Capital Interest, the Financial Sector and Debt Expansion: Toward a More Sustainable and Equitable World Order

Abstract

This chapter presents issues concerned with capital interest, the financial sector and debt expansion. The origin of capital interest is examined. There are three additional factors of interest in the case of capital interest, i.e. biophysical, monetary and anticipatory factors, factors which cannot be attributed to the case of the origin of money interest. Examination of five theories of capital interest is made before an alternative new theory of capital interest is proposed. This chapter then introduces F. Knight’s analysis of uncertainty. Four forms of uncertainty, i.e. perception, modelling future, effect and implementation, are discussed in relation to the forward-looking nature of humans—a nature that proves to be a, if not the, key element of investment activity. The steady growth in the financial and insurance sector is one of the conspicuous trends in developed society, in particular observable after World War II. A close examination of the balance-sheet of three representative producers, Sony, Toyota and Honda, shows that a considerable part of operating income for those three producers derives from their respective financial business divisions. The balance sheet status of each representative producer is discussed in relation to the quantitative easing policy of the Bank of Japan. In addition, this chapter also discusses the role of the World Bank and the International Monetary Fund—two powerful and influential organizations capable of creating a broad world economic policy consensus by way of their system of weighted votes and majority rules. In the context of that discussion, this chapter examines serious debt trap in terms of external debt to national income ratios for three groups of countries. An emerging paradoxical yet inevitable consequence is that the richer a country is, the more that country can borrow and the larger external debt that country can maintain. Ever more debt to the world community results. Identifying who has the right to issue money and money substitutes is the key to understanding this paradox. This chapter discusses the meaning of the Macleod-Soddy-Allais (MSA) relation and follows that discussion with some concluding remarks. The MSA relation represents the theoretical basis for explaining financial instability and the fact that the whole economic system undergoes sporadic yet endlessly repeating financial explosions and ultimate collapses.