The Interest(ing) Part of Debt – Part 1 by K. Kenneth Edusei

As a nation we have a combined 11.23 trillion dollars in debt. This sum is increasing because it is accruing interest. That any amount of money can accrue interest is in need of inquiry; that interest grow a debt infinitely is in need of justification. Defined by Investopedia as a fee for the privilege of borrowing money, interest can be calculated two ways: simple interest or compound interest. Simple interest is calculated on the initial amount loaned, known as the principle, without consideration of any new debt incurred. Compound interest allows for interest to be calculated on the principle and all interest accrued. This type of interest increases the principle amount owed by adding new interest created to the initial loan, then reapplying the initial fee to this new sum. Both methods are used to calculate interest, however variations of compound interest are standard for most loans.

Interest effects many types of debt directly such as school loans, credit cards, and mortgage payments. It also has broader affects which can be seen in areas like employment and consumer spending. Practically, interest can make buying things more expensive. It also can increase the cost of loans. Investopedia has a good explanation on the process of calculating compound interest. Currently the average interest paid on various credit accounts is 12.74% per year. This average annual interest rate may not seem excessive, but when applied to the average household debt, it can be extremely burdensome. Also, it is important to note the total debt owed by all Americans is 11.23 trillion. The amount of interest accruing on that figure is, of itself, a staggering number. Though our current debt is lower than five years ago, I remain highly skeptical of a system in which it is possible for debt to grow faster than it can be repaid. A financing model with the possibility of unsurmountable debt needs to be justified. It is clear that this type of system is unsustainable. The housing market hitting a breaking point, there is anxiety surrounding student loans, and the preemptive action taken on medical debt, is a clear sign there is a problem. Interest is an unsustainable way of financing the world.

There is a need for alternatives to an infinite interest bearing, and by extension debt bearing, system. Before I address alternatives, however, I would like to examine the principles that have created the current system. Interest, as a tool that is necessary, has been defended by economist, philosophers, and others. This ideal has been stated as a fact of our economic structure. It is necessary that a debt bear interest. In our early history it was called usury and it was banned. While some are defending the use of usury, it is obvious we are not lacking interest. What we are lacking is the justification for charging interest.

 

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