NGO
Another Way (Stichting Bakens Verzet), 1018 AM
01. E-course :
Diploma in Integrated Development (Dip. Int. Dev)
Edition
01: 28 November, 2009
Study points
: 06 points out of 18.
Minimum study
time : 186 hours out of 504
The points
are awarded only on passing the consolidated exam for Section B :
Solutions to the Problems.
Fifth block : How
the third block structures solve specific problems.
Study points : 02 points out of 18
Minimum study time : 54 hours out of 504
The
points are awarded only on passing the consolidated exam for Section B :
Solutions to the Problems.
Fifth block : How
the third block structures solve specific problems.
Section 3: Credit crisis. [5
hours]
02.00 Hours analysis of Model material.
02.00 Hours in-depth analysis.
01.00 Report.
Section 3: Credit crisis. [5
hours]
Analysis of Model material.
(At least 2 hours)
The issue of
interest was raised in the part debts and subsidies
of section 1 analysis of the causes of poverty of the
first block poverty and the quality of life of the
course.
Acquaintance
was made in the in-depth analysis of the
basic concepts in section 3 financial structures of the fourth block the structures
to be created with the concept of unearned income
(interest).
The dominating debt-based financial system.
The
interest-factor.
The cumulative interest content of a typical
western industrial product is thought to be at least 40% of the cost to the end
user. It may sometimes be more. This interest content normally exits promptly
from local consumer areas never to return. Little, if any, of the purchasing
price of an imported item is recycled locally. Commonly, not even local savings
are invested locally for local development purposes.
The currently
dominating “capitalist” economy is debt-based. Most money, these days about 98%
of it, is created or put into circulation by privately-owned banks against
interest. Most business organisations, but also public bodies and even
governments, finance their activities by way of interest-bearing loans issued
by private banks. This means the total amount charged to end users by those
involved in the production of goods and services must take into account and
include the amount of interest incurred during the various phases of that production.
Cumulative
interest in supply chains.
A supply chain is a
series of commercial links between the first steps in planning and preparing
for the exploitation of raw materials or equipment for a given product or
service before a product or service reaches the final consumer. In the modern world, especially in
industrialised economies, supply chains can be very complex. There may be many
hundreds, even thousands, of steps in the progress made by a manufactured
product or service from its conception to its final destination.
The following simple supply
chain is purely notional. In reality the supply chain in such cases is
infinitely more complex. It will often have many more steps than in the
following example.
Assume oil has been
found in a desert area. A well has to be drilled to tap the oil supplies. An oil-drill
is needed together with other materials and equipment to drill the well. The
contractor building the factory where the drill is produced, may have borrowed
money against interest to cover the cost of buildings, equipment and materials
costs. The costs of the factory where the drilling machine is made includes an
amount to cover that interest (level 1). This interest must in turn be covered
in the price the drilling manufacturer charges for his drilling equipment. He
may have borrowed funds for his factory and for the purchase of materials and
equipment to build the drilling machine (level 2). The price of each drilling
machine therefore includes coverage for part of the interest originally charged
by the contractor for the factory, together with partial coverage for the
interest paid by the drilling machine manufacturer for his materials and
equipment. The company drilling the well may have to borrow money to buy the
drilling equipment (level 3). Its price for drilling the well must therefore
cover part of the interest originally charged by the contractor (level 1), part
of the interest charged by the drilling machine manufacturer (level 2), and the
interest on his own loan (level 3). The same applies to the cost of the
pipelines transporting the oil, the construction of the ports for the ships,
the construction of the ships transporting the oil, the ownership of the ships,
the running of the ships, the storage facilities for the crude oil, the oil
refinery, the entire distribution system all the way down to the tank station
where the refined fuel is sold to the public.
Interest built into
prices this way is cumulative. On the way along the commercial chain, interest
is paid on loans taken out to cover prices which also include earlier amounts
of interest. More interest is being paid on accumulated interest at each link
in the chain, all the way down the line.
The VAT value added
tax structure widely adopted in industrialised countries is different and
complementary. Under the VAT system, a given rate of tax is applied on the
effective sale price at each passage, and the same rate of tax applied to costs
at that level is deducted. The intention is that sales tax be applied on gross
business profits at each single level. The final consumer pays all. Each supplier,
manufacturer, and retailer is accountable to the state for the VAT tax on his
gross-profit share in the price build-up. Interest accumulated at each single
level in the price build-up is included in the taxed amount, though it is not
easily identifiable and is difficult to trace.
In practice, then,
not only does the amount of interest included in the price of a given product
or service accrue (increase) during its voyage along the supply chain as described.
It is also subject where applicable to sales taxes and other charges which are
also profit, including the interest content, as it accrues.
The interest content of a given product or service and
the taxes paid on it are unproductive and parasitic. They have nothing to do
with the inherent value or usefulness of the product or service in question.
The interest paid by the final purchaser meanders back to the banks who made
the original loan at the various links in the chain in the first place. Since
the interest paid is not cancelled on return to the issuing bank, it is free to
circulate at a vertiginous speed around the world in real time. It becomes part
of an ever-increasing uncontrolled volatile speculative money mass in the hands
of a non-elected financial elite, often of dubious ethical background. The
recent credit crisis provides an excellent example of this.
The total accumulated interest and the taxes included
in the price of a given good or service are fully paid by the final consumer. Without
it, average prices for industrial consumer products and services would on an
average be just one-half to sixty percent of what they are today. Perhaps less.
Final user borrowing.
The final consumer may also have to borrow money to
pay for the good or service he is purchasing. In this case, not only does he
have to pay for the large interest content already built into the price
including interest and taxes as described. In most cases he also has to pay
interest on the funds he gets from the bank to be able to do so. These interest
costs must be added to the price (which includes interest accrued during the
production process and the taxes on the
interest) the buyer has agreed to pay for the good or service. The amount the
buyer borrows expressed as a percentage of the cost of the goods or service in
question can, of course, vary from 0% to more than 100%. For many “special”
consumer items including motor vehicles and housing, the percentage in the
western world tends towards 100%. In
some countries such as the
Interest rates may
be quite low for real property investments, but they easily reach 10% per annum
in real terms for consumer items bought on credit. The longer the credit period
is spread out, the higher the percentage of real interest expressed as part of
the purchasing price of the good or service in question. In general, the poorer
the buyer, the more interest he is expected to pay, while payback time will
also tend to be longer. Annual interest rates in poor countries can be 20% or
more. These comments relate to official markets and interest rates. The
situation is worse still in the presence of
black market and usury practices.
Where accrued interest built into prices is at least
40%, and where interest on the funds borrowed to make the purchase is up to 10%
(per year), the total combined interest content is 50% or more. Where sales
taxes are applied on the interest content, another 5-10% can be added to the
unproductive content of the price of the product in question. These figures may
be considered conservative.
The principles
applied to the industrial production chain are also true, perhaps to a lesser
extent, for the food and fertilisers industries.
What happens to the
interest?
The following is a generalised summary of what happens
with interest under the present ruling economic system. In reality the system
is more complex. Each comment made here is subject to many variations.
Where a buyer
purchases a product or service, the price is usually paid to the seller. The
payment may be in cash, or it may be credited to the seller’s bank account.
There are also other ways of making payment. One way or another, most funds
usually finish up in the private banking system, first at the level of the
local branch of a bank, then at national level, and then (often) at
international level.
Sooner or later,
somewhere along the banking chain, the bona fide capital part of the funds representing
the value of labour and materials
invested in the product or service purchased by the final consumer will be used
as a credit. The credit will cancel a corresponding debt of the buyer in the books of the bank which issued
(created) the loan in the first place. The bank itself wrote the loan into its
books as a credit to itself and a debt to the buyer. Repayment of the loan is
treated as a corresponding credit for the buyer. The buyer’s balance with the
bank, and therefore the bank’s credit with the buyer offset each other .On full
repayment by the buyer they are both set at zero. The two transactions (the
loan and the repayment) are both part of the formal bona-fide productive part
of the economy. Where production takes place outside the area of residence of
the buyer, these money usually leaves the local buyer’s economic system to
return to the one where the goods or services were produced. In this case, even
the bona-fide productive part of transactions represents financial leakage from
the buyer’s area.
The accumulated
interest which (together with related tax loadings) is an important part of the
final purchase price also finds its way back to the ones, usually banks, who
“created” the loans in the first place. The interest represents unproductive,
or unearned, income. For this unproductive part of the purchase price no formal
credit entry (bank) and debit entry (buyer) was made in the bank’s books. It
remains in circulation at the will of the banking system as part of what we
call the paper, or the speculative, economy. This usually happens at national
or international bank levels. This interest is never cancelled from the books
of the banks. It is sometimes, but not
often, fed back into the productive part of the economy in case of economic depression.
Mostly it is held in paper or “liquid” form for world-wide speculative
manoeuvres on currencies or “invested” in real property or in the share
markets. The prices of property and
shares increase and become inflated. People who wish to buy real property or
shares therefore have to pay more for them. To pay for them they often have to
borrow more money, on which more interest has to be paid. The unproductive
speculative cycle continues this way indefinitely….until the whole system
temporarily collapses where the productive part of the economy is no longer
able to support all the interest payments. This is the case with the present
credit crisis.
Debt in developing countries.
In
some ways the poorest people in developing countries have an advantage over the
“rich” in industrialised countries as they often have no personal debt to
finance. They survive on their own work without subsidy and without external
interest-bearing “financing”. Unfortunately, the same cannot always be said of
their governments. These have, under pressure from international (western)
lending organisations, borrowed money against interest for purposes which have
rarely, if ever, led to real, on-going improvement of the quality of life of
the ordinary people.
In
the absence of debt-relief measures, governments of developing countries not
only have to pay their loans back, but also interest on the loans as well. In
order to pay the interest back, they have to take out more loans, in an
exponentially increasing debt-trap spiral. The only alternative governments of
developing countries have is to reduce their expenditure for goods and
services. In poor countries this usually means reducing expenditure on already
scarce basic services such as health and schools and on the maintenance of
basic infrastructures such as roads. In recent times they have actually been
forced to reduce expenditure this way by institutions such as the World Bank
and the International Monetary Fund under their iniquitous Structural
Adjustment Programmes.
Independent financial structures set up during project execution.
Money as a
catalyst.
Libraries have been
written on the subject of money. For our purposes, money is viewed as being
itself without intrinsic value. The metal used for coins might have some limited
value if recycled in the real productive economy. However the intrinsic value
of coins used for transactions today is an irrelevant part of the total value
of the money supply. Bank notes and coins together account for less than 2% of
total money supply in industrialised economies. Coins account for just a tiny
part of that 2%.
The “money” we usually refer
to acts as a “catalyst” so that a commercial transaction can take place. There
are at least two parties to a transaction. Most typically, these are the seller
of goods or services and the buyer of them. The seller passes his goods and
services to the buyer. Let us assume that the goods and services represent 10
productivity hours of the seller’s life. To pay for them, and for the materials
used, the buyer must himself in turn supply goods and services for a similar
value, usually to a third party. Let us assume for convenience that those goods
and services represent 10 productivity hours of the buyer’s life. The perceived
value of the goods and services supplied by the buyer to third parties is then,
in principle, in balance with the perceived value of the goods and services
bought by him from the seller. The money, which is used as the catalyst for the
transaction, enables the seller to take his time to buy goods and services from
third parties for the same value. The real contract between the buyer and the
seller is, in fact, about the productivity hours needed by the seller to make
or perform the goods and services he sells to the buyer. These are balanced by
the productivity hours needed by the buyer to produce the “credits” necessary
to buy those goods or services. Allowance must always be made for variables
such as working speed and efficiency of the parties and the techniques they
use.
Catalysts other than coins,
bank notes and pieces of paper, such as shells and grain, have in the past been
accepted by members of communities and successfully used as means of
transactions for the same purpose, sometimes for centuries. Any material or
immaterial item or concept can be used as a basic transaction catalyst,
provided the members of the community involved agree to adopt and apply it.
In the Model, the means, or “catalyst,
used is the subjectively perceived value of an hour’s work.
No catalyst, no transaction
Where no commonly agreed
transaction catalyst is available, trading other than direct barter between any
two parties cannot take place. One alternative to barter trading would be
theft. While commonly practised, theft is not considered a viable alternative
in this work.
Financial leakage.
Where more goods
and services are bought by individuals, families, groups, or communities than
they can produce or sell financial
leakage occurs. Financial leakage due to trading, interest payments and
“export” of savings funds means that the limited amount of formal money that
reaches rural and poor urban areas in less developed countries is usually
immediately sucked out of the area again. The poor areas are left without any
means for transferring goods and services, including goods and services
bought and sold within the area itself.
Economic development there is blocked.
1.
Opinion.
Bank earn their money from the
difference between the interest they charge their clients for the money they
create, and the interest they pay to their clients with a surplus of funds in the form of
deposits. Most of the profits of the banks depends on the total amount of money
they are able to create. The more the money created, the higher their profits.
On one page, relate this concept to the recent (current) bank crisis.
2.
Opinion.
To issue new money banks have to find
ever more «marginal» clients, running ever greater risks. On one page, relate
this concept to the recent (current) bank crisis.
3. Opinion.
To resell (transfer) their greatest
risks to third parties and at the same time retain margins for profit, the
banks construct financial formulae that are so complex that very few people can
understand them. The creation of these formulae calls for highly paid special
qualities with very high bonuses. On one page, relate this concept to the
recent (current) bank crisis.
4.
Opinion.
One of the services demanded of te
magicians of the banking world is to create instruments enabling the banks to
hold packages of derivative
credits/debts outside their balance sheets. On one page, relate this
concept to the recent (current) bank crisis.
5. Opinion.
An article dated 12th December 2006 by the journalist Robert Gavin in the
American newspaper The
◄ Fifth block : Section 3: Credit crisis.
◄ Fifth
block : How fourth block structures solve specific problems.
◄ Main index for the Diploma in Integrated Development
(Dip.Int. Dev.)
"Money is not the key that opens the gates of
the market but the bolt that bars them.
“Poverty is created scarcity.”
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