Interest is the phenomenon that somebody who lends money – or actually whatever other thing – to somebody that borrows it, wants more money back than it gave. This is impossible.
To give you an example. Imagine we have a library, and this library is the only entity in the world that can print books. Imagine it lends books to its customers and after one week, for every book that it lent out, it wants two back. For some customers it may still be possible. I may have somehow got the book from my neighbor (traded it for a DVD movie?), and I can give the two books the library demands for my one book borrowed. But that would just be passing the buck around; now my neighbor has to give back to the library two books, where he has none. This is how our economy works. And, to explain you what the current solution is of our society is that the library says “You don’t have two books? Don’t worry. We make it a new loan. Two books now. Next week you can give us four”. This is the system we have. Printing money (‘books’) is limited to banks (‘libraries’). The rest borrow the money and in no way whatsoever – absolutely out of the question, fat chance, don’t even think about it – is it possible to give back the money borrowed plus the interest, because this extra money simply does not exist, nor can it be created by the borrowers, because that is reserved to the lenders only. Bankrupt, unless these lenders refinance our loans by new loans.
When explaining this to people, they nearly always fervently oppose this idea, because they think that with money new wealth can be created, and thus the loan can be paid back including the interest, namely with the newly created wealth. This, however, is wrong thinking, because wealth and the commodity used in the loan are different things.
Imagine it like this: Imagine I lend society 100 rupees from my bank with 3% interest. The only rupees in circulation, since I am the only bank. Society invests it in tools for mining with which they find a mother lode with 200 million tons of gold. Yet, after one year, I want 103 rupees back. I don’t want gold. I want money! If they cannot give me my rightful money, I will confiscate everything they own. I will offer 2 rupees for all their possessions (do they have a better offer somewhere?!). I’ll just print 2 extra rupees and that’s it. Actually it is not even needed to print new money. I get everything. At the end of the year, I get my 100 rupees back, I get the gold and mining equipment, and they still keep a debt of 1 rupee.
A loan can only be paid back if the borrower can somehow produce the same (!) commodity that is used in the loan, so that it can give back the loan plus the interest. If gold is lent, and the borrower cannot produce gold, he cannot give back the gold plus interest. The borrower will go bankrupt. If, on the other hand, chickens or sacks of grain are borrowed, these chickens or grain can be given back with interest.
Banks are the only ones that can produce money, therefore the borrowers will go bankrupt. Full stop.
To say it in another way. If we have a system where interest is charged on debt, no way whatsoever can all borrowers pay back the money. Somebody has to go bankrupt, unless the game of refinancing goes on forever. This game of state financing can go on forever as long as the economy is growing exponentially. That is, it is growing with constant percentage. The national debt, in terms of a percentage of the gross domestic product (GDP) remains constant, if we continuously refinance and increase the debt, as long as the economy GDP grows steadily too. The moment the economy stagnates, it is game over! Debt will rise quickly. Countries will go bankrupt. (Note that increasing debt is thus the result of a stagnating economy and not the other way around!).
The way the system decides who is going bankrupt, is decided by a feed-back system. The first one that seems to be in trouble has more difficulty refinancing its loans (”You have low credit rating. I fear you will not give me back my books. I want a better risk reward. It is now three books for every book borrowed. Take it or leave it! If you don’t like it, you can always decide to give me my books now and we’ll call it even”).
Thus, some countries will go bankrupt, unless they are allowed to let the debt grow infinitely. If not, sooner or later one of them will go bankrupt. In other words, the average interest rate is always zero. One way or another. If x% interest is charged, about x% go bankrupt. To be more precise, y% of the borrowed money is never returned, compensating for the (100 − y%) that do return it with x% profit. In a mathematical formula: (1 − y/100) × (1 + x/100) = 1, or y = 100x/(100 + x). This percentage goes bankrupt. For example, if 100% interest is charged, 50% goes bankrupt.
To take it to the extreme. If the market is cautious – full of responsible investors – and decides to lend money only to ‘stable’ countries, like Germany, which lately (times are changing indeed) has a very good credit rating from the financial speculators, even these ‘stable’ countries go bankrupt. That is, the weakest of these stable countries. If only money is borrowed to Germany, Germany goes bankrupt. Apart from the technical mathematical certainty that a country can only have a positive trade balance – essential in getting a good credit rating – if another country has a negative trade balance (the sum, being a balance, is always zero). Germany needs countries like Greece as much as it despises them.
Well, in fact, this is not true. A country does not – nay, it cannot – go bankrupt for money borrowing. Not if it is an isolated country with its own currency, being also the currency in which the money is borrowed. It can simply print money. That is because the money is their own currency based on their own economy!!!