How to replace the myth of compound interest

[cbeast]

There was a time when bank deposits earned interest. If you kept your money in the bank long enough, then the interest earned would itself accrue interest. This was called compound interest and was the foundational incentive to encourage saving. Apparently this was merely a ruse to cover up the ponzi scheme created by the central bank to inflate the ecconomy. Now banks pay little or no interest, yet people still believe in the myth of compound interest.

Bitcoin deposits in an investment bank could hypothetically yield interest, but there is no guarantee of growth because they cannot just print the money to meet the depositor's promised rate. There have been arguments made to add a savings incentive to the Bitcoin protocol, but it is too unbalanced toward the richest savers only. There have been suggestions to change the protocol to discourage savings which has been met with disinterest.  We are left with two choices. Savers will become hoarders and keep their savings offline with the hope of deflation, or stock investors that place their holdings at risk. Even if you hold a stock for a long time, there is ever growing risk of stock manipulation. There is no safe in-between anymore. Some might say we are left with the problem of a safe middle ground.

Here's the thing. We will no longer have the problems created by the central banks, like funding unnecessary wars. We will no longer have treasuries printing corruption of public officials. We will have an even greater dividend from Bitcoin; peace and the greater technologies that will emerge. Bitcoin will pay us something better than compound interest, it will yield peace and progress.

tl;dr It is time to debunk the myth of bank savings and inflationary compound interest and replace it with compound progress.

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[CIYAM]

Agreed - when I was young even a "standard" savings account at a bank earned compound interest - but now unless you have over 5K and pick the right account (which they don't tell you about by default) you end up with *zero* interest.

The current system is failing and that is why Bitcoin appeared at pretty much the perfect time (maybe that's why it didn't appear before).

[DublinBrian]

In the distant past there were "demand accounts" (aka "current account") which paid no interest, because theoretically the bank could not lend out your money, because you could walk in and "demand" it all back at any time.

The other type of account, was called a "fixed term account", where you lent your money to the bank for a specified amount of time. These accounts did pay compound interest because the bank could lend out your money at interest.

The only reason to use the first type of account, was for keeping your money safe, or facilitating transactions. Under a bitcoin monetary system, there would be no need to put your bitcoins in a non-interest paying "demand account".

The second type of account will continue to exist under a bitcoin monetary system. People who would like to earn interest on their bitcoins, will give them to a bank to lend out. The bank will make their profits by the difference between the lending and deposit interest rates.

However, depositors earning interest in a bitcoin bank, will carry more risk than in a fiat system, because if the bank makes losses on their loan book, they will have to pass that loss on to depositors, if they dont have enough capital to absorb the losses themselves.

A central bank will not be able to rescue an insolvent bitcoin bank, because the central bank will not have any special ability to create bitcoins or access credit in bitcoins.

Depositors in a bitcoin bank should do their homework and make sure the bank is well capitalised. If not they should purchase deposit insurance.

[hazek]

Nice post cbeast, couldn't agree more.

[herzmeister]

I always explain these "compound interest myth exponential growth unsustainability" folks that the concept of interest that we have today shouldn't exist in the first place.

Money doesn't come from nothing. If something gives you the impression that it does, then the real mechanics are just cleverly hidden.

In reality, you lend someone your money for their business. It's your risk. You may win, you may lose.

On a stock market, if you compound your dividends, then the value of the stock rises and would eventually be overvalued.

All a bank does is connecting loaners and debtors. The bank must balance interest rates in order to stay even. If people compound their savings, interest rates for savers must drop. If there are more debtors, the interest rates can be risen again.

But because we have monetary politics and a central bank that sets a key interest rate, we fiscally have a planned economy.

[vokain]

wow, this really puts things into perspective after being a part of the whole BTCST debacle a year ago. man, society has been fuckin robbed by bankers :/

[Kluge]

I always explain these "compound interest myth exponential growth unsustainability" folks that the concept of interest that we have today shouldn't exist in the first place.

Money doesn't come from nothing. If something gives you the impression that it does, then the real mechanics are just cleverly hidden.

In reality, you lend someone your money for their business. It's your risk. You may win, you may lose.

On a stock market, if you compound your dividends, then the value of the stock rises and would eventually be overvalued.

All a bank does is connecting loaners and debtors. The bank must balance interest rates in order to stay even. If people compound their savings, interest rates for savers must drop. If there are more debtors, the interest rates can be risen again.

But because we have monetary politics and a central bank that sets a key interest rate, we fiscally have a planned economy.

Well-said.

It should also be noted, that while some people may oppose these "zero-growth" accounts, banks pay for this in consumer services, which typically make up roughly 2% of deposit amount per year. CUs, for example, offer subsidized rates on short-term loans, payday advances, etc. Checking, free notary service, etc -- all this has a price, and these services have effectively replaced interest. Financial institutions are spread thin because they think they can do everything... unsure how it will play out.

Some in here may wish to look up Paypal's short-lived MMA accounts, of which I was a member. As far as "compound progress" goes - I'll again note Bitcoin is a tool, not an end. It could end up being the enabler of evils we could have ever imagined - and it's important, that while this's is a great tool, we actively "do" good with it, not just promote Bitcoin. Evil things can and will be done with Bitcoin, so we need to DO, not just talk, to get that first-movers' advantage.

[halfawake]

Compound interest still exists, it's just not risk free any more.  With the traditional financial system, compound interest exists in the form of the stock market.  It's not risk free, of course, you risk companies going belly up, but if you're smart about how you invest, you can make money, especially if you don't trade individual stocks very often, that's the truly risky part of the stock market.

[bitzox]

In the distant past there were "demand accounts" (aka "current account") which paid no interest, because theoretically the bank could not lend out your money, because you could walk in and "demand" it all back at any time.

The other type of account, was called a "fixed term account", where you lent your money to the bank for a specified amount of time. These accounts did pay compound interest because the bank could lend out your money at interest.

The only reason to use the first type of account, was for keeping your money safe, or facilitating transactions. Under a bitcoin monetary system, there would be no need to put your bitcoins in a non-interest paying "demand account".

The second type of account will continue to exist under a bitcoin monetary system. People who would like to earn interest on their bitcoins, will give them to a bank to lend out. The bank will make their profits by the difference between the lending and deposit interest rates.

However, depositors earning interest in a bitcoin bank, will carry more risk than in a fiat system, because if the bank makes losses on their loan book, they will have to pass that loss on to depositors, if they dont have enough capital to absorb the losses themselves.

A central bank will not be able to rescue an insolvent bitcoin bank, because the central bank will not have any special ability to create bitcoins or access credit in bitcoins.

Depositors in a bitcoin bank should do their homework and make sure the bank is well capitalised. If not they should purchase deposit insurance.

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