Historically, interest and inflation work in collaboration. They control the world’s largest economies. Though there have been new digital currencies that have sprung up and cause a major ripple, interest and money are two old stories that are inseparable. Traditionally, cereal seeds and animals were involved in trade since money was not in circulation. However, the invention of money meant that cereal seeds and animals had to be cease existing in trade, and money took over. Its properties of reproduction should increase with time. This was a perfect invention as long as the currencies bore the inherent value of the metals that helped to mint them.
There were various denominations that arose and they were bent towards moral values. The religions preferred not to have interest charges to curb inflation. They described it as basically immoral and usurious. Currently, usury only applies to exorbitant interest rates. Everyone has accepted the charging of non-abusive and ordinary interest. Be that as it may, there were other religions who had opposing views in terms of interest. Such religions chose to operate as monopolies, and this informed the growth of monoliths. Currently, the banking sector cannot do away with interest and inflation.
What does interest do?
Interest is a perfect way of making money from nothing since it does not have any productive process. Naturally, interest has an inflation characteristic. Central banks charge interest rates that are in tandem with the prevailing inflation rates. Before one can afford a long term loan, inflation is one of the factors to consider since the monetary value of a loan diminishes when inflation rises.
Many people prefer mortgage loans since inflation will absorb the actual cost of monthly repayments. A $2000 monthly payment now will be lower realistically in 20 years. If you can afford your current mortgage repayments, the burden should get lighter with time.
The recent reduction of prime interest in the banking system to around nil came together with an innocuous name “quantitative easing.” This term brought about the mass minting of money to support the stock market value as well as help in bringing inflation to lower levels.
Significance to cryptocurrencies
How will it affect the digital currencies which do not have any underlying interest rate? If a person prefers to borrow Bitcoin or any other form of currency from another, such a business is between the borrower and lender. However, the value of cryptocurrency increases since it is a finite resource since there is no central bank that can create it. You can also look at it this way: since the value of fiat money will continue to reduce due to inflation, the value of digital currencies will continue to increase as compared to fiat currencies.
It is this principle that makes it hard to justify whether one should cash out his/her crypto holding. When anyone sells cryptocurrency (deflationary asset) to fiat currency (inflationary one), it will not be easy to regain the initial asset. There are stories of people who regret why they sold Bitcoin to buy ordinary items. Clearly, very few people would afford a cryptocurrency loan since its value increases whether there is interest or not. Since cryptocurrencies are finite, they are also deflationary what brings about a new paradigm for people. We will have to redefine economics and assess how people react to an interest-free system.