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.