Waiting for Godot.

Economic, or business, cycles are a generally recognised occurrence. But their apparent regularity (Juglar, Marx, Kitchin, Kondratieff, Schumpeter, Kuznets et al.) has not found a satisfactory explanation. However, there is one activity that has a precise time-table – more exactly a range of exact periods – whose effect on growth and recession goes without saying. Expanding credit increases demand and contracting credit reduces it. As for lending and borrowing actual cash, it turns savings into demand.

Once upon a time, credit was based on goods that changed hands at various stages of production and distribution. Manufacturers might grant each other credit, or to wholesalers who might grant it to retailers. But grocers, cobblers and tailors would seldom extend the facility to their customers, preferring the pawn-broker’s coins. Then, the lending of money necessitated the deposit or mortgage of movable or unmovable property, a wedding ring at the pawn-shop, land and buildings at the bank. Only governments were able to borrow money on their good faith with emissions of Treasury bonds, usually to wage war and, sometimes, for large infrastructure projects. Then, money was central bank paper, and these notes were backed by gold. That strange world was institutionalised in 1944 at Bretton Woods and began falling apart in Jamaica thirty-two years later, with the end of the Gold-Exchange Standard.

Basing the value of money on a material standard had always been a problem. Sea-shells, beads, axe and arrow heads, blankets and then bronze, (iron), silver and gold, all have the inconvenience of being often insufficient, sometimes over abundant and rarely equal to the necessary amount to keep prices stable. This chaotic system was maintained throughout the ages because it seemed inconceivable that money need not have any intrinsic value, that its symbolic value was sufficient. However, by 1976, it was more than obvious that the world market and its need of money were expanding much faster than the gold being mined, mostly in not very recommendable South Africa and Soviet Russia. It was finally agreed that money was a purely scriptural reality, of which a small fraction took on a material form (notes and coins) for practical purposes. At this point, the distinction between money and credit started to blur.

Money is the realisation of past productions. A lender, who does not need or wish to spend it, passes it to someone who does. In this way money circulates and demand is maintained. At a stipulated future date the money is returned with interest. It is then lent out again or spent by the original owner. Money can be borrowed for any period of time, up to 30, 50, 100 years (1). Credit is the realisation of future productions. Once the privilege of merchants who had sufficient funds to wait and receive interest, credit fell into the hands of bankers when a few merchants specialised. A bank’s numerous customers have money on their accounts. During any given day, these customers will take money out and put money in, but a certain amount of their collective deposits will stay there all the time and it can be used to grant credit. The banker cannot lend money he does not own, but he can move it around scripturally for short periods of time, as overdrafts.

The mass production of durable consumer goods developed alongside consumer credit. Manufacturers realised that the chain of credit could be extended, that their products could be consumed by instalments. Soon, granting credit became a very lucrative branch for brand names, from vacuum-cleaners to motor-cars. Then, in the 1980s and 90s, deregulatory measures culminating in 1999 with the repeal of Glass-Steagall Act, sections 20 and 32, allowed everyone to grant credit for consumption, notably chain-stores and banks. Credit had slowly expanded from the commercial sphere to the realm of consumption. Instead of just replacing money between two sales, it supplemented to-day’s income to the detriment of to-morrow’s. And, as credit took the place of money for consumption, this money could go elsewhere.

In the years that preceded and followed the turn of the millennium, a huge variety of investment possibilities collected all the disposable cash, funds for the wealthy and intricate derivatives for the rest. A small fraction of these investments actually increased production – there was already some over-capacity – most of them either went abroad to outsource production, or speculated on stocks and shares, commodities, currencies, real estate, bonds, etc. Bubbles swelled and deflated, leaving many out of pocket and a few with full pockets, in an increasing concentration of capital ownership. At the same time, governments were summoned to reduce taxes as they were judged a hindrance to enterprise. This resulted in budget deficits and governments were then summoned to sell the national property that was or could be profitable. This increased the deficits a bit more, as the intake of cash was balanced by more tax cuts, while privatised utilities increased prices and reduced investments to generate profit, and raised the need for social aid. And governments, who could not borrow the nation’s invested savings, had recourse to banker’s credit. This meant that borrowing times and debt renewals were reduced from long to short terms. Treasuries issued bills instead of bonds.

Corporation and Treasury debts have different durations of years or decades. These rounded figures correspond to production cycles, from annual crops to national infrastructure. Every so often, some means of production need to be replaced because of wear and tear, or because of new technology. The previous debt is paid back and borrowed again for a renewed investment. (Credit fills the function for renewals of less than a year). This works fairly smoothly for short cycles, but every ten years there is hesitation, and at the start of cycles lasting several decades everyone relies on governments to play the leading role: Roosevelt’s hydro-electric, Eisenhower’s highways and Kennedy’s space race, Reagan’s star war. At present companies are sitting on great piles of cash waiting to see which way the wind blows, and governments, instead of showing the way, are running after funds on a day to day basis just to avoid a default.

The world appears to be entering a structural revolution, and the shape of things to come is more uncertain than ever. Climate, energy resources, transport and communications, change is accelerating so fast that imagining the next twenty, thirty or more years is a near impossible task. And yet the long cycles cannot be put off indefinitely, as nuclear power plants, highways, railways, air and sea ports and electricity grids prolong their life spans and wonder if they have a place in the future or if they belong to the past. Something will have to be done. The reality of a digitally connected age and of an anthropocene, a man-made planet, will have to be assumed. But the task seems beyond the capacities of world leaders, totally preoccupied by electoral gymnastics, runaway budget deficits and military/commercial strategy. The reduction of the democratic process to periodic elections and the executive’s opaque control of national security, currency and foreign trade are a negation of government by the people for the people. Politics has degraded itself (was it ever any better?) to a quick buck and a re-election. “Who cares about the future? We’ll all be dead anyway”. The alternative to the strutting and posing of futile rulers is a great surge of opinion physically present in the public arena. For the time being, vested interests still hold sway, and habits inhibit change. But the long cycle, like time itself, will not wait.

1. http://www.cbsnews.com/8301-505123_162-36742419/100-year-bonds58-with-all-this-uncertainty63/

Odds and ends.

Resistance to tyranny often finds its ultimate sanctuary in religion and religious buildings. Churches and Sundays played a prominent role in the battle for Civil Rights, in the victory of Poland’s Solidarnosc victory, and in the overthrow of apartheid. So it should not be surprising that mosques and Fridays gave the tempo for Mubarak’s downfall in Egypt and Ben Ali’s in Tunisia. The difference occurred once the tyrant was gone. Christians have an old habit of separating worldly and spiritual matters. Their various churches have an undeniable ideological influence on government and legislation but, outside of the Vatican, they do not run the state. Islam does not have this tradition. Commander of the Faithful is a function that cumulates temporal and eschatologic powers. So that Moslem clergy have no qualms about going into politics and governing. However, the West can never admit that valid alternatives exist.

As usual the 1% are claiming that their massive appropriation of riches – some two-thirds of GDP over the last couple of decades – is in no way responsible for the present situation. The culprits are the borrowers not the lenders, those who spend more than they have, not those who have more than they can spend. They have unlimited means to get their message across, but who will believe them?

 

Bankers are getting the blame for the catastrophic situation the world finds itself in. Yesterday’s fat cats are to-day’s scape-goats, though all they did was to supply liquidity to a runaway process based on extreme inequalities. Considering the present uproar, it is fortunate that lending is no longer restricted to an ethnic minority.

There are those who own the means of production and those who labour. There are those who own their means of production and provide the labour. They are salaried share-holders and cooperative workers, but their influence on decision making is rarely more significant than that of organised labour anywhere. And there are those whose tool is the mind, those who acquire knowledge in social institutions and use it as a means to produce value. The liberal professions, professors and middle management, the petite bourgeoisie sits on the fence and, because of this particular ownership and the pecuniary advantages it brings, usually sides with property. Should their privileged position be challenged politically or economically, middle class intellectuals react by forming the vanguard of opposition and, occasionally, of revolution. Thinkers of all nations! Sharpen your pens and join the rabble.

When reading the classics of socialism (Proudhon, Marx, Luxemburg, Lassalle, etc.), their focus on property is striking. To-day’s progressists have completely abandoned the subject, because to-day’s middle class have their equity, their pension funds and their life insurances. They have become capitalist investors, and none of them are going to suggest that the means of production should not be privately owned and exploited. It would endanger their savings.

No one complains when immigrants come in to do the dirty back-breaking jobs that no one wants, and accept to be under-paid. It is only when they climb the first rungs of the social ladder that there is a general outcry. Servile labour is never far away in the Western mindset.

The property of the means of production concerns all natural resources and all man-made tools. For as long as tools were rudimentary, property was based on land tenure. Historic accounts of 19^th century villages in India and of American native societies before their destruction tell the same tale of communal ownership of land, where particular fields were distributed by lottery on a yearly or multi-annual basis. The produce was also communal and was distributed according to particular needs. Tribute and taxes were paid by the community. Archaeological excavations in Northern Europe seem to present traces of a similar mode of production, and the old Russian “Mir” was a communal structure. This may have been the rule for agricultural societies everywhere. Primitive communism will not help to imagine a more effective form of property. It just shows that the present regime is not the only on possible.

The exchange of goods and services needs money as a standard intermediary of value. This money is used to measure one exchange after another in a perpetual process. So that the measured value of exchanges depends on the quantity of money in circulation and the speed at which it circulates. When the value of exchanges grows, so must the money to measure them. Either there is more of it or it moves faster, or both. The passage from metal to paper resolved the question of quantity, with some notable abuses. Then electronics began accelerating circulation and, for a few decades, the increasing speed of payments allowed them to multiply. To-day’s nanosecond trading can go no faster, which might explain the massive monetary creations of quantitative easing. As money cannot circulate faster than light, its quantity has to grow. Of course, the monetary destruction of the Great Credit Default must also be taken into consideration.