Secular stagnation means economic stagnation that lasts indefinitely, possibly forever. Many economists, including Lawrence Summers and Olivier Blanchard, are of the view that the US and other countries are in secular stagnation.
What is causing it? Lack of investment demand is their answer. I agree.
Why do we have lack of investment demand? There are plenty of areas to invest in, particularly those that address climate change, environmental pollution, resource depletion, lagging infrastructure and other 21st century challenges. So why we are not investing massively in renewable energy and a huge range of other things.
The answer obviously lies in the system that allocates capital for investments. A major component of that system is: interest. Interest rates are a built in hurdle against investments. In the 21st century that hurdle may not be necessary and may have become counterproductive.
After the globalization driven industrialization that took place at massive levels in developing countries the global economy has reached a stage where it has abundant production capabilities. Additionally, increasing automation in workplaces continues to add productivity and capacity. The global economy has far more production capabilities than it can find demand for.
Capital has become abundant in the 21st century; whereas it was almost always scarce before. Interest, the capital allocation system of capitalism, works on the assumption of scarcity of capital. Interest rates, assuming scarcity, act as a hurdle in restricting flow of capital only to investments that earn above the prevailing interest rate. When we have an abundance of capital we don’t need to restrict flow of capital but need to facilitate or even force its flow. Interest by restricting flow of capital is causing reduced investment demand and consequently reduced aggregate demand, ultimately resulting in economic underperformance and crises around the world.
Low investment demand even at very low interest rates, such as 1%, means that marginal return prospects are low or limited in most industries. Low marginal returns on investments can be explained by the “law of diminishing marginal returns.” The amount of capital we have to produce to keep the world economy and labor employed will drive down the marginal return on capital to zero, or even below.
But interest rates cannot go below zero; therefore they stop functioning at zero. In fact interest, as a system, starts to fail at much higher level, around 5%.
Interest rates have hovered around 5% for centuries; its economics tends to keep it there. It only makes economic sense for risk neutral or risk averse lenders to lend for 10 years or so if the interest rate is around 5% or higher. At 1% lender makes 1% by holding the bond for one year but loses 9.4% if interest rates go up to 2% the chances of which are much higher than him benefiting from interest rate slide to 0%. At near zero levels, the lower the interest rate the higher the chances of its going up and the larger the potential magnitude of its upward rise. These asymmetric probabilities of interest rate moves at lower rates is the main culprit that keeps interest around 5%. The upward slope of almost all yield curves indicates higher chances of rates rising. In recent centuries, except for the periods following the great depression and the great recession, 10 year rates have been 5% or higher. In recent years central banks have kept longer term interest rates low through aggressive actions (QE etc.) but that can’t continue forever.
Businesses need to factor in future borrowing costs in their investment decisions; so even when interest rates, including long term, are low they have to factor in at least 5% (pure interest) for future borrowing. Even when interest rates are low their buoyancy, towards 5%, tends to restrict investments. For long term investments interest rates never really go below 5%. The zero bound is actually the 5% bound.
Given the abundance of capital, a capital allocation system that tends to practically remain at or above 5% is certain to be counterproductive in this century.
Interest is the reason for our failure to address climate change in any meaningful way. Sustainable energy industries, like wind and solar power, have relatively low financial returns because their capital requirements are many times higher than the capital requirements of fossil fuel power-plants. A one-gigawatt wind facility costs more than $2.5 billion to build, whereas a gas facility of the same capacity costs $600 million. Harvesting wind or sunshine will always take far more capital than burning fossil fuels. Most sustainable energy industries are very capital intensive and have fluctuating outputs; therefore their profit rates are neither high nor stable enough to be able to pay interest consistently. Interest is the biggest impediment to mainstreaming renewable sources of energy. No practical amount of subsidy can fully counter that impediment globally. A world run on green energy will remain a pipe dream as long as interest is around.
Interest is even more detrimental to space related industries. As long as interest is part of our economic system humans will never be able to make the generations long chain of massive investments required to make space part of earth’s economy.
Temporary low interest rates do not much help industries with inherently low returns because of the fear of interest rates going up when they need to borrow in future. The mere existence of interest discourages long-term investments in low return industries such as renewable energy and space exploration.
Measures currently suggested for addressing climate change include government subsidies, business regulations, carbon tax and cap and trade. They are economically costly and globally un-implementable. Climate change has to have a solution that is globally applicable.
Climate change denial is mostly driven by the fact that currently there is no globally applicable solution to climate change. Climate change deniers instead of uselessly trying deny the problem.
It is obvious that the resource intensive ways of living currently practiced in Europe and America cannot be adopted by seven billion people. We need a new model of living that is inherently friendly to the planet and the environment and can be sustainably scaled up to include everybody on the planet. The amount of work and capital involved in making that shift globally is so huge that it will take almost all of this century and more. It will take time for windmills, solar panels and electricity storage, charging and transmission infrastructure to find their aesthetic place in our life and surroundings and for our cities and localities to adjust to them. It will take time to build ocean water based cities to accommodate the growing world population. This huge and long lasting economic opportunity can only materialize in an interest free environment.
Commercial exploration of space is another area where enormous amounts of investments is needed. On a planet getting progressively smaller for humans the obvious course is to make maximum efforts in exploring other planets. For meaningful space exploration to happen, we need a model of business that is able to capture opportunities and build businesses that go far beyond the life of the current generation. Intergenerational investments are not possible in an interest based system because they cannot stand the erosion of cash flow discounting. At 10% interest a $100 cash flow received 40 years hence is worth only $2 in present value terms. Cash flows have a short vanishing point in an interest based environment. Intergenerational business models will evolve if the economic system becomes interest free. Space related businesses will become significant part of most investment portfolios if interest is eliminated.
In this century humans need huge amounts of capital for their survival and wellbeing and fortunately the global economy also has huge capacities to produce capital; this is indeed very serendipitous. If only we could get rid of interest.
Perpetual economic distress, the planet racing towards a climate catastrophe, and a future with no promise are some of the consequences of interest in the 21st century. It is time for elimination of interest. Sinless Capitalism does that in an economically sound and practical way through the following changes:
The three proposed changes are very well thought and all three are needed to give Sinless Capitalism a sound economic and social foundation so that it could last for centuries. Replacing interest is an extremely challenging task both in theory and in practice and Sinless Capitalism’s design is up to it. I have worked on it and its details for more than ten years.
Interest is unethical at its root. Aristotle, and almost every luminary after him, was against interest. Interest is unfair and exploitative; it is socially unjust; it is the mother of most other social injustices. Interest perpetuates economic stratification and the class structure; it is the lifeline of the parasite class of rentier capitalists. Because it is inherently unfair it destroys character of individuals, people and society.
Religiously, the sins associated with wealth are mostly due to interest; rich men would hopefully have a good chance of entering the “kingdom of heaven” after elimination of interest, and they and their wealth will become respectable in this world as well.
The elimination of interest would also greatly enhance social and economic justice in the society. The raw appeal of communism and other collectivisms which is rooted in a feeling of incurable economic injustice will die forever with the elimination of interest.
The great economist J. M. Keynes wrote extensively on the behavior of interest that trapped economies in underperformance forever. For example, he writes in his book – The General Theory of Employment, Interest and Money – that “the rate of interest is not self-adjusting at a level best suited to the social advantage but constantly tends to rise too high, so that a wise government is concerned to curb it by statute and custom and even by invoking the sanctions of the moral law.” Keynes also discussed at length “the flashes of deep insight” of the economist Silvio Gesell who tried to strip money of the power to demand interest. Keynes fundamentally agreed with the purpose of Silvio’s effort.
The dangers of interest go far beyond economics. If interest remains increasing consumption of limited planetary resources will continue as well inevitably leading to resource conflicts. Those resource conflicts will be abundantly fueled by the production capabilities lying underused. Some countries may find build up for war a means for much needed economic stimulation, as was the case in the build up to Second World War. Interest will inevitably cause major wars, possibly world war. Elimination of interest cannot wait much longer.
Interest was necessary in the gold money system because hoarding of gold could bring the economy to a halt. However, that is not the case in a fiat money system because money can be produced at will. There is no justification for interest any more. Four thousand years of evil is about to end.
Asset tax, besides performing the economic functions of interest and income tax, will ensure economic prosperity in a socially just and planet friendly way. The government through the asset tax rate structure has the role of choosing assets and industries that it wants to favor through low or no taxes (e.g. renewable energy and space industries) and those it wants to discourage through high taxes (e.g. polluting assets and industries). Japan, Germany, China and many other countries have effectively and beneficially used government intervention to favor or disfavor industries and business sectors. It is not choosing “winners and losers” but helping infant, disadvantaged, planet-friendly, and strategically important industries according to tax law and a set of policies.
Asset tax on cash is like a penalty for leaving cash idle; governments will be able to force capital to be employed by increasing that penalty thus increasing economic activity. Its effects can be compared to negative interest rates.
Lending will continue in the absence of interest; lenders will lend to transfer their “asset tax on cash” to borrowers. Credit risk will be priced separately and the unit of pricing will be much better than the current one.
Income tax has been eliminated because it is not needed, fiscally or otherwise, in the presence of asset tax. Income tax impedes upward economic mobility and tends to perpetuate the class structure; asset tax does the opposite.
Asset tax will also help fix the highly myopic pricing system in use today. This demand-supply pricing system prices coal, corn, and haircut the same way. Coal or oil are non-replaceable minerals, once used they are gone forever and won’t be available in the future and there is only a finite amount of them, they should be priced keeping in mind the planet and future generations; corn should be priced keeping in view the long term health of land and the wellbeing of the agricultural community whereas haircut can be priced purely on demand supply basis. Pricing of goods and services should reflect the limits of mineral reserves, land, sea, atmosphere and other aspects of the planet. Pricing everything purely on demand supply basis is wrong in this century. Asset tax will add the component of pricing that is missing in the myopic demand-supply model.
Asset tax will also make it costly to speculate in real estate and practice absentee landlordism. It will also help control harmful inflation in real estate prices.
Interest powers concentration of wealth and also perpetuates wealth inequality; eliminating it reduces inequality. Asset tax reduces inequality by taxing wealth. Elimination of income tax lets the poor accumulate wealth fast. Sinless Capitalism greatly reduces economic inequality.
One of the main insights in Professor Thomas Piketty’s bestseller “Capital” is that the rate of return (r) on investment, of which interest is a major driver and contributor, is greater than economic growth (g) i.e. r>g. And this inequality will be the main cause of growing economic inequality in the 21st century. Eliminating interest will certainly bring (r) the rate of return down and will also increase the rate of growth (g). So r will be less than g i.e. r < g will be the new equation after elimination of interest. Piketty inequality will be solved.
A sure way to actively counter income inequality is to increase wages. Sinless capitalism will increase investment and thereby employment and consequently wages.
Modern societies have evolved to the extent that they do not allow egregious exploitation of labor. Labor have to be paid decent wages. Modern industries are becoming increasingly more capital intensive. Consequently, leaving aside monopoly profits and other temporary or fading phenomena, modern industries are not as highly profitable as the ones before. Low investment demand is a result of low marginal profitability. To be able to pay adequate profits and decent wages we have to get rid of interest. Social injustice associated with interest has been tolerated for a very long time; now interest has become intolerable economically and socially.
Protecting the planet is a public good of the global kind. Interest works against achieving that public good. Efforts to achieve that public good through appendages such as subsidies, taxes, regulations etc. have no chance of working at the global level. Interest is consequently a threat to the future of humanity.
Interest based system not only fails our generation but also robs our future generations, it in fact creates incentives to rob them. For example, the earlier you can take a mineral out of the earth the higher its value in present value terms.
Generally speaking as technology advances more can be done by less labor, so technological progress contributes to unemployment and consequently loss of income and bargaining power for workers. Additionally, technological progress contributes to economic inequality through concentration of power in the hands of technologists and capitalists.
Technological advancement will provide prosperity if the society is able to find better things to do with the labor freed; if not it will immiserate labor and society. The solution should therefore include creation of more and better work for workers, i.e. increased investments in assets and businesses that pay for themselves and generate good paying jobs.
A fundamental essence of statesmanship is to find and develop profitable investment avenues for businesses and society, either in war or in peace. Interest by limiting investment options does not allow leaders and societies, in peace time, to avail the benefits of technological progress. Interest in fact makes technological progress a curse. The current European and US economic conditions are primarily due to the limits imposed by interest on their leaderships to develop those avenues.
In my view the pyramids were built to employ the labor freed due to continued technological advancements; the genius of the investment was that it provided better income to the workers and society and lifted the society to a higher level of skills, possibilities, power, wealth and prestige; it is still providing income to the society. If the Pharos had not built the pyramids in the years that they did their society would have descended into chaos.
Sinless Capitalism will make it easy for leaders to provide ample means and avenues for new investments in industries and infrastructure that will not only address the employment problem but will also address major national and global challenges.
Climate challenge and the current global economic conditions are unprecedented in human history; they require a really new way of thinking. Even though it is fashionable to loudly proclaim “new way of thinking” but in practice economists and politicians continue to try to solve 21st century problems by tinkering at the edges of the current system. That won’t work in this century because the following basic assumptions about investments, capital and the planet have reversed.
i) Rates of return for 21st century industries are low, close to zero in some cases, whereas they were much higher than 5% in almost all cases before.
ii) Capital has become abundant whereas it was always scarce before.
iii) We are now constrained by the limits of the atmosphere, oceans and other aspects of the planet whereas they were practically limitless before.
These assumption reversals are not trivial, they are causing the economic crises and climate change. Sinless Capitalism incorporates these assumption reversals in the economic system. It treats capital as abundant and the resources of the planet as scarce i.e. it makes capital available interest free and it imposes costs (asset taxes) on uses and/or users of natural resources. Eliminating interest also eliminates the need to have high rates of return on investment.
Most of the social and political problems that we face today have their origins in the failure of our economic system to accommodate the vast productive capabilities created after the advent of globalization. Globalization and global prosperity will be reversed if we don’t fix our economic system.
The main culprit behind the 1929 great depression was the same abundance of production capabilities relative to demand, as it is now. The solution then was World War II which created demand for capital goods (tanks, ships, airplanes etc.). The destruction of the war kept high level of demand alive and well for decades.
Now we face the same abundance of capital problem and we wish the solution to be investments that enhance possibilities for human wellbeing now and in the future. If we don’t find a way to convert those desirable investments into actual demand, World War may again present itself as a solution for demand shortfalls.
After the 2008 global financial crisis the central banks of US, Europe and Japan together pumped $10 trillion of extra cash into the global economy. China has pumped $16 trillion.
If the money pumped is used to create productive assets and products then that money has beneficial effects on the economy but if it is spent on existing or unproductive assets it creates asset bubbles and unhealthy businesses. Since the capital allocation system is not working properly the above and other stimuli added an unhealthy mix of assets and financial structures to the economies.
Since the economies have not gained health and have an unprecedented debt overload they will soon, either in response to central bank action or some other event, face a crisis requiring stimulus and bailouts. In the presence of interest there is no reason for anybody to think that there won’t be a third time; this repeated rescuing with fiat money will create a self-perpetuating inflationary pressure on asset prices. Increasing asset price inflation causes extreme economic disparity in the society and may lead to social upheavals and tearing of the social fabric. Hyperinflation is another outcome that usually follows extreme asset price inflation; recently added production capabilities in Asia have so far prevented it from happening but cannot forever. Fiat money can be saved only by eliminating the need for repeated rescuing i.e. by eliminating interest.
Major debasement of fiat money, particularly the US dollar, will destroy the global economic system. People will starve, freeze or be killed around the world. Gold is a disastrous alternative to fiat money; cryptocurrencies are not even that.
Recent US economic boom is a sugar high achieved through high levels of prolonged monetary and fiscal stimulus, demolition of regulations, massive tax cuts, and erection of international trade barriers. Additionally, attrition of work force and assets over a ten year sluggish condition had created room for some global growth. The IMF says that the current economic boom will not last long. I agree. Because the world economy cannot have a lasting recovery till it has a capital allocation system that works.
The economic system has to create multitudes of business opportunities for its economy to flourish. Currently the capitalistic system is not able to do that because of interest.
Once interest is systemically removed the world would rapidly build sustainable cities and societies, coastal cities based on ocean water, colonies on moon and mars, and multitude of assets that enhance the resources of the planet and its ability to accommodate its ever growing population.
Prosperity will follow because labor will be fully employed and capitalists will be building assets that will remain valuable and profitable for a long time
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