The great cash drain.

All the existing forms of payment can be summarised to either cash or credit. Cash is the yield of past productions, and credit is the yield of putative future productions. The question then arises as to whether increased investments should be paid with cash or credit, and the same goes for the increased consumption that follows. Considering that supplementary investments will produce in the future and that past productions are consumed, it would seem logical to use credit for investments and cash for consumption. The problem is that cash (the yield of past productions) is not distributed evenly, and those who get the larger shares save some of it and want to invest it to get even more (1). These savings are collected by pension and investment funds, banking and insurance, who are supposed to make them grow with profits and interest. Hence the inversion of logic, where cash is invested and consumption is paid with credit. The yields of the past are invested to produce in the future, and future yields are used to consume past productions.

Logic apart, investing cash and consuming credit leads to some inconvenient realities. A successful investment, one that avoids bubbles and bankruptcies, returns its value plus a profit, whereas the value of consumption is consumed and must be produced again. Credit invested in future productions is returned when that production is sold on the market. Credit for the consumption of past productions is not returned. Moreover, credit is the fuel of growth because it multiplies at will the means of payment in circulation. When credit is invested, its value is returned and the credit can be renewed. In this case, the amount of credit granted grows at the same rate as investments and as the ensuing production. When credit is consumed, its value is not returned and the credit’s renewal merely restores the original credit. In this case, credit granted for consumption grows much faster than the value consumed. For the value consumed to grow by 10, following the series 10, 20, 30, 40, 50 et cetera, credit must follow the series 10, 30, 50, 70, 90, 110 et cetera (interest would add to the result). It grows twice as fast as consumption.

Cash, the yield of past productions, is the go-between for the exchange of existing products. But it is turned away from this function by savings, and it is invested for profit or lent at interest. This results in a lack of liquidity for the consumption of goods and services, which is compensated by credit and, in the case of states, by buying Treasury bonds and using them as a guarantee for credit (2). This results in Treasury and household debts growing much faster than GDP and leads unrelentingly to the present situation, whose particularity is its amplitude. The subprime fiasco had granted loans to people whose solvency was unverified, in a frantic attempt to keep growth going. The outcome was a multiplication of consumed credit that far outstripped all precedents, and the cash drain equalled this excess. Except that the deviated wealth is far smaller than the mass of credit that was granted and, being invested, is no longer cash.

Those who pretend that the on-going crisis can be resolved by adjustments and regulation are fools or liars. And, even if their responsibility is obvious, expropriating the rich would be far short of the count. In fact, the only way to cancel such a mountain of debts seems to be two-figure inflation. As Keynes suggested, rentiers will undergo euthanasia and, to paraphrase Proudhon, new institutions will be imagined where the property of the means of production is no longer theft. This process can only begin with steep rises for the lowest wages and, to counter the 1% driven austerity of government programs, will have to be preceded by intense and widespread social movements.

1. When a company uses its profits (the yield of past productions) to increase investments, it is doing the same thing. 
2. If consumption is exported, as is the case for China, Germany and others past and present, savings can be invested without creating an unbalance of consumer supply and demand. However, it goes without saying that only some countries can do this to the prejudice of others, who must consume without producing and lose jobs or never have them.

See http://lelezard.blogspot.fr/2012/05/deceptive-promise-of-growth.html

Treasury bonds are also sold to foreign investors, which reduces trade deficits but greatly complicates debt reduction.

Divided we fall.

When the Dismal Thirties succeeded the Roaring Twenties nations everywhere became restive. Free market private capitalism had failed and its financial structures had collapsed, leaving an ideological void that threatened the foundations of power and wealth. Socialism was no longer a scare-crow, as it became obvious that society should unite to care for its own. Solidarity was the general aspiration and elections reflected this opinion. MacDonald in the UK, Roosevelt in the US, Blum in France, even Hitler in Germany, all came to power more or less briefly by proposing social reforms. However, this idea of an interdependent community was necessarily exclusive and nationalist. Trade and finance had been transnational, whereas a state’s control was confined to its frontiers. And, as states increased their control, so they did with the virulence of their nationalism. Russia, Italy and Japan were already applying national-socialist programs. Germany would follow suite as would to a lesser degree the other industrial nations, with protectionism and tariff barriers on the one hand and financial assistance to capital and labour on the other.

During the 1930s state intervention was generalised, and for some nations it was totalitarian. With the Second World War it intensified. Conscription, the abrogation of free speech and the pre-eminence of the arms industry gave governments exceptional powers. And the privations and sacrifices of conflict were offset by promises of a better peace-time future. Total war was a great leveller of class distinctions, in the army as well as in civilian society. Courage replaced wealth as the exemplary value, and government issues were the common lot. This was particularly true in the UK where a rationed distribution of almost everything was organised, food and clothing, doctors and dentists, for the conscripts and for the population as a whole. The measures resulted in a considerable improvement of the nation’s health. To the point that Churchill’s Conservative government considered prolonging some of them after the war (Beveridge Report). However, the people set more trust in the promises made by the Labour Party candidates and voted them into power in the 1945 general election. The new executive led by Attlee set up a tax funded universal health service and a system of benefits for pensioners, families and for those out of work or ill. And, the state having become their only customer, the government nationalised hospitals, railways, coal and steel.

In occupied France resistance to the German occupation forces and their puppet government in Vichy began early, motivated mainly by communist and nationalist ideals, by Thorez in Moscow and by de Gaulle in London. These two groups were later joined by some resuscitated social democrats and, in the spring of 1943, constituted a National Council, in liaison with de Gaulle who had set up his offices in Algiers. The tide of war had turned and, the following year after long negotiations, the Council adopted a political program for a liberated France. The program’s two main aspects were nationalisations and social security. When elections were held in October 1945 the three parties who had concocted the program were chosen by 75% of voters, and immediately split into two factions. Thorez was back from Soviet Russia and wanted to nationalise everything. Though de Gaulle agreed to nationalise the energy sector, public transport and for blatant collaborators such as the car manufacturer Renault, having seen the capacity of London’s City to keep the British government financially afloat during the war he was more reticent about banks and insurance. But it was disagreement over the new constitution that made him resign. And in May 1947 Communist ministers were expelled from government, as relations with the Soviet Union deteriorated. Meanwhile one of them, Ambroise Croizat, had obtained parliamentary approval for a compulsory health insurance and various social benefits funded by employees and employers, in line with the mutual insurances of the past.

The US did not have a post-war change of administration until 1953, and there were no major changes in the attribution of welfare. The American continent had not been subjected to bombing and had not shared the common humiliation of foreign occupation. The US government had taken care of its conscripts but the rest of the population had fended for itself, even if many were employed in war-time production. The civilians had no post-war expectations other than full employment. And there was the persistence of racial segregation and its exclusion of Black Americans from social bonds and contracts. Victory in 1945 did not bring welfare to the US, more the incentive to keep the ball rolling with a Cold War of localised proxy conflicts and an arms race. It was only after the abolition of segregation and during the expanding conscript war in Vietnam that Medicaid and many other universal social and educational programs passed the legislative process, with Lyndon Johnson’s manipulative techniques playing a role.

Welfare, as a universal institution, is the logical aspirational consequence of a unified nation. In the UK the union was provoked by bombing and the rations of siege. In France it was the result of occupation and resistance. In the US it was the Civil Rights movement and opposition to the war in South-East Asia. When the 99% unite, their demands concern all of society and governments are forced to respond, despite their allegiance to the 1%. This union is a rare occurrence because, consciously or not, much thought and effort goes into insuring it does not happen. Individuals are isolated and obliged to compete with one another from the earliest age, and it goes on through life. Being the best is all that counts, and the consequence or inconsequence of what has been measured fades behind the brilliance of 1^st place. Life is made to seem like a Guinness Book. The constant pressure to do better than others at school and at work and the highlighting of individual performances may produce results in terms of productivity, but they are very destructive for those who do not achieve the N°1 place, as well as for those who do and cannot keep it. The competitive society is a denial of solidarity that disrupts social cohesion and international relations.

The welfare systems of the 40s and 60s, and their amendments in the following decades, started to be whittled away when market capitalism regained power in the 80s. And it accelerated following the disintegration of the Soviet Block in 1989/91. The state was judged incompetent in its administration of health, education, urbanisation and just about everything, including war after the retreat from Vietnam (naturally, those doing the blaming never criticised the administration for starting the whole mess on their insistence). The private sector promised better, cheaper (market forces) and more customer friendly services. After a couple of decades the services have improved, but that is largely due to science and technology. Unfortunately, prices can no longer be negotiated collectively, and the choice of providers is nullified by collusion and price/profit fixing. The best to be said is that employees are trained to smile.

Now that the world’s financial structures are falling apart again, it will be increasingly difficult to survive as a competitive individual. During the past two decades, as government services regressed, communities have offered an alternative solidarity. With states tottering on the brink of insolvency, the togetherness of ethnicity and religion has developed everywhere. When bankruptcy strikes, as it seems it must, communities may find themselves alone in providing welfare and assistance, with their cultural and ideological preferences that are potentially conflictive. Considering the transnational nature of twenty-fist century capitalism, a repeat of 1930s social nationalism seems impossible. Were the capitalist empires to fall back on their national bases, they would amputate themselves of vast swaths of their investments and would be in no position to promote social programs. If they are obliged to – who knows where this process is leading to – most countries will be subjected to hopeless governance and to communal conflicts over the nation’s remaining resources. In which case, the growing number of failed states around the world is the shape of things to come.

The jungle capitalism of Hobbesian all against all denied the social contracts of nations, by going global and creating off-shore fiscal havens. Producing and trading around the world, corporations lost their roots and their social incentives. And tax evasion became the norm of accountancy instead of a moral dilemma. Big companies were commercially ubiquitous and responsible nowhere. At present there is much talk of bringing it all back home. Re-industrialisation in its third revolution has become a fashionable concept, and that revolution is no doubt taking place. However, a look at the previous ones shows the mass destruction they caused. The passages from horse to steam and from steam to internal combustion left a lot of wreckage along the way. The move from fossil fuels to renewables will be at least as traumatic, if not more so. The historic trend of increasing energy supplies and ever bigger machines is reversing, but “small is beautiful” goes very much against the general hubris. The transition will surely be painful and long, though it does seem to fit the communal dispersion that has followed the reduction in centralised funds and government services.

The downsizing of governments made way for big global business obsessed by profit. Governments had been spending the nation’s money on health, education, communications infrastructure, et cetera, without making a profit. The private sector cannot do without it, for its shareholders, its executives and for the interest on debt. And obtains it by overcharging, by paying labour less than the value it produces and by avoiding taxes. All three have disruptive effects on demand that are compensated by household credits and treasury debts, and snowball into sub-prime mortgages and fiscal cliffs. A return to government administration of social services may still be possible, if governance is able to encompass the global market by becoming international. It would put an end to that recent and troublesome concept, the nation state, and replace it by a federation of communities. An unlikely and distant forecast, but the other possibilities are too gloomy to consider.