The rule of chaos.

Supply and demand can only grow together. And demand depends on solvency, on being able to pay. Increasing demand needs more paying power. And paying means disposing of some form of credit, for past or future earnings. Credit is the key to the whole process. Too little credit and growth is stunted, and new technologies are not developed. Too much credit causes market bubbles and inflation. But the point at which the credit is circulated is as important as the quantity of extra credit granted. The choice of who gets to spend more and under what conditions, is far from neutral. It is an act of absolute power and of complete responsibility.

Originally and for most of history, credit was granted to merchants and kings. In recent times this has become credit for investment and credit for consumption. The choice is between these two. Favouring one rather than the other has far reaching consequences, and it is an ideological decision based on the principles of profit and the private property of the means of production. And, though banks actually grant the credit and are perceived as the main culprits when there is a crunch, they are just cogs in the system, albeit major ones. What must not be revealed is that the machine as a whole is at fault. A machine first conceived by robber barons, pirate merchants and usurious bankers. A machine built and perfected to concentrate wealth in the hands of a few.

A logical approach seems to suggest that increasing credit should go to increasing investments. As increased investments must precede increased consumption. And, in fact, increasing credit has been used in this way in the past, and still is. What changes is the proportion of extra credit that is invested. There have been times when all increasing credit was invested. The bombing and fighting in Europe (and the Far East) during WW2 had destroyed bridges and railway stations, docks and factories, power lines and canals, and reduced cities to rubble. All this had to be rebuilt before consumption could in turn increase. It lasted more than ten years. And mass production of houses, cars, refrigerators, and other consumer goods only got going in the late 1950s. Over the same period, the US was turning around a major part of its industrial production from supplying a military market to satisfying a civilian one. Investments were the priority everywhere and credit was used to finance them.

So increasing credit increases demand for investments. But investments are no more than accumulated past added value. And added value is the value to be consumed, the national product, the disposable wealth. When investments grow they increase added value, and demand for consumption out runs supply. This results in inflation, thereby cancelling the increased demand. And, when the chain of increased investments reaches its final consumer stage, the devalued demand is insufficient. However, regular growth in investments and perseverance would settle the matter. As, at some point, growing demand would join growing supply. Unfortunately, investments do not grow regularly and other factors have their parts to play.

When an investment is financed with credit, the nominal owner is the borrower, but it is the lender who gets back the value invested (when it is restituted by the production process), plus interest. The nominal owner only owns the investment when the credit is paid back. By which time the investment is used up or out of date. While the profit made by the investment is reduced by the payment of interest. This form of financing investments gives power to the banks that grant the credit. An alternative is to replace credit by shares, but then the shareholders own the investment and the profit. Whereas the entrepreneurial ideal is to finance investment growth with profits, ensuring ownership of both.

The perpetual conflict over the division of added value directly affects the circulation of increasing credit. It determines the passage from investor credit to consumer credit. Increasing investments by the means of credit increases added value and consumer demand ahead of supply. But if the increased added value is invested, instead of swelling demand for consumption, then supply and demand remain balanced and there is no inflation. Instead of going to taxes and wages, the extra added value is considered to be profit and is invested. This allows investments to auto-finance themselves, as increased investments increase profits and increased profits increase investments. However, when consumer supply does finally increase, the demand is lacking. And any increase of consumer demand, by a redistribution of added value, would mean reducing profits and returning to financing investments with credit. The other solution to failing consumer demand is to grant credit to the consumers. Growing added value continues to be invested, while consumer demand can also grow, thanks to generous credit facilities.

The main input of increasing credit moves from investment to consumption, but the two forms of spending are quite different. The value of an investment is returned by the production process, so the credit can be repaid and borrowed again. Only the interest concerns added value and consumer demand. Whereas consumed value is not returned and the credit can only be repaid by reducing future consumption. Increasing consumer demand with increasing credit is a dead-end. As credit must pile up, new on old, and never be paid back, until all the added value that is usually consumed (wages and taxes) goes to paying the interest on debt. That is the ultimate point that cannot be passed, but the credit machine always breaks down before attaining such heights.

Investing added value (profit and rent) and granting credit for consumption can be synchronised to avoid inflation. But this apparent stability has its limits. As consumer credit cannot be paid back without reducing demand, growth depends on adding new credit to renewed past credit. This applies as much to individuals as it does to towns, cities and to the governments of nations. As an ever greater part of added value is being invested (in stocks and real estate), wages and taxes dwindle and so does their capacity to pay interest.

Growth in added value (national product) goes to investments, while the part that is consumed remains constant, and hence diminishes in proportion to the whole. And accumulated consumer credit claims an ever greater slice of wages and taxes for the payment of interest. These reductions, in relative and absolute terms of the fraction of added value actually being consumed, are possible because of the froth of derived consumer credit. Transactions continue, but payments are ever more tortuous and actual cash, here-and-now money, is multiplied ten fold, twenty fold or more, into pay-you-later money. Then, as the diminishing fraction of consumed added value approaches zero, the machine runs out of fuel and stalls. This leads to a free-for-all, where the richest and the roughest always win the highest stakes, and are ready to start things up again for another cycle.

Investing added value and consuming credit is not a viable proposition. Its apparent stability is short-lived and ends up in chaos. So what of investing credit and consuming added value? Is it fatally doomed to inflation and bank (or state) control of the means of production, to centralised planning and the end of entrepreneurial initiatives? Is there no alternative but chaos or total control? Can growth in demand follow another path? A path where money is a tool for social cohesion on a global scale, instead of an instrument for division and dominion. Can it be understood that money as such does not exist? That it is just a medium of exchange and is the ongoing creation of a general consensus. And yet banks (and states) are allowed to act as though it was theirs to manipulate in arcane ways. As long as money, the wherewithal of investment and consumption, is not a public matter, plutocracy will continue to rule a chaotic and desperate world. Socialism or barbarity is still the crucial choice.