Too much money

American companies are trying to spend a massive two trillion dollars of accumulated profits. Handing them out to their employees is not an option, as these profits have been extracted from labour in the first place. And increasing productivity and production is not a priority in a saturated world market. So companies are using some of this cash to buy back their own shares. This practice is not new (1982, SEC rule 10b-18), but it has reached unprecedented proportions, $5B in the 1980s, $350B in 2006, $530B in 2017, and an estimated $650B this year. Buying back shares and taking them off the market may push up the price of the remaining shares, by increasing demand and reducing supply, but it does not change the overall value of the company. It only reduces the number of shares that represent that value.

Stock buybacks are a symptom, froth on the surface of something more fundamental. They signify that company profits have outstripped their investments in more production. Producing more by increasing capacity or productivity depends on demand, and growth in demand has been nil or very slow for the past ten years. Profits have been coming in as usual, and some have even increased thanks to falling or stagnant wages and tax cuts, but productive investment opportunities have been rare, hence the recourse to mergers, acquisitions and buybacks. Too much money is a sign that demand is not growing fast enough. But demand only increases when wages, debts or employment are growing. At present, wages have apparently regressed to where they were in the 1970s, debts seem to have reached a summit, and jobs are growing at a sluggish pace. Slow growth in demand with no change in sight does not encourage growth in productive investments.

Capital has squeezed all it can out of labour and public services, and is straining to get the last drops. Wages and taxes have been replaced by debts that cannot be repaid and just pile up year after year. Imagine a government that has cut taxes and must borrow to continue functioning. To get out of debt it would have to increase taxes once to continue funding itself and, again, to pay back its past debts. No government would envisage such a thing. In the past strong inflation and growth helped keep debts in a reasonable proportion to incomes and GDP. However, over the last ten years both have been very weak. So debts have grown that much faster, and are spurred on by artificially low rates of interest. These bulging debts are a reflection of the bulging profits that are inflating a stock market bubble. It is reasonable to think that both have limits, and if one crashes so does the other. But, as with other complex structures such as the world’s ecosystem, predicting the timetable of a future collapse is hazardous. Pumping money into the economy by debt creation and pumping carbon dioxide into the atmosphere by burning forests and fossil fuels are similar, because at some stage the organised systems they participate in are suddenly modified. In both cases, more and more, and even more, leads to a tipping point and an abrupt succession of failures. However, a devastated economy will be easier to reconstruct than a devastated planet.

A problem with profits

The question of where profits come from has a double signification. The first argues whether profits are expropriated from the value added by labour, or whether they are added on, over and above production costs. The second overrides both possibilities as it wonders where the money to pay for profits is coming from. Whether profits are unpaid labour or are added to the cost price, they can only be sold on the market if there is a solvent demand. Money goes on to the market to invest in goods, services and labour, but the price paid then comes back on the market increased by a certain amount of profit. More money comes out of the market than is put in. And this applies whenever something is sold for more than it has been paid.

The possibility of more for less originated with monetary transactions, money being the generally accepted standard measure of exchange value (1). This means that commodity C is exchanged for money M, and M is exchanged for another commodity C’. Money changes hands as the intermediary in a chain of exchanged commodities: C-M-C’-M-C”-M-C”’ etc. So C is sold to buy C’, which is sold to buy C”, which is sold to buy C”’ etc. This chain can have money as the intermediary between two commodities, C-M-C’, but it can also have a commodity as the intermediary between two sums of money, M-C-M’. In the first case the two commodities are different, which justifies the two exchanges, C-M and M-C’. In the second case money becomes money again, and the only justification of this double transaction is that the second exchange, C-M’, involves more money than the first one, M-C, that M’ is larger than M. Buying to sell, instead of selling to buy, presupposes a profit. It means getting more value of the same thing, money, instead of the same value of something different, commodities.

Merchants were the first to disrupt the exchange of equal values (2). Then some of them became bankers and demanded interest on credit, and industrialists obtained more labour than they paid for. All these groups get more money out of the market than they put in, a supplement that must come from somewhere. In the past, money was sifted from river beds and dug out of the ground, as gold, silver, copper and tin. But that made it a commodity that obeyed the rules of commodity exchange. These metals were exchanges for money before becoming money. If they were minted, they would increase the number of coins in circulation, but each one had been paid for. More coins would increase the number of exchanges that occurred in a given time, but they could not pay the surcharge of profits and interest as they had previously been paid for. In fact, the only money created out of thin air is credit, as even bank notes have a cost and their production is closely controlled. This fiction, which is based on the promise of a future payment with real money, means that more money can come out of the market than is put in. However, if profits continue to be reaped, credit must grow proportionally. It must be renewed and increased. And, as it pays interest, that must also be compensated by additional credit. So credit swells and swells some more, until debtors start defaulting and bonds become junk. And zero interest rates only facilitate credit on an even larger scale.

Some commodities go into the production process and transmit their values to the end product. They are invested. Others are consumed and their value is annihilated. They must be created anew. An invested credit returns its value, and its renewal will renew the investment. A consumed credit has lost its value, so its renewal will not renew the consumption, it will just prolong the credit. This means that credit can cover the profits on investments, and grow at the same rate as investments. But when credit tries to cover the profits on consumption, it multiplies much faster than consumption and gets out of hand. (3)

Profits need to be realised and become money so that they can be invested and accumulate as capital. This problem, especially for profits on consumption, can be solved by foreign trade. If finished products for consumption are exported and raw materials for investments are imported, the transformation occurs elsewhere and has no effect on the home market. This exchange was the original motive for trading abroad and the basis of colonialism. The colonialists would receive consumption from the metropolis, and send back raw or rare materials produced by native labour. Neo-colonialism maintained the system by furnishing local potentates with luxury goods, palaces and weapons in exchange for their country’s natural resources. And the only investments have been ports, railways, pipelines and roads to transport those resources. However, the planet is finite and there is competition among industrial nations to control this advantageous trade. The colonial powers of the past finally fought it out and were ruined. Today’s imperial powers are restrained by mass mutual destruction, but their necessary expansion is a path to confrontation. The new giant with a billion workers and the arch-bully with most of the world’s weaponry may be edging towards such a clash, which could lead to a new division of the planet and a Second Cold War.

Profits can become investments by resorting to credit and lop-sided global trade. But neither solution is perennial, as the first ends in collapsed credit bubbles, and the second in world wars. However investments are a necessary part of production – the renewal and upkeep of existing ones and the production of new and innovative ones – and the wherewithal to pay for them must come from somewhere. The present problem is, and this was probably true a century ago, that the sum of profits is far larger than the sum of productive investments that are made. For example, Apple has $200B in off-shore profits and is bringing some of them to the US at minimal cost, not to invest in production or R&D, not to build schools in Jackson, Montgomery and Atlanta, just to buy back a large wad of its own shares and push up the price of those still on the market. The disconnection between the sums trying to make a profit and the sums used to produce more goods and services has transformed the world’s stock exchanges into vast Ponzi structures that keep going as long as new money is being added to the pot. When that stops, everyone discovers that the pot only contains worthless bits of paper. It is imaginable that investments could be restricted to increasing and improving production and productivity. The other existing forms might not be outlawed, but might be frowned on as perverse and sick-brained, like usury and gambling. But the world cannot be remade, its finality is profit, and the existing rules of fear, contempt, envy, hate and hubris will wreak their usual havoc and destruction.

1. It seems that the use of credit for exchanges preceded the use of coins by a couple of thousand years. See David Graeber’s book, Debt: The first 5000 years.

2. Landowners have obtained rent from time immemorial. But rent, like taxes, is just money changing hands, the weak to the strong, those who have not to those who have.

3. See also:  http://lelezard.blogspot.com/2018/05/no-tomorrows.html