Getting a Higher Return on Savings
We save money with the aim of using the money at some time in the future. If we spend the money to get more money in the future we call it investing.
An example investment is to spend $100 this year to get back $10 in money each year for the next 20. Another way to get a return on investment of $100 is to get back $10 worth of goods and services for the next 20 years.
In both cases, the investor gets a return on investment of $100 in value. To get back $100 extra in money at $10 per year over 20 years the investor needs an interest rate of about 8%. Unfortunately the borrower makes no profit on providing the goods and services while the investor gets a $100 return in value.
However, if the investor receives goods and services with a value of $200, the borrower has $100 in profit while the investor has $100 in extra value.
How can this be? Where did the extra $100 come from? The reason is that when we pay interest we increase the number of money tokens. This gives money a value over time. Creating more tokens because of the passing of time is expensive to maintain and requires us to provide a return to the creators of the money tokens. Economists call the extra value created by the extra tokens an opportunity cost or Capital gains or returns on Capital or interest.
Creating more tokens is expensive and the returns to the providers of money tokens takes value away from savers and borrowers. Fortunately we do not need to increase the number of money tokens to give a return on investment.
Repaying loans with goods and services costs less than repaying with extra money. Savers get a higher return. Borrowers pay less.
The principle applies to all situations where we increase the value of money tokens by increasing the number of tokens over time. It includes interest, dividends and Capital gains. We can remove these costs and share the value saved between savers of money and borrowers of money.
In economic terms, it increases the productivity of investment because it reduces the costs for the same value of output.