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.