Considered logically, a capitalist economy which offers zero returns on capital is a contradiction in terms. Businesses add value when – and only when – returns on investment exceed the cost of capital. Reducing interest rates to zero makes a nonsense of any such rational equation.
Pursuing this thought just a little further suggests that reducing interest rates to zero – let alone turning them negative – amounts to the abdication of the capitalist system. Capital is consumption foregone or, rather, is consumption today surrendered, in return for enhanced consumption later. To render saving pointless is to slam the gates on capital formation. How on earth have we reached a situation where returns on debt capital have disappeared, and even the risk-premium return on equity has become derisory? Is the age of investment over? If so, can capitalism still be said to exist?
Of course, the official view would be that the Age of ZIRP (zero interest rate policy) is a temporary intermission, and normal service will in due course be restored. Perhaps, but this has already become rather a long intermission. The economy will, we are assured, one day become sufficiently prosperous to service its own debts, and thus restore incentives for saving and investment – but for how much longer can a supposedly capitalist system continue in the absence of returns on capital?
If, like me, you believe that the economy is fundamentally a surplus energy equation, and that an age of cheap energy and easy growth is drawing to a close, it will seem perfectly logical that we are on the cusp of profound change, not just in economic affairs but in society and politics too – after all, economic transformation almost always revolutionises society as well.
Even if, on the other hand, you are a “cornucopian” – a believer in perpetual abundance – I think you would have to accept that something profound and disturbing is happening, not least because debt continues to grow much more rapidly than economic output.
However you look at it, growth has become hard to find, and there is something distinctly unorthodox about an economy in which interest rates have been locked at close to zero for a very extended period, with still, it seems, no end in sight. After all, interest is supposed to incentivise saving and the formation of capital, as well as acting as a disincentive to excessive borrowing, so it is hard to see how a debt-based economic system can be sustainable in a zero-interest environment.
This has set me wondering about the viability of an economic model whose very foundation has become consumption funded by borrowing, yet which cannot afford to pay lenders any rate of return at all.
As I’m sure you know, the Islamic faith imposes an outright prohibition on lending for interest, which is known as “usury”. You might not know, however, that the prohibition on usury is just as strong in Christianity as it is in Islam. Jesus was not prone to taking violent action, but even He overturned the tables of the money-lenders in the Temple.
For much of recorded history, usury simply wasn’t allowed. Indeed, in England, until the time of Henry VIII, usury was punishable by death. Henry may have removed the death penalty – except where interest exceeded 10% per annum – but it remained impossible to enforce debt obligations in law. If you lent money to someone, and he refused to repay it, that was your problem, and there could be no recourse to the courts.
Though this situation changed long ago, today’s “anything goes” attitude to debt is a comparatively recent innovation. Credit controls were in widespread use until the 1980s, whilst the ability to enforce international debt obligations is a post-1945 phenomenon.
One problem with debt, you see, is that it hands to the lender power over the borrower. Should international institutions really be allowed to force third world borrowers to divert resources from education and health, simply in order to keep paying interest to affluent Western creditors? Should the need to service debts be allowed to transform a country’s agriculture from the delivery of food to the production of exportable cash crops, again just to please foreign lenders? More fundamentally, should the owners of capital be given a right to levy tribute on the poor?
In a world in which indebtedness has become the norm, these may seem strange questions, but I believe that these very questions are likely to be posed with ever greater urgency as the next economic chapter opens. As recently as the 1970s, the debtors tended to be the poor countries of the global South, whilst the prosperous Western economies were the creditors. Back in 1945, the United States was the world’s biggest creditor, and most European nations were big creditors too.
All of that has changed, basically on the back of two fundamental shifts in the global economy. For a start, the West became far more relaxed about debt, and deregulated lending whilst also stripping away capital controls.
This was compounded by globalisation, which I’m not alone in regarding as a gigantic heist. The logic of globalisation was and is that, whilst the West would offshore production to the cheapest locations, it would sustain (and indeed increase) its propensity to consume. As high-skilled, well-paid jobs disappeared, and were replaced by lower-paid service jobs, access to borrowing was made easy, simply because consumption could not be sustained in any other way.
If you have read Life After Growth, you’ll know that I devoted a whole chapter to the globalisation folly, showing how, in the United States, output saleable on global markets has been displaced by output that Americans can sell only to other Americans, and how this process has paralleled an explosion in levels of indebtedness.
By the early years of this century, borrowing had become the norm, not just for third world governments but for the majority of Western households as well. Two vast and hugely profitable networks have been created to promote the logic of borrowed consumption – global finance is one of these, of course, and the advertising industry, in its role as propagandist-in-chief for consumerism, is the other.
I doubt if I’m alone in recognising lending and advertising as the principal tools of the corporatist system, a system whose sheer resources enable it to bend governments to its will. This cannot, realistically, be changed politically, certainly unless we can block all of the “revolving doors” between government and big business. The likelihood of political activity undermining the corporatist behemoth is pretty remote, since the corporatists hold almost all of the aces.
Instead, it seems far likelier that the corporatist edifice will be brought down by its own internal contradictions. Thus seen, the current state of the global economy is highly instructive. The combination of consumerism and easy borrowing has mired the world in debts of a scale that, in the absence of super-robust growth, simply cannot be serviced (let alone repaid). The only feasible response to this was – and has been – ZIRP, but even this has failed to revive growth to anywhere near the levels that the corporatist-consumerist system requires. Latterly, we have seen a global recourse to “monetary activism” as a desperate – and final? – attempt to keep the system from toppling over.
I’m not saying we haven’t been here before, because I think we have – or, at least, France has. By 1789, the French state was bankrupt, government was hopelessly corrupt, rentiers ruled the roost and the advertisers’ motto seems to have been “let them eat brioche”. Is there something increasing familiar about this?
The revolutionaries were dismissed by the defenders of the old order as “sans-culottes”, which loosely translates as “people too poor to own trousers”.
If belts have to be tightened any further, we may need to remember that it was the trouser-less who triumphed in the end.