Systemic failure

All exchanges for money belong to one of two categories. Either their value is destroyed and has to be created again, because they are consumption, or their value is returned with a profit, because they are investments. This being so, borrowing to consume on a regular basis piles up debts, whereas borrowing to invest can be a livelihood and even a road to riches. Credit, tomorrow’s incomes, as opposed to cash, yesterday’s incomes, was originally granted for investments in commercial or industrial enterprises, e.g. wholesaler to retailer, and for consumption if it was guaranteed by property and revenues, e.g. the state and the wealthy. However, the advent of life employment after WW2 offered the same guarantees as property, and allowed the spread of consumer credit and mortgages to people who had no property. Nowadays, with the chaos and uncertainty of the job market, that growth model is moribund.

Credit is seen as a growth factor. Meaning that today’s demand will be greater than yesterday’s if credit increases disposable incomes. But growth is also about supply, and credit can also increase production. In this case, incomes will grow without the need for credit. It all depends on whether credit is invested or consumed and, therefore, whether incomes are invested or consumed. The spread of consumer credit meant that incomes were invested. The rich increased their wealth, the poor increased their debts and those in the middle did a bit of both. For the first fifty post-war years, inflation and rising wages kept this process going with cyclical ups and downs. But, in the mid-1990s, inflation all but disappeared and working incomes stagnated. This meant that debts piled up at a much faster rate, compared to incomes, as they were no longer eroded by monetary devaluations.

Debt cycles seem by far the best explanation for business cycles (a reasoning that is absent chez Schumpeter et al.). Both have short, medium and long periodicities of similar lengths, and borrowing is closely linked to demand. Supposing a five year credit is proposed, where interest is paid yearly and the debt is paid back at term. Every year a new credit is granted and only interest is paid back. Demand grows at the same rate as borrowing minus interest. As the total debt grows so does the total interest, so that demand begins to grow more slowly than credit as it is reduced by the cost of interest. At the end of the fifth year, the first debts of the cycle start to be paid back and must be lent out again twice to keep up growth in demand (1). This credit surge is seldom successful – when the debts accumulate over several cycles, their size makes it all the more difficult – and demand’s growth slows down, stops, or turns negative. However, debt comes in all shapes and sizes, and their up-and-down effects on demand can either add up or cancel each other. Short term consumer credit is about everyday life between two wages – commonly a month but still a week in the UK – paying for rent and food, transport and energy. Then there are “durables” with credits lasting months and up to three or four years (for a motorcar). Longer still are housing mortgages, lasting ten to twenty years, and public borrowing at all levels of administration, the longest of which are 30-year Treasury bonds. This long term cycle gives the general trend, with shorter terms jostling together in ups and downs.

Were it not for interest, credit for investments would grow at the same rate as demand for investments. With or without interest, consumer credit grows much faster than demand for consumption. And yet, in contradiction with obvious facts and their catastrophic consequences, credit is consumed and income is invested. The reasons for this apparent folly are property and income inequality, interest and profit. First of all, interest takes a levy on profits and unspent incomes aspire to fructify. And then there is the question of surplus value (profit). No one has been paid for it so no one can buy it. Surplus value destined to be invested finds arrangements with investors, but surplus value whose destination is mass consumption depends on consumer credit (or on foreign trade for raw materials, i.e. investments). Unspent incomes and surplus value, often one and the same, mean that consumer demand must be supported by credit if it is to keep up with supply.

Weak trade unions and lost bargaining power – largely due to the outsourcing of industrial production, which was the mainstay of organised labour – along with huge gains in productivity have considerably reduced labour’s share of the value produced. The past two or three decades have seen wages keep just abreast of inflation – some say that US wages have regressed in buying power to 1970 – while financial, commercial and industrial profits have never been as generous. The gap between supply and solvent demand got wider and the amount of credit needed to fill it got bigger. Credit can be renewed indefinitely and never be repaid. Its absolute limit is that the interest due cannot exceed income, but credit bubbles burst long before that extreme. Fuelling growth in consumer demand with credit was bound to fail and has failed. The last resort of printing money (QE) by American, European, Japanese and Chinese central banks is in its last stages. Henceforth no one knows where the money will come from to go on paying for growing consumption and ballooning interest dues, hence the hesitations over interest rates. A rise could block everything, and no one wants to shoulder the blame for starting a financial apocalypse. However, free money for bankers does not make the 99% any richer, and neither doubling wages nor Friedman’s “helicopter money” (2) seem at all likely. So the prospect is a slow recession, with an ultimate crunch when one of the world’s financial centres falls and brings down the others.

1. X earns 100 each month. X borrows 10 and spends 110. The following month X still earns 100 and must pay back 10. X must therefore borrow 20 to spend 110 and maintain increased demand, plus 10 for growth. For spending to grow by 10 every month, the borrowing series is 10, 30, 60, 100, 150, etc.

Private consumer credit for durables and mortgages is usually paid back piecemeal over the term of the loan. This accentuates the debt growth curve and reduces the terminal effect as there is no sudden surge.

2. This is an argument for a money hand-out to the 99%. It offers a short term fix but does not question the fundamental contradictions.

http://mainlymacro.blogspot.fr/2012/10/what-do-people-mean-by-helicopter-money.html

A Syrian fatality

Whenever the struggle against tyranny reaches a climax, it can mutate into civil war. Tyrants install and maintain their dominion by force and constraint. Right is nothing without might, and the power of numbers is nullified by armed power, just as their organisation is disrupted by arrests and executions. The crucial moment is when moral and vocal resistance turns into violent rebellion. Its outcome depends on how the military react to a civilian show of force. Often they support the tyrant, or they put a senior officer in his place. Occasionally they stay on the side-line as spectators. More rarely they side with the people as in the Carnation Revolution of 1974 in Portugal. And sometimes they are divided, with some units staying faithful to the tyrant while others join the civilian uprising. This seems to be the path to civil war, when both sides have an army.

Guerrilla wars and insurgencies are asymmetric. Small poorly armed groups fight against a regular army and police. This entails hit-and-run tactics without battle fronts. Combatants are among the people like fish in the sea. In a civil war, equivalent forces and armaments face each other. Territory is held and front lines are fought over. Civil war is a high intensity conflict producing a lot of deaths and, when one army is victorious, the defeated troops go into exile. This happened in Russia (1920), Spain (1939), China (1949), Vietnam (1975), Rwanda (1994), and Syria will follow suite whichever side wins. As for a cease fire and new borders, the precedents of Palestine, Korea and Bosnia-Herzegovina are not very encouraging. What seems most likely is that the Syrian regime, with abundant help from Russia, Iran and Lebanon, will annihilate the minor opposition groups (Free Syrian Army, al-Nusra Front, etc.) and will only then fight ISIL, at which stage the American coalition will have to support them. Whether this strategy was imagined in Moscow or Damascus, it has destroyed any hope of political change and will force even more Syrians to leave their country. A half-hearted backing to a popular uprising against a murderous regime is doomed to fail. The Syrian people needed guns and planes, not words and promises. All that can be done now, short of fighting the Russians, is to welcome the refugees.