Jumping debts and cyclical borrowing.

Cycles govern most aspects of our environment. The returning seasons, the quarters of the moon and the succession of days and nights are decisive for life on planet Earth. History is subjected to similar periodic phenomena, as empires rise and fall. And business and trade have their own times of growth and slump. And, though the cosmic cycles have given up their secrets and the movements of empire show the historic limits of accumulated power, the cycles of production and consumption, those very human affairs, are still clouded in mystery. What has been studied so far (Kitchin, Juglar, Kuznets, and Kondratieff) is growth in production. This led Schumpeter to conclude that technological innovation was the driving force of growth. And that may be so, but why the cycles? Innovation is an accelerating historical force that can’t be chopped up conveniently into regular slices of time. The cyclical time factor must come from somewhere else.

More supply needs more demand and, hence, more money in circulation. This is done by granting credit, either by lending unspent incomes, or by creating virtual banking money. Credit is granted for investments and for consumption, but only the second case will be considered, that of consumption, of public state spending and private personal spending.

Credit for consumption increases spending to-day and reduces spending to-morrow (when the credit is repaid), unless the credit is constantly renewed. In which case, only the interest is deducted from to-morrow’s spending. An increase in spending due to credit is followed by a reduction in spending, unless the credit and the interest are borrowed again. So past credit and interest are added to the new credit that is maintaining growth in demand. All the credit paid back must be lent out again. And growth cycles in demand are in fact credit cycles.

Credit cycles result directly from successive emissions of treasury bonds. These pay yearly interest, but the value of the bond is only returned at term, in one sum.

A government decides to spend 100 units more per year. To do so, the treasury emits 5-year bonds that pay 5% interest.

The first year = 100

The second year 100 plus 5% interest on the previous year’s borrowing = 105

(Neglecting compound interest)

The third year 100 plus two years interest = 110

The fourth year = 115

The fifth year = 120

But on the sixth year, 125 plus 100, as the first year’s bonds have come to term and must be borrowed again = 225

The “jump” (from 120 to 225) is the turning point in the cycle. It must necessarily cause a slow down in credit growth, as extra funding for an already expanding debt gets more difficult to find. For the usual 10-year and 30-year T-bonds the “jump” is less pronounced, as the sum of interest (x9, x29, instead of x4) accumulated before the “jump” is greater. But the slow down occurs for the same reasons. Government debt, borrowed in the name of the governed, grows and stabilises and grows again, following different time spans. Periodically, the growth and the stabilisation phases of two or more cycles coincide. And the accumulated growth mirrors the magnitude of the ensuing slump.

Public borrowing by states (cities, counties, etc.) depends on unspent incomes. Government debt circulates money that would not do so otherwise, it makes use the nation’s (the world’s?) savings. Private borrowing by individuals is not able to raise funds with bonds, and must depend on banking credit. Individual debt circulates promises of future payments. It creates more money and increases demand. But, as the rules of private borrowing are different, there are no particular turning points.

Consumer credit and mortgages are usually paid back piecemeal. This means that the amount of renewed credit increases faster, but that there is no “jump” at the term of the debt. For example, a 5-year mortgage at 5%, paid back in five instalments, for a growth in spending of 100 per year, gives a progression of credit something like this:

100, 125, 155, 190, 235, 285, 330, 380, etc.

The amounts paid back (that must be lent out again) increase rapidly. And the necessary lending out of ever larger amounts seems to explain the actual debacle of sub-prime loans. Private borrowing also has a variety of time scales, and these regularly coincide. So mortgages and consumer credit just pile up as high as they can. Whereas bonds are cyclical, as the value emitted must “jump” at each term. The two interact however, as both increase demand for consumption and, thereby, sustain investments and employment. And, at regular intervals, a privately cumulated borrowing bubble coincides with a publicly cumulated borrowing “jump”. That seems to be happening at present, as it did 57-odd years ago at the start of the Cold War. And each time around, the dimensions of the event are multiplied.

Another cumulative factor is the gradual synchronisation of the world’s markets in the emission of treasury bonds. Different nations used to have their “jumps” at different points in time. Though the imperial nations had synchronised their dominions and had already magnified growth and slump. Then, the USA being the only solvent nation after WW2, the international monetary institutions were all backed by the US dollar and this synchronised borrowing in the Western sphere of influence. The Soviet and Chinese markets and their satellites tried (with decreasing success) to manage on their own until the early 90s. Since then, all is one and one is all.

It is difficult to grasp the sheer dimension of what is happening. There is no precedent or equivalent to this one-world system of finance and trade. That we all inhabit the same space ship is becoming ever more obvious, as the effects of climate change become apparent. At present, financial synchronisation has also become global but, as with emissions of carbon dioxide, government borrowing is still considered a national prerogative. And, just like greenhouse gases, borrowing is really an integral part of the technological and ideological system that rules all existence on this planet.