Lowest Interest Rate in 500 Years is about the New Morality of Debt

David Rosenberg, former Chief Economist for Merrill Lynch, recently commented that the current global interest rates at below 2 percent haven’t been this low for 500 years. The globalization cycle over the last two decades pushed up total world debt to $223.3 trillion, over three times the world GDP of about $75 trillion. But the current low rates indicate that individuals and corporations have become morally challenged about taking on more debt.

In Dutch and German word “Schuld” means both debt and guilt. A similar association is found in the Hebrew word “Chayav.” According to Kenneth Dyson in Foreign Affairs magazine, owing money is “more than just rational material exchanges within a market economy”; it is “socially constructed on hard moral judgments about character and powerful emotions of resentment, shame, and humiliation.”

Credit and debt predated money, since they originally took the form of favors among friends and neighbors, which created personal moral obligations. Money later provided a unit of account for keeping track of debts. But money also depersonalized the creditor-debtor relations, making commercial society possible with the posting and exacting of collateral. But with this change, debt became bound up with the potential for erosion of freedom as individuals and their entire families could become “debt slaves.” As the Biblical proverb warns, “The rich rule over the poor, and the borrower is servant to the lender.”

The eighteenth century saw the expansion of property rights, which led to the use of tangible collateral to expand credit. This inevitably led to the “birth and huge increase in public debt” that financed the ruinous wars in Europe and underpinned the egotistical pursuit of empires in the Atlantic, the Mediterranean, and India. Borrowing also led to enlarged political patronage and the mutual dependence between states and creditors.

The late nineteenth century saw the emergence of the German “institutional school of economics” that viewed public debt as an “integral part of national economies.” The state was seen as having a positive role to play in balancing the economy and financing the “productivity-enhancing investment in infrastructure and public provision.” With this confidence in the state, paper money freed of the requirement of metal exchange.

Throughout the twentieth century, the liberated attitudes about debt and risk were also bound up with the right to new social entitlements. Consumers expected ever-higher living standards fuelled by more lenient and readily available bank lending.

The subsequent booms in construction and property market sectors, and the expansion of retail sectors, modern advertising, and marketing led to social status and identity becoming closely associated with consumption, especially the concept of luxury. Dyson observes, “Debt was the price one paid for the joys of being part of a hedonistic consumer culture. Its denial had the potential to foster a deep sense of loss, despair, social protest, and riot.”

By the early twenty-first century consumers and investors exchanged paper for electronic money. In today’s cyber-finance, “Money is now endless,” wrote economist Satyajit Das in Extreme Money, “capable of infinite multiplication and completely unreal.”

But vulnerability was growing with new private-sector technologies of credit creation and the secularization of society that increasingly eroded religious warnings about indebtedness. This was coupled with a new belief in the scientific management of public finances, often referred to as “financial engineering.” Gone was the virtue of prudence that acted as an inhibitor to expansion of private and public debt.

The Financial Crisis caused a widespread sense of confusion, unease, and alarm about the implications of the behavior of banks and how government central banks now manage money with new tools, such as quantitative easing.

The public began to worry that the decline in prudence had become ever more serious with the huge growth in the scale of financial assets; “with the size, complexity, and opacity of the financial institutions managing these assets; and with the proliferation of ever-more exotic credit instruments, like securitization and collateralized debt obligations.”

Although states continue to borrow at record rates, individual and corporate moral willingness to borrow is moving faster in reverse. This explains why interest rates have moved down to historic lows. As Kenneth Dyson comments, “Creditors are again prone to be seen as saints, debtors as sinners. Virtue is attached to the former (prudence, hard work), and vice to the latter (fecklessness, laziness).” 

David Rosenberg, former Chief Economist for Merrill Lynch, recently commented that the current global interest rates at below 2 percent haven’t been this low for 500 years. The globalization cycle over the last two decades pushed up total world debt to $223.3 trillion, over three times the world GDP of about $75 trillion. But the current low rates indicate that individuals and corporations have become morally challenged about taking on more debt.

In Dutch and German word “Schuld” means both debt and guilt. A similar association is found in the Hebrew word “Chayav.” According to Kenneth Dyson in Foreign Affairs magazine, owing money is “more than just rational material exchanges within a market economy”; it is “socially constructed on hard moral judgments about character and powerful emotions of resentment, shame, and humiliation.”

Credit and debt predated money, since they originally took the form of favors among friends and neighbors, which created personal moral obligations. Money later provided a unit of account for keeping track of debts. But money also depersonalized the creditor-debtor relations, making commercial society possible with the posting and exacting of collateral. But with this change, debt became bound up with the potential for erosion of freedom as individuals and their entire families could become “debt slaves.” As the Biblical proverb warns, “The rich rule over the poor, and the borrower is servant to the lender.”

The eighteenth century saw the expansion of property rights, which led to the use of tangible collateral to expand credit. This inevitably led to the “birth and huge increase in public debt” that financed the ruinous wars in Europe and underpinned the egotistical pursuit of empires in the Atlantic, the Mediterranean, and India. Borrowing also led to enlarged political patronage and the mutual dependence between states and creditors.

The late nineteenth century saw the emergence of the German “institutional school of economics” that viewed public debt as an “integral part of national economies.” The state was seen as having a positive role to play in balancing the economy and financing the “productivity-enhancing investment in infrastructure and public provision.” With this confidence in the state, paper money freed of the requirement of metal exchange.

Throughout the twentieth century, the liberated attitudes about debt and risk were also bound up with the right to new social entitlements. Consumers expected ever-higher living standards fuelled by more lenient and readily available bank lending.

The subsequent booms in construction and property market sectors, and the expansion of retail sectors, modern advertising, and marketing led to social status and identity becoming closely associated with consumption, especially the concept of luxury. Dyson observes, “Debt was the price one paid for the joys of being part of a hedonistic consumer culture. Its denial had the potential to foster a deep sense of loss, despair, social protest, and riot.”

By the early twenty-first century consumers and investors exchanged paper for electronic money. In today’s cyber-finance, “Money is now endless,” wrote economist Satyajit Das in Extreme Money, “capable of infinite multiplication and completely unreal.”

But vulnerability was growing with new private-sector technologies of credit creation and the secularization of society that increasingly eroded religious warnings about indebtedness. This was coupled with a new belief in the scientific management of public finances, often referred to as “financial engineering.” Gone was the virtue of prudence that acted as an inhibitor to expansion of private and public debt.

The Financial Crisis caused a widespread sense of confusion, unease, and alarm about the implications of the behavior of banks and how government central banks now manage money with new tools, such as quantitative easing.

The public began to worry that the decline in prudence had become ever more serious with the huge growth in the scale of financial assets; “with the size, complexity, and opacity of the financial institutions managing these assets; and with the proliferation of ever-more exotic credit instruments, like securitization and collateralized debt obligations.”

Although states continue to borrow at record rates, individual and corporate moral willingness to borrow is moving faster in reverse. This explains why interest rates have moved down to historic lows. As Kenneth Dyson comments, “Creditors are again prone to be seen as saints, debtors as sinners. Virtue is attached to the former (prudence, hard work), and vice to the latter (fecklessness, laziness).”