When Janet Yellen (pictured), chair of the US Federal Reserve, announced that America would be raising the government interest rate it signified the end of a dramatic period of declining rates since the global financial crisis of 2007-2008.
If the Great Depression of the 1930s cast worldwide doubt on the validity of capitalism, encouraging many to consider socialism or communism as preferable systems, the Great Recession, which has now lasted nearly a decade, has raised similarly pointed questions.
The engine of capitalism is the cost of capital, the interest rate. In North America, Japan and Europe that engine has for eight years ceased to function, largely because governments allowed the reckless creation of 'casino money' that inevitably led to the GFC.
Only the developing world has been behaving in anything resembling a conventional capitalist fashion, with mid-range interest rates and periods of reasonably strong economic growth.
As the period of zero rates finally starts to come to an end, the developed world, including Australia, is confronting a new problem: extremely high levels of debt. The world may have survived the era of casino money — just — but it is now facing another crisis.
Low interest rates tend to change the understanding of risk; having high debt seems to be less of a problem because the cost of servicing it is lower.
This cavalier understanding of risk has been especially evident with Australian households, which have racked up over $2 trillion in unconsolidated debt. This is 123 per cent of Australia's GDP, which is more household debt compared to the size of the country's economy than any other country in the world.
The massive appetite for debt in Australian households has been replicated across the world economy. Since the GFC, global debt has grown by over 40 per cent and is now over $200 trillion. Compared with global GDP, global debt has remained fairly stable compared with pre-GFC levels, but this indicates that the much vaunted government 'austerity measures' have had a negligible effect.
What are the likely consequences of the debt binge? One is that governments will have only limited capacity to raise rates because the relative effect of doing so will be so much greater. A return to 'normal' capitalism does not seem in prospect, and governments, including Australia's Reserve Bank, will have few options available with monetary policy.
Another implication is that, to maintain stability, it is essential to have growth in the world economy. The