Thomas Kubo – Compound Interest and International Debts

Aug 10, 2020 by

Thomas Kubo, a writer and activist from Germany, spoke with the students of AEMS regarding the role interest rates play as a driver of economic growth. Many of the ideas Mr. Kubo used in his lecture originated from Helmuth Creutz, a German architect and author who analyzed the economic system. The overarching point of the lecture was that a monetary system with high compound interest rates has negative social and ecological consequences. Kubo argued that, though counterintuitive, low interest rates benefit the health of the economy.

An undesirable social effect highlighted in the presentation by Kubo was the role of interest in exacerbating wealth inequality within a society, as the interest burden is distributed unequally among the population. Kubo argued that we pay interest not only on loans, but that interest is contained in any product we buy, as it is common business practice to use borrowed money to finance production factors, e.g. machinery. The interest paid on these loans is therefore contained in the final product price. As the interest paid adds up along the value chain, interest may constitute quite a large share of the product price. An additional source used argued that the interest contained in rent may be as high as 77%. While people with more money profit from interest, people with less wealth are the ones that suffer under the burden of interest driving up commodity prices. Kubo presented a graphic where the population of Germany was broken out into decile groups, with the amount of interest paid, and interest earned, visible for each group. For the lowest four decile groups there was no interest earned at all, as one can only earn interest on invested wealth or savings, both of which the poorest groups in society do not possess. Already, the game is rigged. On top of that, only the top two deciles make more interest-profit from savings than they pay in interest. By this mechanism, positive interest rates pull the most money from the poorest in society (relatively speaking) and benefit the richest the most, thereby increasing inequality. Kubo proposes that maintaining a near-zero interest rate would thus have a beneficial effect on wealth equality. Alternatively, he suggested that a demurrage fee, which is effectively a “punishment” for hoarding money, would lead to the same effects.

In addition to this within-country effect, interest rates are also a larger burden for “developing countries” as they often receive loans at such high rates that it is impossible to pay down the principle on a loan. This effect serves to maintain and exacerbate between-country inequality. Two additionally proposed short-term measures which could help to mitigate inequalities between as well as within countries where a tax on financial transactions, and debt relief (or a longer time horizon for repayment without rising interest rates). The measure to extend debt repayment time becomes especially relevant given the economic downturn caused by the Corona crisis and could be attractive for creditors in order to avoid failed repayment.

In addition to these issues of equity, Thomas Kubo connected interest rates to ecological effects through the concept of planetary boundaries and Kate Raworth’s donut economy. An economy based on debt issued with compound interest rates needs to grow exponentially, which will inevitably lead to the violation of the planetary boundaries.

Written by: Colleen and Lukas

Based on the session with Thomas Kubo during the AEMS 2020.