There are certain established facts in economic theory on which we have to accept as natural. The presence of interest rates is one of them. Nobody chooses to challenge their existence. Even the current zero-bound interest rates in the Eurozone (including UK) and the US do not mean interest will disappear. Banks still charge interest on mortgages, and central banks still fumble around with interest rates to dictate monetary policy.
Incredulity would result if one should say get rid of interest rates. That would mean a complete overhaul of the financial markets. Banks would have not function and aspects of economic theory would fly out the window quicker than you can say ceteris paribus.
Interest rates are a given because the language of economics, and more specifically economic relationships, tends towards the idea of the naturalness of credit. Credit is assumed to result in growth, but it is a truism that there will also be debt. So the world economy is constantly in a debt-growth cycle. To grow assumes the country has incurred debt.
Germany current has a trade surplus meaning that it currently exports more than it imports. It has a trade surplus of $54 bn mostly with countries in the Eurozone, countries that are currently on the brink of bankruptcy. Cheap imports in these near bankrupt countries have meant that these countries cannot invest in their own domestic industry, which means an enervated commercial sector as well as debt repayment problems. Deflation is occurring meaning that domestic companies are not receiving enough in their coffers and cannot pay wages leading to unemployment. To improve will require expansionary fiscal and monetary policy, meaning Germany spends more resulting in greater debt for Germany, or increasing quantitative easing. Interest rates are too low to have an effect.
All this seems rather tortuous, but also reflects the interconnectivity of the fiscal and monetary system. One would think that trade surplus is a good thing but the criticism levelled against Germany for maintaining this surplus and its impact on the rest of the Eurozone reveals that it may not be. The problem with the eurozone is that because monetary policy of all countries are entwined and centralised, the impact of changes in policy has contagion effects. That’s why the UK, for the most part, has been protected from the burdens of the Eurozone.
Yet there is something more pernicious in play with most economies in the world. Fiscal and monetary policy is founded on the idea of surplus and credit. For instance, with fiscal policies Governments borrow from the banks or from other nations in order to spend. In monetary policy, interest rates are set according to borrowing between banks. Interest is considered the price of borrowing.
But what if there is no price to borrowing, then how does the economy look? This is an exercise of imagination and given the established nature of financial system, it is not something that is readily considered and requires much pondering. But it would probably mean that we would spend as much, which means fewer goods in the economy. Entrepreneurs would also be stifled as access to money would be limited so once again you have fewer goods in the market. Prices would also be lower, which means wages would be lower. That might be fine if the purchasing power of a pound can purchase required goods. Banks would be less willing to give loans because they would not receive a return. They would towards investing instead, making money from the share of the company. To do this, they would scrutinise the investments far more. One thing for certain is that there would less financial instruments in the market, and the concentration would be on building trade.
Does that mean there would be more trade than in a debt based economy? Probably not, but it does mean that the financial markets would be less vigorous. This may not be a bad thing as buying and selling of goods and services will not have the debt element factored in. So cheaper prices, less wages, but the purchasing power could potentially be the same.
All this is hypothetical and subject to a lot of criticism. However, we have failed to consider the possibility because we take interest and the necessity of credit as a given. Maybe we should start contemplating.