A while ago Thomas Piketty's book, "Capital in the Twenty-First Century" took the world by a storm; if memory serves correctly it was initially acclaimed as the economic book of the century, until it was subjected to intense critique, which went as far as challenging the underlying data and analysis forming the basis for the conclusions in the book. My personal theory about the rise and fall of "Capital in the Twenty-First Century" is that initially the Establishment pundits assumed that since the title of the book had to do with Capital, by default it praised capitalism and hence the initial acclaim. To clarify, references to the Establishment hereunder, and for that matter in any sense of the word under domestic and international parlance, are always to the uber moneyed class.
Anyway, as soon as somebody in the Establishment camp got the time to actually read Piketty, realisation set in that the latter was suggesting taxing their wealth, and all hell broke loose. Immediately the Establishment's experts got busy in developing theories to prove Piketty wrong and generally discredit the book; the nerve of him, is he mad!? Taxing wealth is sacrilegious even, especially after the decades it took to fool the world into believing that reducing the tax on the rich spurs growth.
At the time when the book was released, in a column in this very newspaper, Piketty's recommendations for addressing global income inequality were compared with Zakat, and taking a leap of faith the conclusion was that 2.5% was the correct amount of wealth tax. The particular observation would obviously not amuse those who believe in the infallibility of capitalism.
At the time of the collapse of Capitalism in 2008, and while once again the Establishment camp vehemently denies any such occurrence and has propagated theories which try to find excuses for the recession laced with arguments that Capitalism was not the cause but the saviour of the recession, it became abundantly clear that if busts were uncontrollable in a planned economy, capitalism has no answer for them too. Back then, in another column elsewhere, the inability of capitalism to make true on its promises culminated in a astute, even if self proclaimed, observation; the difference between Communism and the Islamic economic system was that while the former abhorred property rights the latter recognised them, and the difference between Capitalism and the Islamic economic system was that while the former was built on interest the latter was categorical that Sood is Haraam.
Let there be no doubts, the rich's lust to earn interest and the related prohibitive burden on the ultimate borrowers, the middle classes through personal debt or taxes, was the cause behind the double jeopardy unleashed upon the latter destroying whatever wealth they had; the so called sub-prime and Euro Debt crises. Astoundingly the solution that the Establishment pundits came up with is issuing even more money out of thin air again on interest! What fools these mortals be! To understand explicitly, for the layman, Central Banks can "print" as much money as they wants for lending to governments or private banks on interest; and in fact need not even print, but since explaining that is complicated let's stick with printing. These magical powers to create unlimited money out of thin air were necessary for democracies to fulfil over ambitious promises made to their respective voters all over the world, hence the desperate need to abolish the gold standard. However, common sense tells you that nothing is for free; in this case the world populace eventually paid a fatal price, in the form of interest.
Some estimates on the web, without commenting on their authenticity, place current world debt at in excess of a whooping phenomenal US $200 trillion; and jokes aside it is not owed to Jupiter. Fiat money and interest thereon are the tools of choice for the Establishment to multiply their wealth without putting in a hard day's work; but currently all is not well in their paradise.
Negative interest rates are spreading across the world, and if not negative hovering around zero. According to the standard theory, low or negative interest rates should encourage consumers to spend more; which assumption is fantastically ludicrous and once again malignantly opposed to common sense. The underlying gullibility behind the belief that interest rates can in any manner be a catalyst for the real economy or can incite irrational man into desired actions is utterly remarkable. Ignoring these false assumptions for a minute, how can a government, in the first place, encourage its citizens to be spendthrifts and why should the latter squander their savings just because the former wants the GDP growth statistic to look good; a statistic which in the first place never made sense and even if it ever did is today marginalized by the mischief of Goodhart's law.
Unfortunately however, since capitalism continues to be obsessed with interest, not even accepting that negative or almost zero interest means no interest, there is no alternate system and the global populace is forced to rely on interest on their savings to plan their future; which, at negative or low interest rates, suggests spending even less and saving even more.
Frustrated by this irrational actions of their subjects, the governments needed another policy to kick their minions into doing what was envisaged by the theories surrounding interest rates; and their brilliant and faithful experts, as always, delivered in the form of what is termed as "Bail In". Now in order to pay their creditors interest, governments can simply freeze bank accounts and forcefully appropriate savings as in the case of Cyprus; and in certain cases just simply tax them. With gold prices pushed down and artificial currency pricing mechanisms in place, populations the world over are forced to look at lesser of evil options; keep getting their bank accounts taxed with a real risk of losing majority of their savings; or hoarding cash or gold which lose value as well and carry the additional risk of theft. Communism's dictators were its nemesis; democracy's bane will be the Establishment. Until then however, the ultimate lie continues because the only way the rich can make money while doing absolutely nothing, is interest.
Fundamentally speaking, interest has a negative impact on the lending decisions banks make and bad lending decisions were the primary cause behind the sub-prime and the Euro debt disasters. Since banks are assured of a return in the form of interest, they couldn't care two hoots about what the lender intends to do with the money; which money in the first place belongs to other people in any case. In order to secure the loans, as best they can, banks are more worried about security which generally takes the form of property and where applicable sovereign guarantees. Strangely the State Bank of Pakistan discourages real estate lending by banks apparently due to the risks involved primarily in terms of overvaluing and eventually enforcing the underlying security; which is a contradiction since all private sector loans are ultimately secured by real estate of the borrowers in any case and subject to the same risks. Perhaps why banks now prefer not to sweat over private loans, and simply lend to the government. Now for a minute imagine that banks could not charge interest and their returns were solely dependent upon the success of the underlying reason for borrowing; for one banks would reduce lending to the government and secondly diligently focus on the proposals merit, rather than obsess about which properties to mortgage to secure their loan. That particular change in mindset will undoubtedly lend tremendous impetus to economic growth.
Clearly global events have proven that interest is perilous; but they, the vested interests cling on. Perhaps there is merit in the argument that Pakistan has no choice in the matter in respect of its international transactions, but that should not stop the government to work towards devising an interest free mechanism, in letter and spirit, for the domestic economy to eventually replace the imported monetary system, which relies purely on interest. To venture a guess, if negative interest rates are here to say, interest is already a doomed false idol. If Zakat is the final solution for addressing inequality; then Sood after all is Haraam.
(The writer is a chartered accountant based in Islamabad. The views expressed in this article are not necessarily those of the newspaper.)