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Capitalism isn’t dead, it just smells funny

  • 24 September 2019


To paraphrase Frank Zappa, capitalism isn't dead, it just smells funny. The point is easy enough to demonstrate. The cost of capital, the prevailing interest rate, is, as one commentator quipped, about to hit 5000 year lows. The 'capital' element in 'capitalism' is in trouble.

Interest rates are headed towards one per cent in Australia, they have turned negative for depositors in Germany, they are 0.75 per cent in Britain, they have been near zero for nearly three decades in Japan, and they are over two per cent in the US but probably headed lower.

It is true that there are other defining features of 'capitalism', such as private property ownership. It is also true that there are other types of capital that do not carry an interest rate, such as equity (share) capital.

But those plummeting interest rates indicate something is very wrong. The effects are also likely to be perverse, making capital less available, not more, as commentator Sajit Das observes. Banks tend to raise fees, or turn to other revenue measures, to boost earnings, which keeps actual borrowing costs relatively high. There are also many other collateral effects from a struggling banking system.

'Instead of stimulating the economy, negative rates increase uncertainty about the future,' Das says. To see what he means, one only has to look at the experience of Japan, which has failed to stimulate its economy since 1990, despite decades of low rates.

The lowering of interest rates in the wake of the global financial crisis of 2007-08 sparked a massive global debt accumulation (and a series of asset bubbles, which in Australia has been most obvious in the distorted property market). World debt is now running at over 320 per cent of global GDP and the only way of preventing a widespread collapse is to maintain the low interest on the debt. Central banks, which decades ago lost the ability to control the supply of money, can now only control the cost of money (the interest rate). That lever is all but exhausted.

It is easy to blame the financial sector — and the governments that were supposed to oversee the financial system but instead just washed their hands of it — for creating this global debt debauch. They certainly bear much of the responsibility, but in many ways the financial misbehaviour is as much symptom as cause.


"In an effort to keep the ball rolling, and to stimulate demand,