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Saturday, March 29, 2008

No-Interest Contracts

In order for a contract to be legally binding, both parties most contribute something of tangible economic value.

Suppose I write a contract to sell you my car for $0, and you offer me nothing in return. That isn't a legally enforceable contract. You can't sue me and demand I give you my car. This is a "no-interest contract".

With fiat debt-based money, *ALL* loan contracts with a bank are no-interest contracts.

What happens when you take out a mortgage or loan? The bank literally prints new money and loans it to you. The bank isn't performing any real work. The bank pretends to "screen your creditworthiness". Once you "qualify", the bank does no real work when it writes you a check.

What about the individual who takes out the loan? He doesn't have the banks' magic money-printing power. In order to repay his loan, he must work. In order to repay a loan, an individual must produce tangible goods and services. Even worse, due to the Compound Interest Paradox, an individual can repay his loan only because other individuals are making bigger loans.

Contrast this with a gold standard. In that case, the bank *IS* providing you with tangible goods. It is lending you gold, or paper promises that are convertible to gold. Banking regulations encouraged fraud by banks. In a *TRULY* free market, banks that make gold-based loans are providing tangible goods and services.

According to common law, all bank loan contracts are invalid no-interest contracts. The bank doesn't provide tangible goods or services when it makes the loan. Unfortunately, a corrupt legal system recognizes these no-interest contracts as valid. If you default on a bank loan, monopolistic State police will violently seize your property.

During the Great Depression, some bankers famously wrote about the importance of enforcing illegitimate debt contracts. Seizing foreclosed property is a fundamental aspect of a corrupt monetary system. The people who lost their homes due to the Subprime Mortgage Problem did not lose their homes legitimately. Such periodic crises are built into the rules of the US monetary system. It is a statistical necessity that a certain number of defaults occur in each economic bust. Unfortunately, it isn't feasible to make such an argument when State police are violently kicking you out of your home.

That doesn't mean you should borrow money from a bank and then default. The correct way to boycott a corrupt monetary system is agorism. Use sound money, refuse to pay taxes, and ignore stupid regulations.

Having a mortgage is actually beneficial, because real interest rates are negative. You can invest the proceeds elsewhere for a profit. However, you don't know when the next economic bust will occur. Large banks assume no risk due to economic cycles, but as an individual you can lose everything due to margin calls during an economic bust.

Sensible use of leverage, via the Kelly Criterion, allows individuals to profit from a corrupt monetary system somewhat. An individual can't profit to the same extent as a bank, but you can still use leverage to earn a positive inflation-adjusted return.


David_Z said...

i noticed this week that your posts are appearing several days prior to their timestamps. Are you living in the future now?

Diogo said...

Hi! I’m portuguese, so excuse me if my english isn’t great.

I’ve found your blog and I think it is very interesting. I am really interested in this subprime thing. But I think you miss a point: the really owners of the commercial banks are the owners of the FED and the ECB. So, this is all a very great scam.

There’s no liquidity problem. The two ways you have to reduce money are: the central bank absorb it, through selling bonds or whatever, or if people hide it in the mattress. None did happen.

So, what is happening is that the central banks are injecting trillions (with interest) and the commercial banks are multiplying that by ten. It’s the robbery of the XXI century.

Diogo said...

Was Alan Greenspan really as dumb as he looks in creating the late housing bubble that threatens to bring the entire Western debt-based economy crashing down?

Was something as easy to foresee as this really the trigger for a meltdown that could destroy the world’s financial system? Or was it done, perhaps, "accidentally on purpose"?

Anonymous said...

Fiat money has no tangible value. Therefore any contract involving payment in fiat money is a no-interest contract. Income taxes are therefore not legally binding. Property taxes are therefore not legally binding. Death taxes, birth taxes, poll taxes, breathing taxes, and farting taxes are not legally binding. "Legal tender" laws are not consistent with a free society and are illegal laws. In fact, no current law is legally binding, because the State has provided nothing of tangible value in return for making those laws. Forcing me to accept the State's "contract" is duress and that contract is not legally binding.

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