Wednesday, February 16, 2011

the great islamic contraction.

in a contracting global economy, in which the expansion bounce would become a rare and surprising event, ( like serious recessions have been in the 20th century), islamic interest free banking might just come into its own ?

for interest to be paid at even 2 1/2 per cent, the economic system requires growth.

but in a contracting economic system - inevitable where energy availability is declining - the savers still put away money in the bank which the bank accumulates and lends out to a smaller number of borrowers.

if the economy declines by 2 1/2 per cent, the saver - repaid the same amount - has enhanced purchasing power in terms of the real world. conversely, the borrower, while paying back the same amount, pays 2 1/2 per cent more in terms of what must now be sold to raise the money.

the world of banking is not as simple as that - but the illustration holds good. after all, borrowers and lenders ultimately do business through real, not nominal, interest rates. it is by variations and anomalies in real interest rates that one of them is rewarded and the other punished.

thus money will still be bought by borrowers and sold by savers in a contracting global economy.

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