Undoubtedly, the world is currently observing some powerful mega trends taking place, particularly of climate change, economy and politics. The world accordingly seems poised for some mega historical changes – technology, finance, economy, social and political. Global awakenings are happening almost in every part of the world. Monarchies and kingdoms have felled in the Middle East and the trend is continuing with what is termed as the Arab Spring and the economies of major developed countries like the US, Europe and Japan are facing serious problems – debt crisis with persistent recession, unemployment, homelessness, nuclear crisis etc. Prices, particularly of commodities are skyrocketing. Accordingly people have taken to the streets to protest against what they regard as crippling wealth and income inequality, corporate greed and government policies that seem bias towards the elites. This protest that started on September 17, 2011 as Occupy Wall Street (OWS) in New York City’s Wall Street financial district has now spread to over hundreds of cities worldwide. Interestingly many world leaders have voiced support for the protests. India’s Prime Minister Manmohan Singh, for example, stated, “There are reasons why people are protesting. People are protesting in Wall Street, in Europe about the fat salaries that the bankers are getting when people are being asked to tighten their belts. There is problem of growing unemployment in the United States. There is also worry in Europe. So there are problems which the system must have credible answers to take them on board.” Truly, the debt crisis in Europe is threatening the euro as a single currency and might even rip apart the European Union. On the climate front, one just has to look at the latest devastating flood in Thailand.
There may be many reasons for the above observations, but strange as it may sound, I have always asserted that the one most important factor that is contributing to all the above is the structure of our global monetary system based on fiat money and compound interest. I will focus on compound interest in this article.
Compound interest means interest over interest. For example if one were to deposit RM1,000 at a compound interest of 10 percent per annum, one would have RM1100 at the end of the year, i.e. RM1,000 principal and RM100 as the interest. In the following year, this balance would grow to RM1,210, i.e. 10 percent of RM1,100 is RM110, added to the beginning balance of RM1,100. A simple formula relates this ending balance known as Future Value (FV) to the initial amount known as the Present Value (PV), i.e. FV = PV (1 + i)n where i is the interest rate and n is the number of years. Accordingly, the second-year balance can be obtained as FV = 1000 (1 + 0.10)2 = 1,210. The tenth-year balance, for example, would then be FV = 1000 (1 + 0.10)10 = 2,593.74. Note that since the formula has a power n in it, it is exponential in nature. In fifty years, the balance is RM117,390.85 while in a hundred years it is RM13,780,612.34! This computation is well-known to many of us, but what most of us are not aware is that it has serious implications for society, economy and the environment.
The reason why we postulate that the compound interest is at the root of the global chaos of today is that under the present fiat monetary system, most money is created through mere accounting entries by commercial banks in the form of loans, that carry compound interest with it. Due to this reason, both money and debt grow exponentially in almost all economies. But the real productive economy, i.e. the economy that produces goods and services does not and cannot match the exponential growth of money and debt. This is where the problem lies.
As a consequence, money and debt overshoots the real economy, the difference of which shows up in the form of inflation and bubbles; stock market bubble, housing bubble etc. See diagram. But in the process, individuals, businesses and governments become increasingly indebted (See table below). When the average debt level reaches a point that is unbearable for the weaker sections of the economy it then ‘bursts’, causing an avalanche of foreclosures of properties and the destruction of money in the process, which in turn brings about recession, unemployment and so forth. If individuals, businesses and governments all become indebted then one wonders who the creditors within the system are. Of course the creditors are indeed the banks to whom the system has given the legal right to create money out of thin air and lend it out to others at compound interest. Hence during times of crisis if one were to take a helicopter-view of the economy below, one would see things seem so normal down there but what really happens is that huge transfer of wealth taking place, from those who are distressed by the debt-situation to a small section of the economy, i.e. the banks.
The world after being under this pure fiat money system for the past few decades has been brought to the precarious position we are currently observing. There is now a global debt crisis, a situation significantly brought about by compound interest, but compounded further by the fact loans themselves are created out of thin air. This is the reason why a great productive nation like Japan, a nation of very hardworking and intelligent people, has fallen into a receding economy since almost two decades ago. In the real economy, one would expect such people to be able to produce abundantly and lend to others any extra they might save. And yet, in a compound interest-based system, Japan has become the country with the largest total debt as a percentage of GDP, i.e. more than 450%, with the government debt alone accounting for almost 200% of GDP. Government debt is indeed debt of the people. This can, therefore, ultimately wipe-off the national savings of the people, thereby transferring the saved wealth of the people to the government.
The US is also somewhat in a similar situation albeit it is not a nation with high savings rate like Japan. Compound interest has brought its economy practically to a halt, as shown by employment data. In capitalism, the compound interest-based monetary system strengthens a small section of the economy at the expense of the system itself. Hence compound interest is a seed of the capitalism’s own destruction. While strengthening a small group of people, it causes outright calamity on the rest of the people – economic deprivation, inflation, social disparity, high crime levels, erosion of moral values, collapse of the institution of family, erosion of feelings of love and compassion for others etc. Hence one is not surprised by the Occupy Wall Street movement, with its reverberations worldwide. In a recent interview by Bloomberg, George Soros mentioned that the turmoil in the US and Europe reminded him of the Soviet collapse. On how to fix the European debt problem, his amusing answer was “There is a lot of confusion and I am also confused.”
The compound interest monetary system has also brought the whole world to an interesting historical juncture. Almost every nation would be facing political upheavals and challenges due to this precarious position the world is currently in. At this juncture, we are reminded that the ongoing Arab unrest in the Middle East was triggered by one individual’s self immolation as a reaction to serious economic deprivation. The debt crisis is threatening even the very existence of the European Monetary Union, particularly with the latest crisis faced by Greece. Italy, Spain and others might follow soon. It’s crucial to note that Italy’s debt is larger than that of Greece, Spain and Portugal combined.
As mentioned earlier, the compound interest system in a fiat monetary system causes individuals, businesses and governments to become continuously and increasingly burdened with debt. Government debt, being the debt of the people, would have to be paid through collection of tax and other revenues from the people. This is the reason why in the case of Greece, for example, draconian austerity measures were required on its citizens. All these would but add extra burden on the people. Accordingly one could see why the anger against banking system worldwide – it is highly lucrative and relatively risk-free. In good times banks collect interest while in bad times, i.e. default-period times, they collect real assets placed as collaterals.
The political implications of the compound interest system are already obvious in many countries. In Malaysia I think it will be apparent by next year. In such times radical forces would make headways. Even the political challenges faced during the last election by PAP, the ruling party in Singapore, I would attribute it to the economic distress felt by many of its citizens, particularly the younger generation.
In Malaysia too, I believe that in the coming general election Barisan National would face among the strongest challenges it has faced, particularly caused by this socio-economic distress factor caused by the global monetary order. People would attempt to seek solace by going to the opposition, thinking that the opposition might be able to help them out of their predicament. But, nonetheless, even the opposition would not be able to help them on this unless it can effectively address the debt-burden faced by the people. Since compound interest is time-based, the challenge would only grow stronger as time elapses.
Therefore the solution to all these lies in giving the entire economic system a debt relieve – i.e. writing-off the interest portion of loans and demanding repayment of the principal amount alone. Indeed this is also what the whole world actually needs today – both the developing and developed nations. But unfortunately I do not see any political will towards this end anywhere in the world. The Barisan National government can hence become the hero and darling of the people if it can do this. It can lead and show the world the right path to recovery.
The collapsing global compound interest monetary system is currently taking the world into a runaway global hyperinflation mode. The low returns from equity and bond markets coupled with cheap money from the Quantitative Easings are fuelling a commodity bubble. Any bailouts in the European Union would add to this. Hence the prices of commodities, particularly grains like wheat and rice, are expected to skyrocket and potentially devastate millions of people. Malaysia would not be spared. In the case of rice, the problem is further exacerbated by the flooding in Thailand that has wiped out millions of acres of rice fields. Accordingly, the Malaysian government must take proactive actions now to control the prices of basic food items from seriously affecting the people. Otherwise things can get very bad particularly by next year. The authorities must also take measures to prevent food items from being smuggled out of the country, so as to contain prices and keep inflation to its minimum.
There are a lot of talks of transforming Malaysia into becoming a high-income nation by 2020. This on the outset looks something commendable, but nonetheless we must be wary of such simple macroeconomic statistics. Pushing national average income into the high income bracket may not mean much if there is wide disparity in income and wealth distribution. Averages alone do not tell the true picture. Accordingly some additional measures of income dispersion among individuals and even among the races may be necessary if we are to develop the nation as a whole into a high-income nation that enjoys not only prosperity but also peace among its people. Economic deprivation among groups of people or races can lead to tensions, crime and chaos.
Going back to the global scenario, what worries me most is that, judging from history, in situations as we are in now, mankind tend to resort to devastating wars to ‘solve’ such problems. The last ‘stronghold’ in this global political game, as I see it, is Iran. An attack on it seems imminent. I hope I’m wrong on this because the effects of a World War III, with many countries having nuclear capabilities, are unthinkable.
In conclusion, I have no doubt that the precarious global socio-economic-politico-environmental situation we are currently in is rooted in fiat money compound-interest monetary system. It is hence not surprising that Albert Einstein had apparently once remarked that the most powerful force in the universe is compound interest. We are at a juncture of human history where mankind has to boldly and urgently confront this manmade ‘virtual force’ if it must save itself from its own utter destruction.