The snowball effect of credit.
The credit system allows a bank to grant credit that is a multiple of the cash and securities it actually owns. This is possible because credit is scriptural money (as opposed to the bank notes that loan-sharks have to use). Credit allows payments, but it is merely a plus and a minus on accounts within the banking network. The multiplication has rules and is not unlimited. The multiplier used to be around 12 (8 for 100), then it went up to 20, 25 and in some instances 30+ (3 for 100). Supposing the multiplier is 10 (10 for 100), and the credit brings in 5% yearly interest. Starting with 10, a credit of 100 is granted. A year later the interest paid of 5 is “real” money, and can be added to the original 10. 15 allow a credit of 150, which brings in 7.5 as interest. Added to 15, it gives 22.5, 225 and 11.25.
Year four: 33.75/337.5/16.875.
Year five: 50(.625)/500/25.
In five years the original capital has been multiplied by five, and so has the credit. The tenth year, the capital reaches 280 and the credit ten times more. Such rates of accumulation (50% p.a.) rarely exist elsewhere and are very tempting, but they can only be obtained on an expanding credit market, which reaches its boundaries sooner or later as does any expansion in a limited environment.
Consumer credit has always been granted by shopkeepers, but only in particular circumstances and to habitual customers. For the most part, consumption was paid cash, which meant that the acquisition of the more durable goods (clothing, tools, housing) was preceded by saving, which meant in turn that a part of the money supply was withdrawn from circulation, as coins, banknotes and, when they were generalised, in current accounts at the bank or saving accounts that received the remuneration of interest. Banks were the guardians of vast sums (the nation’s salaries and savings) of which they could use only a fraction to grant credit, and some of it had to be paid interest. This situation was possible when banking (money and credit) was considered to be a social utility, i.e. after war armament had settled the crisis that began in 1929, by bringing full employment to America and wrecking half the world’s industrial capacity, and when wartime solidarity and government supervision were the norm. Thirty years and a cultural revolution later it was beginning to seem anachronistic. It was time for customers to become debtors instead of creditors.
The cultural confrontations of the 60’s and 70’s, following the demands of civil rights in the US and of national liberation in European colonies, replaced the social confrontations of the past. Social rights became minority rights. The idea of reducing social hierarchy was replaced by the practice of granting access to influential groups. Minority representation merely reinforced the pyramid and helped it shed the constraints of the previous era. It gave priority to the individual over the group, ant to personal wealth and power over society’s cohesion and the well-being of all its members. The change was helped along by TV networks and celebrity magazines. And it assisted capital in obtaining a larger share of added value, to the detriment of labour and state. Taxes on revenues, profits and property were reduced, wages and mean salaries were frozen, while the production of wealth multiplied and a predatory “meritocracy” grabbed riches unashamedly, as never before.
There was, however, a problem to resolve. If wealth was accumulated as capital, and if production expanded, where would consumer demand come from? What could be the substitute for the state’s reduced cash flow and the general public’s congealed incomes? Credit and debt were the simplest and most obvious short term solutions. Buy now, pay later. Consumer credit, mortgages, and public borrowing at all levels of government, compensated the flow of surplus value that was used to out-source production, to inflate real estate and stock exchange bubbles, and to lend. As out-sourcing brought down the price of goods, the different spending expanded the services sector and compensated the loss of employment in industry. However, these new jobs offered neither the security nor the wages of those lost in the industrial sector, and they introduced a new sociological concept, the working poor. The writing was on the wall, but the property owning middle-class was buoyed up by the constant growth in the hypothetical value of their homes, and attention was constantly being distracted by the ultra-violence of governments and other less official organisations.
Consumer credit is a gold mine and mortgages are safe bets that can be hedged. But expanding debt must bring an ever growing number into its clutches, in an exponential growth that will inevitably push into the sub-prime regions of ever more doubtful solvability. As for public debt, which is not (yet?) scriptural money, the sheer magnitude of the sums needed to roll it over and to pay the interest is finally limiting its expansion. A solvability crisis has hit individuals and governments, and the world’s lenders will be left holding the can. The cancellation of all debts could be the solution, but those who hold them have too much influence to let it happen. It would have to be “over their dead bodies” with a lot of collateral damage. The more likely alternative seems to be high inflation, which whittles away the small holder’s savings and gives the big holder time to compensate his losses.
Year four: 33.75/337.5/16.875.
Year five: 50(.625)/500/25.
In five years the original capital has been multiplied by five, and so has the credit. The tenth year, the capital reaches 280 and the credit ten times more. Such rates of accumulation (50% p.a.) rarely exist elsewhere and are very tempting, but they can only be obtained on an expanding credit market, which reaches its boundaries sooner or later as does any expansion in a limited environment.
Consumer credit has always been granted by shopkeepers, but only in particular circumstances and to habitual customers. For the most part, consumption was paid cash, which meant that the acquisition of the more durable goods (clothing, tools, housing) was preceded by saving, which meant in turn that a part of the money supply was withdrawn from circulation, as coins, banknotes and, when they were generalised, in current accounts at the bank or saving accounts that received the remuneration of interest. Banks were the guardians of vast sums (the nation’s salaries and savings) of which they could use only a fraction to grant credit, and some of it had to be paid interest. This situation was possible when banking (money and credit) was considered to be a social utility, i.e. after war armament had settled the crisis that began in 1929, by bringing full employment to America and wrecking half the world’s industrial capacity, and when wartime solidarity and government supervision were the norm. Thirty years and a cultural revolution later it was beginning to seem anachronistic. It was time for customers to become debtors instead of creditors.
The cultural confrontations of the 60’s and 70’s, following the demands of civil rights in the US and of national liberation in European colonies, replaced the social confrontations of the past. Social rights became minority rights. The idea of reducing social hierarchy was replaced by the practice of granting access to influential groups. Minority representation merely reinforced the pyramid and helped it shed the constraints of the previous era. It gave priority to the individual over the group, ant to personal wealth and power over society’s cohesion and the well-being of all its members. The change was helped along by TV networks and celebrity magazines. And it assisted capital in obtaining a larger share of added value, to the detriment of labour and state. Taxes on revenues, profits and property were reduced, wages and mean salaries were frozen, while the production of wealth multiplied and a predatory “meritocracy” grabbed riches unashamedly, as never before.
There was, however, a problem to resolve. If wealth was accumulated as capital, and if production expanded, where would consumer demand come from? What could be the substitute for the state’s reduced cash flow and the general public’s congealed incomes? Credit and debt were the simplest and most obvious short term solutions. Buy now, pay later. Consumer credit, mortgages, and public borrowing at all levels of government, compensated the flow of surplus value that was used to out-source production, to inflate real estate and stock exchange bubbles, and to lend. As out-sourcing brought down the price of goods, the different spending expanded the services sector and compensated the loss of employment in industry. However, these new jobs offered neither the security nor the wages of those lost in the industrial sector, and they introduced a new sociological concept, the working poor. The writing was on the wall, but the property owning middle-class was buoyed up by the constant growth in the hypothetical value of their homes, and attention was constantly being distracted by the ultra-violence of governments and other less official organisations.
Consumer credit is a gold mine and mortgages are safe bets that can be hedged. But expanding debt must bring an ever growing number into its clutches, in an exponential growth that will inevitably push into the sub-prime regions of ever more doubtful solvability. As for public debt, which is not (yet?) scriptural money, the sheer magnitude of the sums needed to roll it over and to pay the interest is finally limiting its expansion. A solvability crisis has hit individuals and governments, and the world’s lenders will be left holding the can. The cancellation of all debts could be the solution, but those who hold them have too much influence to let it happen. It would have to be “over their dead bodies” with a lot of collateral damage. The more likely alternative seems to be high inflation, which whittles away the small holder’s savings and gives the big holder time to compensate his losses.
posted by le Lézard at 7:03 AM
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