Microcredit.

Microcredit has had massive news coverage recently, with the Nobel peace prize awarded to Muhammad Yunus and his Grammeen Bank. This not so new form of banking (Yunus granted his first loan in 1974) is a step up from the pawnbroker, inasmuch that the borrower who has nothing to pawn can nevertheless be deemed credit-worthy. These small loans have been widely praised and, if a few have expressed misgivings, fewer still, if any, have considered what debt is all about. Or that Third World microcredit may just be a down-scaled version of the frantic borrowing going on in the First World. We have the mortgages and the credit cards. They get the loose change.
Debts have one vital function, which is to increase demand. Whereas, the paying back of debts reduces demand. This means that demand increases as long as new debts are granted and old debts are renewed, as long as borrowing increases. The question being, is there a limit to borrowing? Can new and larger debts be contracted indefinitely? Logically, the answer is no. Logically, there comes a point where more borrowing is impossible, but no one seems to know where that point is. Not even Alan “Magic” Greenspan.
The price of commodities is partly investment and partly added value. The added value is the nation’s income and is divided into salaries and wages, social insurance, taxes, rent, commercial margins, corporate profit and interest. So what do we see? There’s been a down trend in salaries (with illegal labor) and in social insurances and taxes. Whereas rent, margins and profit have taken all the growth in income, and interest has tried to remain stable by reducing its rates (10% of 1000 = 5% of 2000). And the growth of all this demand is fuelled by borrowing. Or, rather, growth is fuelled by new debts, while all old debts must be constantly renewed.
So debts pile on debts and all payments are postponed by credit. We’ve now reached the stage where citizens of the First World owe on average three years income. One year they’ve borrowed themselves, one has been borrowed by their local governments, and the third is owed in their name by the National (or Federal) State. Europe even has a fourth supra-national (European) level of borrowing. And then there’s the World Bank granting loans backed by First World central banks. It just goes on and on, and we haven’t a hope in hell of ever paying it back, as that would just bring about a recession.
There is, however, a quick way of canceling debts. It’s called inflation and it comes about in several ways. Inflation is generally perceived as rising prices, which can result from demand exceeding supply. Or, more classically, wage demands not linked to increased productivity are compensated by higher priced commodities. However, the most spectacular form of inflation is the result of too much paper in circulation. Paper money, that is. Unable, for some reason or other (e.g. The Weimar Republic), to raise enough taxes, the State pays its expenses by printing bank notes. As this money is not linked to any kind of production, it inflates demand and raises prices.
However, when the State pays its expenses with bonds, instead of increasing demand it merely displaces it. The State spends what others would rather save. Instead of taxing excess income, the State borrows it and pays interest. There is no excessive demand and no inflation.
So the State borrows to balance its budget. And it borrows to pay back previous debts and their interest. And, as the debt accumulates, the amount paid back gets bigger, and so does the amount borrowed. These growing budget deficits are recurrent and may finally cast doubts as to the State’s financial situation.