Global credit collapse.

Since the end of the Cold War and the demise of state capitalism – or should it be the other way round? – the private property of the means of production has taken over the planet. Behind the façade of “free enterprise”, the accumulation of wealth in a few hands has been spectacular. The past twenty years have been an exceptional time for money-grubbers, but the credit cycle has run its course and the growth it fuelled is at a stand-still. A situation that was recurrent in the past without being global, as the world was divided into blocs, and each had its own credit calendar. To-day’s credit collapse is synchronized by a unified financial market operating 24/7. 

The private accumulation of capital is the result of investing unspent private incomes, investments that can be made personally, or by funds, insurances and banks. Big and small savings are put aside for a rainy day. And, according to the Puritan ethic described by Max Weber, this parsimony is a moral act that should be rewarded, not only in the hereafter but in the here and now, by a profit. However, and this was true even when savings were coins in a hidden pot, unspent incomes reduce consumer demand and disrupt the circulation of added value. All the more so when it is on an extensive scale. 

Marx remarked that in imperial Rome wealthy citizens had limited investment opportunities, which explained their lavish spending on public games and private feasts, whereas in 19th century England the industrial revolution had greatly multiplied the range of possible investments. (Their only final limit seems to be the Earth’s ecosystem). Rich Romans consumed the incomes they drew from slave labour, whereas industrial magnates invested the profit they drew from underpaid labour in more machines and raw materials. Having restricted the ravages of Napoleon’s wars to continental Europe, England had a head’s start in the mechanisation of production, and its navy ruled the waves. So that the expansion of mass produced goods, mainly steel and cotton, was driven by exports to the rest of the world. Finished and semi-finished products were sent abroad and their value returned as raw materials. Labour’s added value could be invested without affecting the balance of consumer supply and demand, as the consumption was taking place elsewhere. Marx perceived the huge new investment possibilities but seems to have missed their disruptive effects. 

Quite obviously, if some nations export their consumption in exchange for investments, others must import theirs in exchange for investments. Those nations will produce less, lose jobs and can end up being ruled by tyrants who distribute the imported consumption arbitrarily. The other response to invested incomes is consumer credit. Incomes are the value of past productions and credit is the value of future productions. If incomes are invested in future productions, then the past productions must be consumed with credit. This simple time inversion allows the accumulation of private capital and is the cause behind the present credit collapse. Invested credit gets its value back when the produce is sold on the market, plus a profit to cover the interest. Consumed credit is consumed and must be produced all over again, not to mention the interest. Meaning that, while invested credit grows at the same rate as investments, consumer credit grows twice (and more) as fast as consumption, and leads to the private credit escalation that reached its limits five years ago, and to the chronic public borrowing that is facing a fiscal cliff. Whatever way one looks at the problem, there is no easy solution to loans and debts on such a grand scale. And all those who claim there is are either fools or liars. They refuse to see that this is a slow motion catastrophe. 

P.S. I have developed these ideas in several previous blogs, notably:-
http://lelezard.blogspot.fr/2010/08/binary-production-of-wealth.html 
and
http://lelezard.blogspot.fr/2012/05/deceptive-promise-of-growth.html