The Bookkeeper's Dilemma: How Falling Interest Rates Destroy Capital, and Why the Accounting Cannot See It
Since the interest-rate structure began its secular decline in 1981, the United States has experienced the cheapest cost of capital in the history of organized finance — culminating in a 2020-2021 window when the federal funds rate touched zero and the 10-year Treasury briefly traded below 1 percent. Under any conventional theory of investment, this should have been the most favorable capital-formation environment industrial civilization had ever produced. It was not. Corporate capital expenditure relative to profits declined against a rising tide of share buybacks; the marginal productivity of debt — how much additional GDP a new dollar of borrowing produces — fell from more than 70 cents on the dollar before 1981 to a small fraction of that by the 2010s; and the same falling-rate regime that was supposed to unleash productive investment instead financed a forty-year run of financial engineering. This essay develops the specific mechanism that explains the puzzle: falling interest rates destroy capital, silently and by construction, through an asymmetry in accounting standards that has never been corrected because the standards themselves were compromised in 1914 and have not been restored since. Antal Fekete's Law of Liabilities — the specular twin of the accounting profession's own Law of Assets, articulated but never codified — reveals that every fall in the interest-rate structure raises the liquidation value of existing fixed-rate debt, producing a real economic loss that conventional balance sheets do not record. The loss does not vanish for being unrecorded; it accumulates, weakens the capital base of the firms and financial institutions carrying it, and eventually forces recognition through bankruptcy, banking crisis, or both. This essay develops the mechanism with worked arithmetic, traces its 1914 origin and its one surviving correct implementation in modern pension accounting, distinguishes it carefully from Austrian Business Cycle Theory (with which it is often conflated and from which it substantively differs), explains why the standard Quantity-Theory-of-Money critique of central bank policy misses it entirely, and closes with the framework's reading of what the mechanism implies for the interest-rate structure the world has lived under since 1981 and is now, in 2026, tentatively reversing.