The Effects of Today’s Money System on Sustainability
Box 5.1 – Time Perception and Interest versus Demurrage The purpose of this box is to show how interest encourages short-term time horizons. Figure 5.1 below shows how interest rates affect the investment process. To keep the numbers simple, it is assumed that all numbers are inflation-adjusted and that the risk of investment is independent of the time frame. Furthermore, we will consider only a choice between two projects: planting a pine forest or an oak one. Here, a pine tree is assumed to be harvestable after ten years, when it will bring a yield of $100. An oak tree can only be harvested after a hundred years and it is estimated to be worth $1,000. So the two investments could be seen as equivalent as one could harvest and replant the pines every ten years, ending up with the same $1,000 in 100 years. When we put on financial glasses, things change. For example, a deposit of $61 in a bank account with a guaranteed interest rate of 5% automatically becomes $100 after ten years.10 That is why the $100 pine ten years from now is equivalent to only $61.39 today.
Figure 5.1: Investment behaviours differ according to the monetary system. Any currency with a positive interest rate discounts the future. A currency with a demurrage fee – equivalent to a negative interest rate – amplifies the value of the future. Therefore, when the investor asks, “What are these two investments worth as seen from today?”, the answer depends on the applicable interest rate.We have seen that at an interest rate of 5%, $100 in ten years is worth $61 as seen from today. This is so because at 5%, only $61 would have to be deposited in the bank in order to have $100 in ten years’ time. 10
10 The multiplier in the formula is (1+i)(n-1), where i is the interest rate and n the duration, in number of years, of the investment project.
For additional information, and to buy the book, visit www.triarchypress.com/missinglink 97