What does the current interest rate tell us about the dominant economic system in the world?

The real interest rate in the country is minus 2.7% since the current interest rate is at 2% and the inflation rate is 4.7%. With this kind of economic and monetary environment, savers are losers and borrowers are winners. “Revving up economic activity” is the goal why BSP keeps interest rate at the current level.

Turning to mises.org for guidance on how to see this kind of environment, I stumbled upon Murray N. Rothbard’s article about The Interest Rate Question. According to him, this is one topic where “financial writers are mired in hopeless confusion.” If this is the case then, “how can we expect the public to make any sense of what is going on?”

And then at the middle section of the article, he identified the real cause of lower interest rates. He describes this as “a repeated injection of inflationary bank credit by the Fed (In our case, replace the Fed with BSP).” Such monetary policy will “keep the artificial and unsound economic boom going (in our current situation, “revving up economic activity”).”

Another interesting observation Rothbard wrote is about the international aspect to this interest rate problem. According to him, capital moves from an environment of low interest rates to higher ones:

"As a long-run tendency, capital moves from low-return investment (whether profit rates or interest rates) toward high-return investments until rates of return and equal. This is true within every country and also throughout the world. Internationally, capital will tend to flow from low-interest to high-interest rate countries, raising interest rates in the former and lowering them in the latter."

If Rothbard’s analysis is correct, then the current monetary policy that we have in the country might cause capital flight into countries that offer higher interest rates.

Rothbard then concludes his article by saying that his students should not blame him if they find the question of interest rates and other topics like inflation, money and banking, and business cycles complicated. The answer to the question can be easily understood if not for government’s interference.

Murray N. Rothbard and other economists from the Austrian school reject the mainstream narrative that capitalism is the dominant economic system in the world today. Instead, they think that the current economic crisis the world is experiencing right now is not because capitalism has failed. In reality, it is because of economic and monetary policies created to replace capitalism. Economic and monetary policies such as minimum wage rate, credit expansion, and lower interest rates are not characteristics of capitalism. Though reality is difficult to accept. Ludwig von Mises calls these policies as socialism in practice with the external appearance of capitalism. In his magnum opus, the Human Action, Mises further provided institutional proof that what we have as a dominant economic system in the world today is not capitalism. Our existing monetary system is not connected to anything of value, but purely fiat. We also have central banking and a redistributionist and confiscatory tax policy. Add to them, the interference with price structure, currency and credit expansion, and welfarism. Mises argued that in reality, the spirit that shaped all these policies permeate college textbooks and periodicals. This spirit inspires teachers, theologians, and politicians and its influence can be seen in party platforms, plays, and even novels.