The unbalance of debt and demand

The story begins with exchanges for money. Produce (or labour) is sold for money, which is used to buy something else. Money transfers the value of the first transaction to the second, and makes them equal. Different things of same value have been exchanged. In principle that is, because market forces of supply and demand are constantly modifying that equality. However, the exchange of commodity (or labour) for money and of money for commodity (or labour), C’ – M – C”, once in place, can take the alternative form of money for commodity and commodity for money, M’ – C – M”. Instead of money being the intermediary for the exchange of different commodities of equal value, a commodity is the intermediary for the exchange of the same money (metal, paper, digital) of different value. This led to merchants selling goods for more than they had paid them, to bankers selling money for more than it was worth, and to manufacturers selling the product of labour for more than they had paid it. And all this extra value had to come from somewhere.

Monetary creations can cover the extra value of commercial, financial and industrial exchanges. Spain did this in the 16^th century, at the dawn of the modern era, with its convoys of American silver. But the quantities of bullion were soon insufficient, so trade and credit took the relay. The driving force of Robber Capitalism is accumulation. In its primary form, capital was land and bonded labour. As trade developed, gold and silver money, the universal exchange values, became capital in its ubiquitous perfection. Finally, with the machine age and the exploitation of fossil fuels, capital encompassed the means of production. Capital could accumulate not only as land and money, but also as productive investments. And these could be procured by trade and credit.

A part of production concerns investments, and the other part concerns consumption. When the extra or surplus value, which has not been paid and for which there is no corresponding money in circulation, is an investment, it can be exchanged for other investments, like for like. When the surplus value is consumption, it can only be exchanged for investments abroad. India’s wealth was largely due to its cotton fabrics. Growing the plant, spinning the thread and weaving the cloth were a cottage industry that earned income for millions of people, and part of the produce was traded for foreign goods. In the early 1800s English engineers invented mechanical systems to spin and weave cotton. This led to cotton plantations in America, much closer than India to the factories of Northern England, to the ruin of India’s cotton industry, to the subcontinent’s subsequent conquest and its colonial subjection. Trading consumption for investments allows one side to accumulate capital and increase employment, while condemning the other to stagnant or contracting capital and employment. But here again the amount of surplus value for consumption outgrows the possible trades for foreign investments. At which point the last and only resort is consumer credit.

Credit is a promise of future payment based on thin air. It is not unspent income lent to and spent by someone else. Credit is not the circulation of savings, of money. It is the guarantee that money will be paid at a later date. Credit is a virtual monetary creation limited in time. Credit is not money because it must be replaced by money at some future date, but it acts like money by increasing demand. Consumer credit can absorb surplus value for consumption, until it is time for the credit to be paid in money. At that point, money changes hands without a corresponding exchange of goods or services (labour), and this non-exchange reduces demand. To fuel growth in demand for surplus consumption with credit, the credit granted must grow faster than demand (1). As the total amount of credit increases, the credit granted has to multiply to maintain growth in demand, until the size of the sum begins to cast doubts on the system’s sustainability.

Money allows the unequal exchange of value for more value. But the supplement must come from somewhere, and each of its sources has its limitations. At present there is a $152 trillion sovereign debt out there (2), overshadowed by a $1.5 quadrillion derivative bubble based on credit (3). This means two years of world income have been lent by the part of humanity that has too much wealth to the part of humanity that has too little, and about ten times more has been whisked up by banks as ephemeral credit. These colossal sums have reached a stage where they can no longer grow significantly (1% of a quadrillion = 10 trillion). And the interest they take is bleeding dry world demand. It seems that the capitalist rule of getting more for less is approaching its financial end-game and, as October has a history of market turbulence, the world may be just a week or two from a horrendous tipping point, a market crash shortly before the US presidential elections that would set off some dangerous fireworks.

1. Supposing that, over a given period of time, income and demand are 10. A credit of 1 is granted, which increases demand to 11. But, at the end of the period it must be paid back. Income is still 10, so demand is reduced to 9. To bring demand back to 11 needs a credit of 2, and to raise demand to 12 a third unit of credit must be granted. Supposing income has risen to 11 at the end of the second period, a credit of 3 must be paid back, which reduces demand to 8. And 5 units of credit are needed for demand to grow to 13. Credit has grown to 5, while demand has only grown by 3. If incomes do not grow the difference is greater.

2. http://www.foxbusiness.com/markets/2016/10/11/iea-warns-risk-to-oil-demand-from-record-global-debt.html

3. http://thejanssenreport.net/derivatives-10-times-size-global-economy-trigger-global-financial-meltdown/