Bankruptcy Now.

On the one hand, we are told that economic growth is the only way to reduce the world’s miseries. On the other hand, it has been clear for some time that we can’t go on indefinitely taking increasing amounts of « stuff » out of the Earth’s crust, transforming it and putting it into landfills, rivers, oceans and the atmosphere. Firstly, because this is already disturbing the delicate balance of our planet’s ecosystem and, ultimately, because the « stuff » is exhaustible. This contradiction is so fundamental that the mechanisms of growth are usually ignored. And yet, the mastery of growth is essential, whichever way we go.
Value is measured when goods and services are exchanged for money. The wealth of nations is the sum of these measured values. It can increase in several ways. One way is to introduce the exchange for money where it did not exist before, as with numerous domestic services. Another is to increase the sales of existing commodities or to sell a greater variety of commodities. In all cases, if the value to be measured increases, then the amount of money needed to measure this increased value must also increase.
Money is materialized as metal or paper. But, nowadays, it is mostly virtual, book-keeping money, credit and debit. This quite recent reduction of material money in favour of electronic payments has meant that increasing the flow of money relies more than ever on accountancy, rather than the printing press and the mint. And that circulating extra money in this form no longer depends on the treasury and the central bank. Any bank can and does grant overdrafts to its customers, or mortgages, or consumer credit. It can also lend money for investments, commercial and industrial. (1)
Money, be it gold coin or a plastic card, is merely credit, paying power. Granting credit in gold coins is limited to the amount of bullion on hand. Whereas electronic credit knows no boundaries. And demand can keep abreast of supply whatever its growth, as the amount of money in circulation can increase indefinitely. Or so it would seem. Though, in practice, there are periodic ups and downs in demand, with repercussions on supply. Variations which appear to be a consequence of the borrowing process.
Borrowing increases demand, but paying back reduces it. The credit and the subsequent debit give a zero result, unless the refunds are lent out again. The necessary renewal of previous debts is added to the necessity of granting new debts to sustain the growth in demand. As debts must never be settled, they are renewed regularly at each of their terms, by the same or by a different borrower, and pile up indefinitely. Though it does get harder and harder to extend the scope of borrowing. Unless, or until, high inflation devalues the currency the debts are measured in.
Borrowing insures demand for both investment and consumption. However, their respective shares of the total debt vary with time. There are times when a majority of debts are used to finance investments. And there are times when debts are used mainly for public and private consumption. This alternation seems to show that investors borrow when inflation is high and consumers borrow when inflation is low. Or, alternatively, that investors who borrow can bring about inflation by raising the price of their commodities, whereas consumers who borrow only influence prices by excessive or insufficient demand. And these tend to balance out, as far as inflation is concerned. However, some excesses result in price bubbles, as with the present situation on the property market. (2)
Investments are financed by means of shares, debts and profits. Shares lessen control and claim a part of the profits. New debts must replace refunded ones, as investments need renewing, and perpetual interest takes a part of the profits. Whereas investing profits, once they are sufficient, represents the ideal form of capitalistic accumulation. Invested profits refund themselves and generate more profits to be invested. Comes a time when the recourse to borrowing for investments is marginally necessary and all important shares have been bought back. A time when corporate power is at its peak. And the burden of debt is on the consumer. (3)
Investment and consumption are the beginning and the end of the production process. Growth means more of both. But an increased investment must always precede any increase in consumption. And granting credit to the one or to the other does not have the same consequences. In the first case, invested value goes into the production process, becomes part of the price of commodities and is refunded by the exchange for money, as is the debt but not the interest. In the second case, the value consumed is not refunded by a future exchange. It must be created again by work, and so it is with both debt and interest.
Value is measured by the exchange of commodities for money. It is the sum of invested value and added value. The exchange returns the past value of investments and determines the present value of consumable incomes. Added value is that value which can and should be consumed, though it never actually happens that way. Profits and interest make up a part of added value, and both may be invested instead of consumed. Taxes are another part of added value, and governments regularly contribute to private investments, as do those who receive salaries and rent. These investments reduce demand for consumption. However, if foreign trade is able to exchange consumer goods for raw materials, this reduces the supply for consumption and counterbalances an insufficient demand. Otherwise, invested added value and the subsequent increase in supply must rely on consumer (and state) borrowing for an equivalent demand.
Growth in supply needs growth in demand, which is fuelled by borrowing. Borrowing for investment is refunded (except for interest) without reducing demand. Borrowing for consumption is refunded (as is interest) by reducing demand.
If loans are used for investments, they refund themselves (except for interest) so that renewed loans renew the investments. This means that (except for interest) a constant debt keeps up a constant investment and a constant supply.
If loans are used for consumption, refunding them (and the interest) results in a reduction in demand. This means that a constant demand will depend on borrowing to refund itself (plus interest) and borrowing to maintain itself. Borrowing for consumption increases demand but, to maintain that growth, borrowing must (more than, because of interest) double at every term.
By reaping larger and larger profits and investing them, corporations have forced states (because of tax reductions) and workers (because of reduced salaries) into debt. All those trillions owed by humanity, mainly by the richest 15%, are finding it hard to double as some of the longer debts (ex. 20 year mortgages) reach their term. Huge sums are being refunded which need to find new or already indebted borrowers in just as huge numbers. When refunded debts are not lent out again, this will reduce demand and, in all likelihood, start off a recession cycle of unprecedented dimensions, proportional to the size of our accumulated debts.

(1) A banking rule in the form of a ratio (Cook) says that the value of credit granted by a bank should not exceed twelve times its reserves. But even this generous multiplication is no longer applied by all. Some deposit firms have reserves which cover less than 1% of the credit they are handling. See Mike Whitney’s Counterpunch article : http://counterpunch.org/whitney03012007.html

(2) Buying and selling on the property market and the stock exchange are a form of speculative gambling. As such they have little or no influence on the production of wealth. However, both markets regularly get caught in a bullish spiral and form a bubble, which must deflate or burst. Resulting in a massive drain of wealth, with middle class savings going to banks and corporations. It is not inconceivable that these periodical transfers of wealth could be provoked deliberately or, at least, that they are an inherent part of the process of accumulation.

(3) Investment funds and private equity companies borrow to buy up companies, but this invested debt is aimed at increasing productivity and profit, not supply.