A debt quagmire

Adam Smith was one of the first to point out that the Earth’s natural bounty had to be transformed by human activity to acquire use value, that nature as such was mostly useless. As for exchange value, it was the result of rareness and desirability, of supply and demand. These logical observations opposed the Physiocrats (Quesnay, Turgot, etc.) who equated all wealth with agricultural produce. They marked the moment when the power of industry replaced the power of landowners, with bankers having to hover in between. Later, Smith’s reasoning led Marx to study the due paid by labour to property. Setting aside its morality and its flagrant abuses, Marx realised that this very ancient practice was becoming increasingly problematic. In the past property was land (and slaves). Excluding conquests, its ownership was fairly stable and, as the investment opportunities were few and risky, mostly in trade and overseas enterprises, the incomes it generated were consumed by the owner and his retinue. Machines had changed that equilibrium by multiplying productivity and investment possibilities. Property owners were able to invest their incomes and increase their property. Capital that previously could only be increased by foreign conquest began to grow in the form of factories, railways, canals, ports and all their machines. But this unlimited expansion would stop periodically, regress and then start again as vigorously as before. Capitalist accumulation had a fundamental fault, but Marx was unable to fathom its intricacies and, distracted by the politics of the First International, held to his idea of a falling rate of profit.

The owners of capital take a share of the value produced by labour. Surplus value, which includes rent, interest and dividends, starts off as a part of production. To be invested and accumulated, surplus value must first be exchanged for money on the market. But, as Rosa Luxemburg explained after a critical study of previous writings on the subject (1), it is the unpaid produce of labour and there is no equivalent solvent demand for it. How can the surplus value of all production – whether for consumption or investment – be transformed into investments? Those producing investments could exchange their surplus produce among themselves, but what of the surplus consumption? Rosa Luxemburg concluded that imperialist exploitation was the explanation and that surplus consumption from the metropolis went out to the colonies to supply the colonial administration, while its value came back as investments, as raw materials or as ownership of expropriated land. And with independence, governments changed without changing those asymmetrical exchanges. Surplus consumption can be transformed into investments by foreign trade but, as all countries want to do it, the possibilities are limited (2). On the home market, surplus value in general is exchanged for credit, which must grow alongside surplus value to maintain demand.

As surplus value is the unpaid part of production, it depends on credit for demand. And, because a part of surplus value is destined to be an investment and the other part is destined to be consumed, the credit that fuels demand does not have the same progression in both cases. Invested credit grows at about the same rate as investments and at a lesser rate if there is inflation. Consumed credit increases much faster than consumption, though its rate of growth is also reduced by inflation. But the accumulation of credit cannot continue indefinitely in either case can. Many economic statisticians have studied business cycles and several have given their names to a certain periodicity. In round numbers these cycles are: Kitchin (1861-1932) for three years; Juglar (1818-1905) for ten years; Kuznets (1901-1985) for twenty years; Kondratieff (1892-1930) for sixty years. Schumpeter (1883-1950) attempted to synthesise previous studies, but his conclusions did not explain the regularity of the various cyclical periods. He and the others overlooked the possibility that the perfect time scales of credit could cause business cycles, preferring the obviously haphazard evolution of technological innovation, or (Kitchin) a glut in production. Borrowing is obviously cyclical, as it always comprises a fixed term. As borrowing increases so do the paying back and the lending out again. Consumer credit in particular, whether for governments or households, has to grow very fast at each term to maintain a regular increase in consumption. In practice the acceleration in borrowing is rarely sufficient, and each term puts a brake on consumer demand. This also holds for investments, but neither the progression at term nor the downturn in demand is as strong, except when investment terms and consumer terms coincide. And the wide variety of durations for debts, days to decades, means the increasing debt of one term will compensate a reduction elsewhere. However, occasionally several cycles will cumulate their growth or their stagnation/recession.

High capital gains and low inflation are the ideal combination for a borrowing bubble. It occurs when increasing productivity benefits capital and excludes labour. Profits rise while wages stagnate and keep inflation low. So borrowing grows rapidly, the more so if several borrowing cycles are in an expanding phase. The borrowing balloon that should have burst in 2008 was merely deflated by bailouts and quantitative easing. It is still there and still adds up to several years of future incomes and, even at very low interest, it still takes a significant fraction of yearly income. Having borrowed to pay for surplus value, households and governments must borrow more to pay interest on their previous borrowing, thereby increasing the surplus value that goes to banks. In this context it is difficult to imagine a surge in demand, and the actual upturn is the probable consequence of the price war being fought by off and online retailers. Cutting prices without gains in productivity means a reduction of surplus value. Selling more at a reduced price can compensate the reduction, but in such a competition only a few can win and the losers go out of business. The world’s leaders are grasping at straws as 99% of humanity sinks into a quagmire of debt. And, following their demagogic instinct, they are using foreign wars and homeland paranoia to distract public opinion from the growing chaos of last stand capitalist exploitation. How far will they go as the situation worsens? Will the 99% realise that they are held only by written words and numbers that can be written differently, and that united they have the power to decide? Historic precedents answer negatively, but the speed and quantity of circulating information have increased so fast these past decades that previous experiences may be obsolescent. Fooling all the people some of the time is becoming more and more difficult.

1. The Accumulation of Capital, sections I and III:

http://www.marxists.org/archive/luxemburg/1913/accumulation-capital/

2. All industrial countries have done it, and China is just the latest example of capital accumulation by importing investments and exporting consumption.