Interest - Affect on Society...

[Team 17]

I read the following statement and would like to know how accurate it is, what do you reckon?

[i]Let us consider an economy that has £100 of money in total and that £100 has been lent out to the people. If the interest rate at which the bank has lent is 5%, then £5 will need to be printed by the bank the following year. Only then can the £105 owed, be paid back to the bank.

The economy now has £105 chasing the same number of goods and services, which will result in prices rising. Therefore, the application of interest in a society causes inflation. Inflation devours the wealth of everyone in society, since it causes money to become less valuable. £100 next year will not buy the same amount of goods and services as £100 today.
[/i]

Edited by Team 17 on Thursday 8th July 10:37: Not sure why the italics tag isn't working, oh well.

Edited by Team 17 on Thursday 8th July 10:37

[cmsapms]

Effect, surely?

[Team 17]

cmsapms said:

Effect, surely?

Yes, you are right. I spotted it after I had posted it and not sure how to edit titles. Thanks for pointing it out though.

[emicen]

This is only accurate where the economy does not grow or shrink and money is not lent outside our economy.

[Neil H]

That's basically how inflation comes about, discounting other factors.

[Plotloss]

That's a gross over simplification isn't it?

Look at the 'Fractional Reserve Banking System'

[fido]

It the printing of money bit that causes inflation, increasing interest rates should actually reduce inflation and vice-versa. Team 17, you've missed out the bit where the Bank lends the £100 out to a borrower at 5.5% and pays it's shareholders a bonus

Edited by fido on Thursday 8th July 11:19

[Stevenj214]

Team 17 said:

Therefore, the application of interest in a society causes inflation.

I thought inflation 'caused' interest.

[CaptainSlow]

Team 17 said:

chasing the same number of goods and services

so no one makes or does anything?