The daily fluctuations of financial markets and the fractious debates over economic policy are concealing something deeper and much more disturbing. The future of money itself is in question
A decade after world banking almost collapsed in the global financial crisis, the questions raised have not been answered. The only way to keep the system going—kick the can down the street, as it were—has been to reduce the base interest rate in the developed world to almost zero. It has been an admission that the cost of capital, the very cornerstone of capitalism, no longer applies.
This drama has several elements, some familiar and some new. One is soaring global debt, which is over $US200 trillion, or 325 per cent of global GDP. Although that aggregate is not necessarily as scary as it looks at first glance, it is too large to eliminate with inflation, which is how debt in the twentieth century was typically dealt with.
The problem persists because of an arithmetic truism. Compound interest on borrowings always grows faster than economic growth. The former increases geometrically, the latter is linear. Eventually, debt becomes too large and something has to be done.
As the economist Michael Hudson has pointed out, the pattern goes back thousands of years, to the Bronze Age. To solve the problem, civilisations had debt jubilees:
‘So central to Israelite moral values was this tradition that it framed the composition of both the Old and New Testaments. Radical as the idea of cancelling debts and restoring the population's means of subsistence seems to modern eyes, it had been a conservative tradition in Bronze Age Mesopotamia for some two millennia. It took thousands of years for the idea of progress to become inverted, to connote freedom for the wealthy to deprive the peasantry of their lands and personal liberty.’
Once, usury was considered a vice. Now, retiring debt, even with struggling developing economies, is considered an unimaginable economic heresy—demonised as an attack on democracy, free markets, progress, a return to communism and so on. We must protect the banks, after all.
Thus the global financial system has entered a kind of frozen condition, with interest rates negligible and ultimately unpayable levels of debt sloshing around the global markets. The financial disease that hit Japan in 1990—ridiculously high asset prices, especially land values and stratospheric levels of debt—has now spread across the developed world. Japan has still not recovered from those excesses, and the