Your still asserting that interest is caused by the return on investment of capital and thus the interest rate reflects currently available investment opportunities that have that rate of return. If this was the case why doesn't more money get directed to these investments saturating them and dropping us down to the next tier of investments and a lower rate and eventually to zero?
Simple, because money (or rather, the economic surplus it represents) is scarce, and has uses other than investment. This is like asking why more production and competition don't get directed to a particular good and drive its price down to zero. As for why different investments have different rate of return, the answer is uncertainty. An investment with a
guaranteed return will tend to reach equilibrium with the interest rate, but a more typical investment involving a degree of risk requires a higher return to compete.
Further more your argument breaks down as soon as investment that is not for the purposes of investment is added to the picture.... Lots of lending is to non-investment activity without it being fraudulent. If a lender can lend to someone in need of some money to cover an immediate expenditure that their savings don't cover ... at 5% then they will do that first.
This gets back a bit to nybble41's claim that ALL that money in the 5% interest earning bank account is actually going out into productive investments with a 5% return on investment. I don't think it's at all reasonable to make that kind of leap of faith when we know that LOTS of loans are just for short-term consumer credit.
From the depositor's and bank's points of view it makes no difference whether the loan is for investment or consumption. The loan itself
is the investment which provides a 5% return. In the case of a business loan the return will generally come out of the proceeds from a capital investment, while the return on a personal loan is typically funded by foregoing future consumption. The former is easier to analyse in terms of accounting, but economically the personal loan is just as productive—it corrects an imbalance involving an excess of future income relative to the desire for present consumption, just as capital investments improve the balance between future supply and present supply when future demand is projected to be higher than present demand. (When future demand is expected to be
lower than present demand, capital investments are malinvestments.)
