Running on borrowed money

Growth in GDP is an expanding process, a progression similar to compound interest, where an increasing amount is needed to maintain the same percentage. Fuelling this growth with credit and debt is at best problematic, and can easily become cataclysmal. However, there seems to be no alternative way to increase demand other than handing out cash. Lenders would give away their savings and central banks would distribute a constant flow of new bank notes, both of which would be extremely coercive. So demand is maintained by lending – the existing wherewithal changes hands – and is increased by credit. And if some savings are horded, credit must compensate. Year after year more credit is granted, some of which is obscurely turned into cash by the monetary emissions of central banks.

Growth in demand depends on increasing credit, but demand belongs to two distinct categories. The acquisition may be an investment, in which case it will return its value and should bring a profit, or it may be for consumption, in which case its value is used up and must be produced again. Credit was originally a commercial practice. Goods would be paid once they had been sold on to someone else. When markets expand so must credit, because it is the necessary go-between for increasing exchanges. This progression begins on the supply side and results in an excess with regards to demand. At which point credit turns to fuelling consumer demand and thereby sustains growth. However, an invested credit comes back with a profit and its renewal maintains the increased investment, whereas consumed credit does not come back and its renewal does not maintain the increased consumption, a renewed credit has to be paid back to be spent again. This being so, invested credit grows at about the same rate as investment, whereas consumed credit grows at a much faster rate than consumption (1). Feeding consumer demand (public and private) with credit can only lead to sub and sub-sub-prime contracts as it expands beyond measure.

Credit is paying today with tomorrow’s income. Cash is paying today with yesterday’s income. Investment is the first stage of future production. Consumption is the last stage of past production. It would seem logical to invest in future production with tomorrow’s income and consume past production with yesterday’s income, but this is not the case. With central banks producing the stuff in generous quantities cash is being invested (though not much in actual production) and credit is being consumed,(with a recent surge in cars). This situation cannot be turned around as it would need a complete redistribution of incomes, so the behemoth must stumble on, blaming others for its woes, crushing resistance into desperation and pushing humanity to the brink. The beast is on its last legs, it has no future. What is uncertain is how destructive its demise will be.

1. For more details see this previous posting:

 http://lelezard.blogspot.fr/2010/08/binary-production-of-wealth.html