Excellent analysis. Now add in inflation, risk, and time-preference.
You mean monetary inflation?
When central banks issue more currency to fight deflation, the liquidation process is postponed but not avoided. Some of the new investments not based on real loanable funds but in inflation are made and the unavoidable collapse of credit becomes even worse.
When I said interest, I meant
basic interest, excluding risk premium. If the lending is risky, the borrower acquires at the same time a loan and an insurance. While the basic interest can be suppressed through demurrage (freigeld) or money abundance (LETS), the risk premium has to stay.
Time-preference is not applicable to all goods and services. It wouldn't be applicable to money with demurrage. No one would prefer to save fish forever instead of lending it because fish decays. Time-preference belongs to the
"abstinence theories" by the terminology of Boehm-Bawerk, but I don't think the austrian school is correct in this particular point.
To remove your prejudices regarding interest and time preference, I recommend you
this short story.
There is only one kind of inflation. If you want to call it monetary inflation, feel free.
Although they're related, I like to distinguish between monetary inflation (money printing) and price inflation (rising prices) to avoid misunderstandings. Monetary inflation is taken into account in my later explanation. Price inflation was already in the first analysis.
A moment's thought should convince you that an insurance premium is exactly the same as a higher interest rate.
But there's a basic interest that doesn't disappear with perfect secure lending. I guess you attribute it to the time preference.
Time preference is indeed applicable to all things. The only way it couldn't is if you assume it only goes in one direction at all times and for all things.
No. Why should I prefer everything now instead of later? Things rot and capital depreciates with its deterioration.
The utility of a liter of milk today doesn't include the utility of a liter of milk in a year, because you won't be able to safely drink it in a year.
With demurrage you could prefer 100 coins next year rather than 100 coins today. Money, an artificial good, a symbol of value can have the qualities that its users decide it to have. Their users will chose a currency with demurrage if it has advantages, for example, cheaper
trades and loans.
The island story doesn't remove prejudices, it just tries to replace them. Also, it doesn't apply here, because you were talking about money.
I don't understand how are you still convinced that is always better to have a loaf of bread today than tomorrow. It is so clear to me that it depends on the concrete circumstances of the owner of the bread...
Why bakers sell on credit (without interest) then? Wouldn't they be better keeping the bread although they can't sell it tomorrow?
I suppose I should also point out that inflation is indistinguishable from currency demurrage, in practice.
I don't think so, but it is a common claim.
Isn't demurrage equivalent to inflation?
No. Their impact on the gross interest is the opposite. Demurrage removes the privilege that lenders have over borrowers and the demurrage is substracted from the basic interest.
With inflation, the money holder could just buy things and sell them later at a higher price. That has to be taken into account when negotiating the interest.
This is added to the
gross interest in the form of inflation premium (Hausse-premium in the text).
The reason why we have low interest with inflation today is the way the inflation is created.
Central banks monetize debt by buying bonds and giving cheap loans to banks. This way, when the real savers (not the central bank) go to the financial market they find that some borrowers (the banks and the governments) have already obtained its funds with cheap loans and they have to lower their prices (their interest) to meet the demand that the central bank has decreased.
Real savings have to be balanced with investments and that's in my opinion the most important lesson from the austrian school. But that's not incompatible with demurrage.
They found out that increasing the money supply doesn't solve the problems of deflation, just postpone and aggravate them.
But with demurrage you incentive money circulation without increasing the money supply.