Riding the debtworm
Why
is the world periodically subjected to economic slumps, depressions,
and recessions? This has nothing to do with meteorological disasters,
as was the case in the past when just about everyone’s livelihood
depended on agriculture, it is something systematic, inherent to the
way finance and production function. Money is lent and credit is
granted at interest, so that more comes back than has been handed
out. Goods and services are produced and sold with a profit, so that
more comes back than has been paid out. More value comes out of the
market than is put in, and that constant flow of extra value must
come from somewhere.
Only
central banks are allowed to print banknotes and mint coins, and they
thereby control the amounts in circulation. But all banks can create
scriptural money out of thin air, by simply crediting their clients’
accounts. This is what allows the market to give more than it gets.
However, material notes and coins are marginal forms of payment, so
it is the virtual value of credit that funds that extra wealth.
(Credit is virtual value because the transaction occurs but the
actual payment takes place at a future date or by instalments.)
Credit
is granted and allows the realisation of profits and interest. But
every additional credit granted increases the amount of interest that
is due. Credit is needed to pay both profits and interest, but it
only increases interest, which becomes increasingly preponderant.
Moreover, past credits must be constantly renewed to avoid a fall in
general demand. Credit must multiply to accompany the growing profits
of an expanding supply and to sustain its own growing interest, and
it must be regularly renewed, so it just piles up ever higher.
Credit
covers a wide variety of forms and conditions. One of these
conditions is its duration, which can last hours, days, weeks,
months, or years up to a century. These different time scales mean
that some debts need to be renewed frequently, while others run for
decades. Also, borrowing tends to be cyclical with peaks and troughs,
and when several peaks occur more or less simultaneously, the down
turn is sudden, whereas troughs usually last some time so their
assembled up turn is gradual.
Profit
and interest need the extra inflows of credit to realise their value.
But credit is cyclical. It expands and contracts, and often errs into
the subprime region where it falls off a cliff. And, even without a
cliff-edge effect, contracting credit means the toll of profit and
interest is taken on demand, which in turn contracts. To be able to
operate, profit capitalism and usury need credit, but it grows and
withers, and occasionally collapses. These causes and events are the
mechanisms of the world’s economic upheavals. But, without profits,
how would production expand with more of the same and with novelties?
It seems possible that productive investments, as opposed to
speculative ones, could be financed by credit granted by local,
national and international mutual funds. The invested credits that
fail (some will) would be written off, and those that succeed would
become part of the monetary mass in circulation. The unsuccessful
borrower – there could be several in association - would find it
difficult to borrow again, and the successful one would keep his
credit as part of his stock. Another way of doing things is possible.
There is no fatality in human acts. They are driven by ideology and
emotions. But ideologies can be shown to be false and misleading, and
that modifies the emotional aspect.
posted by le Lézard at 3:56 AM
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