off from access to loan funds. That would be good for society. There is plenty of good analysis out there showing the destructive effects of debt-fueled private equity in terms of eliminating productive activities and jobs and harming consumers and renters. Metlife Investment Management predicted that private equity ownership of single family rental homes would skyrocket from 5% of the market in 2022 to 40% by 2030. The Gordon Gecko business model hasn’t gotten any less bad for society. Even the LA fire disasters were aggravated by a private equity firm that concentrated the fire equipment industry, jacking up prices for equipment and maintenance so that much of LA’s equipment was unavailable. During the post-2008 free money era, the Fed made sure that parasitic private equity and hedge funds could borrow unlimited billions at low rates, subsidized at the cost of productive-class retirement savers. Laborism would simply shut down the ability of these parasites to borrow from anyone other than each other.
Laborism would ban interest charges on new corporate bank debt and bonds, instead leaving it to corporations to use risk-based investment instruments (which could come from banks, in a new business model). It would provide transition rules for existing debt. In return, it would provide for appropriate new government assistance in deserving cases as will be discussed in a later post.
Laborism would get rid of the time value of money component of various kinds of consumer debt – payday loans, refund anticipation loans, credit card interest, etc. - and cap interest rates at an amount that reflects the risk of loss to the lender. It would further help consumers by providing non-predatory assistance for their personal liquidity problems, while still maintaining incentives to keep stable employment and to accumulate a savings cushion. In our current system, the most honest borrowers, the ones who try the hardest to pay off their debts, suffer the most, effectively paying for the sins of deadbeats (including high-income deadbeats) who blow off their debts. The system should be rebalanced so that virtue is rewarded, not punished. However, such reforms require eliminating predatory practices designed to get people to enter into perpetual debt that they can’t repay, with the usurious lender raking in heavy interest payments.
Laborism would greatly improve the Small Business Administration to help small businesses to thrive without the burden of predatory bank debt. The new practice one sees in commercials of encouraging innocent would-be business people to run up high-interest credit card debt to fund their risky business investments would end. As one can again tell from commercials, we are long past the days when everyone graduating from an American high school understood the basics of small business bookkeeping and finance. Hard-working people with good ideas and energy try to start a business and quickly get under water financially, causing their useful businesses to fail. With better support and guidance, and if freed from unbearable interest costs, they can be helped to succeed, which will benefit all of us.
To defeat the power of compound interest, we must use compound effort. Please subscribe as a supporter (it’s free) and pledge to recruit at least 5 other people who each pledge to recruit at least 5 others. Recruit family, friends, co-workers, church members, union members, lodge members, people in your organizations, strangers. We can do this, but we each need to put in the effort
This would be enough to cover the average productive class family even in the top 10% of the population, and would be more than enough to cover the average family in the lower 90%.
America has long acted as the primary enforcer for the international financiers, using sanctions and death to punish anyone who tried to thwart their will. This is why other countries would have a very hard time switching to laborism. America, however, has the power to rebel and throw off the yoke of the financiers. Others may then follow. America’s destiny is to be a beacon of freedom, but as discussed below that will happen by America leaving everybody else alone, not by America “liberating” them.
Public utilities are more likely to use bond debt for capital expenditures, but they could easily switch to the new form of equity, just as they used to use a lot of preferred stock.