Nearing the edge

Profits and interest are the surplus value of capital. They are the unpaid part of labour’s production, the extra value that is added on to costs without an equivalent value being circulated. Finance grants a certain credit and demands more in return. Commerce sells at a higher price than it has bought. Industry has more produce to sell than it has paid for. Capital expects to get more out of the market than it puts in. But all this supplementary value can only be obtained by colonial plunder or by granting credit. As it does not exist here and now, it must come from abroad or from the future. But plundering the planet and accumulating debt have reached their ultimate stages, and printing money is a sign of that finality. It is the last fuel of a failing system.

Capitalism could be dated back to the expropriation of land by armed force and the extraction of rent, or to the profits of trade. The monetisation of exchanges and the development of banking were also a turning point. But it was science and technology that really got capitalism started, by opening the path to unlimited investments and accumulation. A little over two centuries ago, the means of production took on a different signification. They had been essentially land and slave or serf labour. They would increasingly be machines and the buildings that housed them, while labour was “free” to be employed or not on demand. The acceleration brought about by engines resulted in mass production and the necessity of corresponding mass markets. But, as workers were only paid a fraction of their produce, markets had to be found elsewhere. Steam driven jennies and looms in English cotton mills would be the ruin of India. Industrial capitalism was ever more in need of foreign markets to sell its surplus value.

Capital began the 19^th century by selling its industrial surplus for bullion. Then it colonised for raw materials. By the end of the century, European powers had been joined by the USA and Japan, and the fighting for dominion intensified. Meanwhile the Bessemer converter (1855) multiplied the production of steel, and thereby of railways, trains and steamships, and plenty of dreadnoughts and ordnance. Steel replaced textiles as the ruling industry and, along with coal, greatly influenced politics, eventually leading to war on a grand scale. Banking also grew in influence, lending to governments and businesses, organising the flows of capital and receiving the backing of military might. However the colonial system turned out to be a costly failure. After a second global conflict, more extensive and destructive than the first, and a lot of post-war fighting, a new world order was slowly put in place. The newly independent nations would trade their raw materials for consumption. The industrial nations could exchange their surplus value for investments. But this proved insufficient to absorb huge productivity gains, especially once reconstructed Europe and Japan joined the competition for market shares.

Surplus value is unpaid labour that has no equivalent demand. It can be exchanged for investments, or it can be monetised by credit. This advantages investment surplus values that can be exchanged among themselves. And it disadvantages the surplus value of consumption that must be exchanged for investments abroad, or resort to credit on a fast expanding scale. Consumer credit must be constantly renewed. If instead it is paid back, demand will slump. The mounting levels of debt were mitigated by strong economic growth and by occasional bouts of inflation. But, for the past three decades, growth has been mostly in developing nations, notably China and its satellites, and inflation has been historically low. Profit and interest have been paid with debt, and that debt has accumulated to gigantic proportions. And so far no one has implemented anything other than more of the same in ever larger quantities.

Profit and interest are paid with debt and then invested. Capital accumulates on one side and debt on the other. But capital is privately owned, whereas debt weighs on the public domain and on wage earners. Everyone is in debt, but just a few possess the capital. And that possession gives the right to decide how and to what ends it is used. That is, more profit at whatever cost to the community and the environment. Capital has accumulated on a mountain of debt that has no material consistence. It is just paper and writing, engagements and promises. And an increasing number cannot be held and kept. These defaults will leave empty holes in the structures of finance. They have the potential to be so big that even central banks will not be able to fill them. When interest rates start rising steeply, it will be the prelude to pandemonium.

Funny money

Commercial banks grant credit to their customers, big and small. But they only possess a tiny fraction of the money they lend, as little as 3%. The rest only exists in writing. It is scriptural money based on promises of future reimbursements. However, it is accepted as payment and circulates as such. At term these debts are either renewed for another period, or they are paid back, often in instalments. In the second case they are lent out again to other customers. What distinguishes payments is that some are made with past incomes while the others are made with future incomes that have not yet materialised. Credit and debt are bets that future revenues will be available. And the risk of such a wager justifies the extortion of interest. Defaults on debt do occur, and lenders write them off as calculated losses. Problems arise when the numbers of defaults is greater than expected, when they come in large clusters. If they pass a certain percentage, they cancel the profits of interest. Beyond that they consume the banks reserves and bankruptcy looms.

Credit comes from nowhere by writing, but it can only return to oblivion when future incomes materialise. It is and then is no more, as it has already been spent. However, credit can be and is prolonged indefinitely by being granted a new term or transferred to another borrower. This perpetual credit accumulates as additional ones are constantly being granted. Credit expands and reaches a point where the solvency of new borrowers is questionable. The mass of people whose future incomes are uncertain, and whose only source of credit used to be the pawnbroker and the payday lender, are encouraged to buy all they need or want and pay later. Subprime lending and junk bonds are attractive because they pay much higher rates of interest. This high interest comes with a heightened risk of default. But all those capital profits must be invested somewhere, either as company shares or in debt. And capital gains need to be as large as possible.

Bad debts are statistical probabilities. But they can be overwhelming. This can happen when there is overreach, when the vast volume of debts risks toppling at the slightest incident. A dozen years ago mortgages on inflated house prices had been granted far and wide, and the demand they generated pushed prices even higher. This created a perfect bubble that brought down Lehman Brothers and threatened global finance. The system was saved by floods of cash from central banks, and lending took off again to ever loftier heights. Bond buying by central banks was on such a gigantic scale that it pushed up their prices and brought interest down to almost nothing, and even lower. This led to a surge in debt funded acquisitions and share buybacks, but households and consumers went on being bled for their mortgages and overdrafts.

By the end of last year all kinds of debts, from governments to students, had reached alarming levels. Then came the COVID pandemic and the overburdened structure began to slowly fall apart. Central banks and governments seem to think that more of the same will solve the problem. But today’s crisis is not just about debt. It includes closed businesses and industrial sites, rent arrears and consumption falling off a cliff. Throwing cash at it will not save the situation this time. Whereas debt cancellation, democracy in work-places and a massive redistribution of income would solve a lot of things, and drastic cuts in carbon dioxide emissions would have to be part of the solution. None of this is likely, as most people seem to want to go back to where they were three months ago. The known is often preferred to the unknown, and this conservative preference is the ruling class’s main ideological foundation. What is was and will be, as there is no alternative.

Capitalism’s necessary expansion was already in trouble before the pandemic. The present contraction is so sudden and massive that the debt structure based on growth will probably collapse as defaults multiply. As usual, governments will pretend they have things under control, until they manifestly do not and resort to a state of emergency and martial law. The system was wobbling and is now broken beyond repair. Will something new emerge, or will the same old violence and oppression just accelerate their devastation?