There seems to be a flaw is Marc's argument below ("leave an interest-bearing loan device on its own and debt will grow towards infinity"): Interest must be paid regularly or the loan will be called in. The monetary system's design does NOT include allowing interest due to grow indefinitely. So, any model that simulates the process should assume either regular interest repayments (to ensure that interest due does not grow indefinitely) or a loan termination process kicks in. While it is true that fixed interest payments, over an infinite period of time, appears to accumulate to infinity, the accumulated total will be actually be a finite value if one takes into account the time value of money (1 dollar a year from now is worth less than 1 dollar today). If the discounting rate is 1%, for example, , then an infinite stream of $1 a year is actually equivalent to a finite $100 today (i.e., $100 deposited at 1% interest will give an infinite stream of $1 a year). Roberto P2P Foundation wrote:
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Author: Marc Comment: A typo correction in upper case
Ardeshir wrote:
“My argument against Marc’s position is that current lending practices, even WITH INTEREST, are not inherently unstable in PRACTICE, because in PRACTICE, even according to common lending practices, loans are NEVER issued for unlimited amounts of time; and thus the interest on them never grows towards infinity”
Our argument is not that loans must grow to infinity to be unbounded, which is what Ardeshir’s argument necessarily implies. But rather our argument has always been that whatever amount of growth that takes place if it is towards infinity it is unstable. Common lending practices do grow towards infinity by definition, so by definition they are unstable period.
If we take Ardeshir’s statement that because loans do not go on forever they are not unbounded, therefore they are stable. it then implies that in order for INSTABILITY to manifest loans must go on forever. But that is not the definition of instability. The definition is that any growth TOWARDS infinity is unstable no matter how limited that growth is!
The test is quite trivial, leave an interest bearing loan device on its own and debt will grow towards infinity, leave an interest free loan on its own and debt will remains constant. The former exhibits instability and the latter does not i.e. is stable.
Marc
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