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/