The reason that the economic system is unstable is that we have a monetary system where we pay interest on interest – or we allow interest to compound. If we remove interest on interest we will stop the instability of the system. The simplest way to achieve this is to create loans where capital is paid first, then interest and there is no interest on outstanding interest. This immediately prevents compounding and with it instability.If a loan of $100K attracts an interest of 10% then we have a interest payment of 10K a year. If repayments is 10K then the loan can never be paid off with an interest first loan because we have to pay interest on the interest. However, this is clearly unfair because the lender has received the 10K which they can reinvest to get more interest and so the lender is “double dipping”. They continue to get the interest on their original 10K and they get the interest on the repayment of capital.
Alternatively if the interest accumulates as a credit to be paid after the loan is repaid and the interest does not itself attract interest then as long as some of the capital can be paid off each year then the system will stabilise.
Perhaps the simplest way to understand it is to stop calling interest on money interest and to call it rent on money. If rent is used to purchase another place then rent can be charged on the new place but there is no justification for charging rent on rent if the rent is not reinvested.
The other way to understand the problem is to note that by changing the interest rate from say 5% to 10% does not result in a doubling of interest paid but several times more interest. The amount paid is not linear even though the cost increase appeared to be linear. The result of this is that for the transfer of capital goods the amount paid tends to be much much greater than expected. This in turn results in the devaluation of the currency or inflation which occurs when we pay more for goods. Simply changing the way we account for loan repayments will bring certainty to the cost of capital goods and with it little or no inflation of the goods or services being transferred.
We will use the name envesting instead of investing to distinguish between investments where where capital is returned first and rent is not paid on rent and the case where interest is paid first and interest accumulates on interest.