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Saturday, August 16, 2008

The Fallacy of Microlending

In microlending, individuals make small loans to one another. The interest rate charged is higher than what a bank account would offer, but less than a credit card would offer. The rates I've seen were around 6%-8%.

Individuals don't have the magic money-printing power that banks have. Individuals can loan each other money, but they can't create new money. Microlending doesn't allow individuals to escape the Compound Interest Paradox.

Further, microloans aren't profitable for the lender. Why should I make a microloan for 6%-8% when inflation is really 15%-30%? The microloan isn't paying a positive inflation-adjusted return. If I want to protect my savings, I have to invest in inflation-hedged assets, such as stocks or gold.

The central bank credit monopoly distorts the lending market. Interest rates are held artificially low. An individual who loans money to other individuals, bypassing the banking system, either has to charge an extortionate interest rate or lose out to inflation.

A microloan is only attractive to individuals who don't qualify for a loan via the official financial system.

Unfortunately, an agorist has to fund his business via reinvested earnings. It isn't feasible to raise capital in the free market. Until the collapse of the State draws near, it won't be practical for individuals to make gold-denominated loans to one another. The implied interest rate of a gold-denominated loan is too high. If you make a Federal Reserve Point denominated loan, then the interest rate is probably lower than the true inflation rate, making the loan a bad deal than the lender.

The central bank credit monopoly means that the cheapest way to raise capital is *ALWAYS* through a bank. That's one key "benefit" of a central bank. The ability to raise capital to form businesses is stolen from individuals and given to the State (financial industry).

Until individuals achieve monetary freedom, other types of freedom are impossible.

4 comments:

Anonymous said...

Also do not forget that banks work on fractional mechanics and bouble entry accounting. When they make a loan it becomes an asset which increases in worth and makes new money creating more wealth for the banks, the intrest is a sidebar income. If you could make 1000's of % on the scam (fractional mechanics and bouble entry accounting) and pay taxes on low INCOME (6--8% interest return)you would jump on it. When an individual makes a loan its only interest earned baby.

Jonathan said...

Micro-lending for the super, super poor is cost effective. It helps shift a class of people into the market.

Anonymous said...

mico-lending does work, for both the lender and the borrower when it is the advancement of capital to kickstart a business. If the loan is to a collective, then more the better. The loan often servers a greater purpose than simply being a fiscal compound interest exchange. interest bearing debt mutates in the right conditions to become a lever for equity, this aspect of debt that i think needs to be more effectively included in the debt discussions, as its exclusion is leading to erroneous conclusions. if an individual has some seed capital, debt leverages their personal wealth if they generate genuine economic assets through business. The banks have a legally protected monopoly not as part of some global conspiracy, but as an implicit recognition of this service, they also get regulated a lot (which is always a loosing game for the regulator as you may block 99% of bad things, which never get publicised, then 1% get through or general structural trends which are uncertain run ahead of total legal power and you're done for again, but that's another story).

Micro lending when done well multiplies the wealth and owned assets of people rather well. The assets are often intangible and therefore the lenders are exposed to default, but when structured correctly the default rate is low and manageable. The repayment of principle and capital is possible for the borrower, which is a great incentive to build value for themselves.

for the lenders part its good business, as if structured well the default rate is low so the uplift over traditional personal loans is greater than the strict APR difference.

Briefly to the wider point about the growth of the money supply, the inflation rate is not the same as the growth in money supply (M3 or similar). The core reason is that the increase in the money supply is mainly absorbed in greater economic activity through the physical need for more units of account. However, the system we have is far from perfect, and further from fair, as the distribution of new units of account is multiplicative to existing units, thus if you have money you broadly do better yet if there is more of it about. For the majority of people the most sensible concept of inflation is that of property, as it’s the only hard, limited asset that most people require for life. Property inflation is a reasonable proxy for the alternative rate of interest to personal loans (as a deposit for a property would grow at that rate and it has an economic value beyond that of a unit of account).

Micro lending is like all debt, whether it is ‘good’ or ‘bad’ depends not on its innate nature, but on the situations and conditions under which the participants engage with it.

lordi said...

What I've seen happening on those microlending sites popping up every here and there (America and Europe), those who lend money, are not making money at all. They seem to be donating their savings to those, who know better how to spend them (and not paying back).

Risk of no payback is too high compared to the interest the lenders are taking.

Btw, why you say inflation rate is 15-30%???

Where are you living? In Zimbabve?

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