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USA Real Estate Blog

Doubling the Productivity of Loans – Kevin Cox – Medium

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Interest is one way of getting a return on investment. It is expensive. Removing it and getting a return on investment through more goods and services for the same price doubles the productivity of investment money.

Traditional Debt — Figure 1

The debt system gets a return on investment by putting a time value on borrowed money. Figure 1 shows the ten-year finances for borrowing money as interest bearing debt. Here a Company has borrowed $1,000 at 5% to produce goods and services that it sells for $200 each year. The Company pays interest, and at the end of ten years it still owes $1,000 and has made a profit of $500.

Repayments with Discounts — Figure 2

Figure 2 shows the same Company where it borrows money from its future customers and gives a return on investment by giving a 5% per annum discount on the price of goods and services. The Company still makes $500 profit and has paid off all the debt of $1000. The customer has purchased $2000 worth of goods and services for $1500 and has received a $500 return on investment.

Repayments with 10% Discount — Figure 3

In Figure 3 the Company gives a 10% discount. Here the lender receives all their money back and makes $1000 return on investment. The lender has twice as much profit as earned with interest bearing debt, and they have their money back. In this scenario, the Company has made no profit on the sales to the lender, but makes a $100 profit on sales to other customers.

This example shows how we can get twice the value from a given amount of investment by eliminating interest and giving a return in other ways. In the above scenario the productivity savings can be shared between the two parties by changing the discount rates.

For a country like Australia with 6.3 trillion dollars of debt at say an average interest of 5% removing interest could potentially increase the productivity of investment from 5% to 10%. For Australia this is 630 billion each year in an economy with a GDP of $1,200 billion.

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