Back to the frying -pan.
Growth concerns both supply and demand. And growth in demand needs more buying power, which ultimately means more money in people’s pockets. Or should it be “meant”, when payments with bills and coins are getting ever rarer? However, until quite recently, money had a material form whose quantity was obliged to increase to allow more spending. When money was gold and silver, multiplying demand depended on new sources of precious metals. The introduction of paper money resolved the problem of quantity, but there remained the question of how the extra money was circulated, of who was the first user. Minting and spending new coins had always been a state prerogative. Printed money followed the same path, with frequent and even notable abuses.
Meanwhile, another kind of payment was circulating in ever larger quantities. Merchants have always traded for profit, it is their livelihood. Selling to buy focuses on commodities, the sold and the bought. Buying to sell focuses on money, less for more. So that, very early on, merchants realised that money was also a commodity to be bought and sold at a profit, and a virtual one at that. Transactions could be made without any actual money changing hands. Credit could be granted and returned in the form of scriptural money, by simply writing it up in a ledger. With time – first in the Ancient World and again in the Renaissance – banking specialised and took financial control of the merchant sphere by allowing or refusing credit.
To pay for budget deficits often caused by dynastic wars, states minted more coins when they could obtain the bullion or were obliged to debase existing coins when they could not, while banks circulated and accumulated wealth by granting commercial credit at interest. Then the more secure banks, those backed by city-states such as Venice and Florence, began to finance various European monarchies. Even with galleons bringing gold and silver from the Americas, Charles V of Spain was heavily indebted to Venetian bankers. Progressively, credit was shown to be a way to increase spending that was far more dependable than the circulating of ever more coins and notes, and their current account equivalents. (US monetary growth over the past 50 years demonstrates this preference. The newcomer M3 has completely cannibalised M1. http://en.wikipedia.org/wiki/Money_supply#Money_supplies_around_the_world")
Spending depends on the quantity of money in circulation. But the speed at which money circulates is just as important. A sum of money can change hands twice in a day, or only once. It can allow the exchange of twice its value, or of only once. A faster circulation of money has the same effect as an increase in the quantity of money. However, the speed of spending is not really controllable. Daily and weekly wages circulate faster than monthly and yearly salaries, and electronic payments outstrip paper checks sent by land mail, and inflation accelerates spending while deflation slows it down. But the way people are paid cannot change easily, and technology happens when it does. As for provoking inflation to get people spending, who would dare plead for that? So quantity remains the only lever of control over demand. And even that lever has its limits, to the dismay of Bernanke, Trichet, Shirakawa, et al.
Growth is driven by demand, and demand is fuelled by credit. But demand has two distinct forms. One applies to investment, and the other to consumption, and this distinction affects the credit they depend on. Invested credit goes into the production process, and comes out again with value added by human labour. The credit is returned with added value to pay for interest. So that a renewed credit renews the investment, and production continues. Consumed credit is used up and does not return, nor does the interest. So that a renewed credit merely pays itself back. It neither pays the interest, nor does it renew consumption and maintain demand. The difference between investment and consumption means that the credit needed to increase their respective demands must follow separate growth curves. In the first case, increasing credit increases investment in a direct proportion. (Questions such as how the interest is paid, where does it come from, and the effect it has on the general balance, are not considered here). In the second case, renewed credit does not renew consumption, so that increasing credit must first insure this renewal, and only then will it allow growth in consumption. Credit for investment grows as a constant percentage of GDP, whereas credit for consumption must necessarily follow a much steeper growth curve.
Households have spent their incomes in advance, and the same goes for local and national governments. Once consumer credit was institutionalised -- public spending is also consumption -- to become the fuel for growth in demand, it could only lead to excess. The multiplication at each turnover was completely out of step with the growth of domestic product, and the outcome was unavoidable. What needs explaining, therefore, is not the proliferation of consumer credit, it is the reason for its existence in the first place. Why did growth in consumer incomes (wages and taxes) lag behind so consistently that it had to be supplemented and progressively supplanted by growth in consumer credit?
Increased investments are supposed to increase incomes, so that consumer demand keeps up with supply. If this was the case, invested credit would fuel growth in demand for both investment and consumption. This ideal balance is in fact upset by inherent problems, namely interest, inflation and private property.
Invested credit comes back increased by the added value of human labour. If some added value goes to interest, human labour gets less than its share, and consumer demand is insufficient. Unless the interest is the value of banking labour, and is consumed. But, as banking costs are added to interest, this is never the case. Interest goes to financing more credit, which results in more interest in an ever increasing spiral.
Not all increased investments lead directly to increased consumption. Many investments, such as R&D, far precede the equivalent consumption. More generally, growth in production begins at the primary and secondary stages before reaching the consumer stage. This is most obvious when a nation rebuilds the destructions of war. There is plenty of work, but not much to eat, nothing to wear and nowhere to live. If, during the first stages of growth, increased investments go to increasing incomes, then consumer demand will precede consumer supply, with inflationary consequences. More money chasing the same quantity of goods and services induces a rise in prices. And, when the consumer supply does increase, the higher prices cannot be met by demand. However, if the growth in investments continues, as it did in post-WW2 Europe and Japan, the continuing growth in incomes this generates will at some point be in step with increasing consumer supply. Later, if investment growth slows down while consumer supply is still growing fast, demand must be stimulated with credit. All the more so when investments begin to be outsourced, taking incomes with them.
Invested credit takes interest away from incomes. But there is also the question of who owns the investment. Is it the banker who grants the virtual value of credit, or is it the entrepreneur who puts it into a production process to create real value? Moreover, incomes never seem to correspond to consumer supply, too much or too little. The litigious property of the means of production, and the constantly unbalanced state of consumer supply and demand, logically led to the notion that incomes should be invested, thereby clarifying the ownership of investments, and that consumption should be credited according to supply. So most incomes stagnated while a few got bigger and bigger as they accumulated interest, rent and profit. And consumer credit, mortgages and government debts had to multiply extravagantly just to stay ahead. A jump from the frying-pan of banks/central bank/government control over investments and of endemic inflation, into the fire of an abysmal incomes gap and a catastrophic credit collapse. And, as things are shaping up, humanity is about to scramble back into the frying-pan.
Having walked on the Moon and landed on Mars, having invented perfume and wine, having cloned and genetically modified living matter, split and fused atoms and run a hundred metres in less than ten seconds, must humankind resign itself to these two dismal alternatives?
Meanwhile, another kind of payment was circulating in ever larger quantities. Merchants have always traded for profit, it is their livelihood. Selling to buy focuses on commodities, the sold and the bought. Buying to sell focuses on money, less for more. So that, very early on, merchants realised that money was also a commodity to be bought and sold at a profit, and a virtual one at that. Transactions could be made without any actual money changing hands. Credit could be granted and returned in the form of scriptural money, by simply writing it up in a ledger. With time – first in the Ancient World and again in the Renaissance – banking specialised and took financial control of the merchant sphere by allowing or refusing credit.
To pay for budget deficits often caused by dynastic wars, states minted more coins when they could obtain the bullion or were obliged to debase existing coins when they could not, while banks circulated and accumulated wealth by granting commercial credit at interest. Then the more secure banks, those backed by city-states such as Venice and Florence, began to finance various European monarchies. Even with galleons bringing gold and silver from the Americas, Charles V of Spain was heavily indebted to Venetian bankers. Progressively, credit was shown to be a way to increase spending that was far more dependable than the circulating of ever more coins and notes, and their current account equivalents. (US monetary growth over the past 50 years demonstrates this preference. The newcomer M3 has completely cannibalised M1. http://en.wikipedia.org/wiki/Money_supply#Money_supplies_around_the_world")
Spending depends on the quantity of money in circulation. But the speed at which money circulates is just as important. A sum of money can change hands twice in a day, or only once. It can allow the exchange of twice its value, or of only once. A faster circulation of money has the same effect as an increase in the quantity of money. However, the speed of spending is not really controllable. Daily and weekly wages circulate faster than monthly and yearly salaries, and electronic payments outstrip paper checks sent by land mail, and inflation accelerates spending while deflation slows it down. But the way people are paid cannot change easily, and technology happens when it does. As for provoking inflation to get people spending, who would dare plead for that? So quantity remains the only lever of control over demand. And even that lever has its limits, to the dismay of Bernanke, Trichet, Shirakawa, et al.
Growth is driven by demand, and demand is fuelled by credit. But demand has two distinct forms. One applies to investment, and the other to consumption, and this distinction affects the credit they depend on. Invested credit goes into the production process, and comes out again with value added by human labour. The credit is returned with added value to pay for interest. So that a renewed credit renews the investment, and production continues. Consumed credit is used up and does not return, nor does the interest. So that a renewed credit merely pays itself back. It neither pays the interest, nor does it renew consumption and maintain demand. The difference between investment and consumption means that the credit needed to increase their respective demands must follow separate growth curves. In the first case, increasing credit increases investment in a direct proportion. (Questions such as how the interest is paid, where does it come from, and the effect it has on the general balance, are not considered here). In the second case, renewed credit does not renew consumption, so that increasing credit must first insure this renewal, and only then will it allow growth in consumption. Credit for investment grows as a constant percentage of GDP, whereas credit for consumption must necessarily follow a much steeper growth curve.
Households have spent their incomes in advance, and the same goes for local and national governments. Once consumer credit was institutionalised -- public spending is also consumption -- to become the fuel for growth in demand, it could only lead to excess. The multiplication at each turnover was completely out of step with the growth of domestic product, and the outcome was unavoidable. What needs explaining, therefore, is not the proliferation of consumer credit, it is the reason for its existence in the first place. Why did growth in consumer incomes (wages and taxes) lag behind so consistently that it had to be supplemented and progressively supplanted by growth in consumer credit?
Increased investments are supposed to increase incomes, so that consumer demand keeps up with supply. If this was the case, invested credit would fuel growth in demand for both investment and consumption. This ideal balance is in fact upset by inherent problems, namely interest, inflation and private property.
Invested credit comes back increased by the added value of human labour. If some added value goes to interest, human labour gets less than its share, and consumer demand is insufficient. Unless the interest is the value of banking labour, and is consumed. But, as banking costs are added to interest, this is never the case. Interest goes to financing more credit, which results in more interest in an ever increasing spiral.
Not all increased investments lead directly to increased consumption. Many investments, such as R&D, far precede the equivalent consumption. More generally, growth in production begins at the primary and secondary stages before reaching the consumer stage. This is most obvious when a nation rebuilds the destructions of war. There is plenty of work, but not much to eat, nothing to wear and nowhere to live. If, during the first stages of growth, increased investments go to increasing incomes, then consumer demand will precede consumer supply, with inflationary consequences. More money chasing the same quantity of goods and services induces a rise in prices. And, when the consumer supply does increase, the higher prices cannot be met by demand. However, if the growth in investments continues, as it did in post-WW2 Europe and Japan, the continuing growth in incomes this generates will at some point be in step with increasing consumer supply. Later, if investment growth slows down while consumer supply is still growing fast, demand must be stimulated with credit. All the more so when investments begin to be outsourced, taking incomes with them.
Invested credit takes interest away from incomes. But there is also the question of who owns the investment. Is it the banker who grants the virtual value of credit, or is it the entrepreneur who puts it into a production process to create real value? Moreover, incomes never seem to correspond to consumer supply, too much or too little. The litigious property of the means of production, and the constantly unbalanced state of consumer supply and demand, logically led to the notion that incomes should be invested, thereby clarifying the ownership of investments, and that consumption should be credited according to supply. So most incomes stagnated while a few got bigger and bigger as they accumulated interest, rent and profit. And consumer credit, mortgages and government debts had to multiply extravagantly just to stay ahead. A jump from the frying-pan of banks/central bank/government control over investments and of endemic inflation, into the fire of an abysmal incomes gap and a catastrophic credit collapse. And, as things are shaping up, humanity is about to scramble back into the frying-pan.
Having walked on the Moon and landed on Mars, having invented perfume and wine, having cloned and genetically modified living matter, split and fused atoms and run a hundred metres in less than ten seconds, must humankind resign itself to these two dismal alternatives?
posted by le Lézard at 1:00 AM
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