Spending the future

Government borrowing has reached a different dimension. Billions are passé. The new counting is in trillions. In Europe and America numbers with thirteen digits are casually being added to balance sheets. With the yen at about a hundred to one for the dollar/euro, Japan has been there for quite a while. And the yuan being at about seven to one, China also had a head’s start. This sudden acceleration of debt accumulation to 10% and more of GDP, instead of the usual 2-4%, is being blamed on the pandemic and the need to compensate the loss of income due to the lockdown. The same pretext has allowed companies to do plenty of borrowing with the blessing of central banks, even those already weighed down by debt. Households have been spending less, and many have lost their income. Some households have probably reduced their debts, but many have had to increase them just for food and rent.

2020 is shaping up to be a record year for debt. All that unearned spending consists of payments put off to some future date. But those future payments cannot occur without reducing future spending. So debts are renewed at term. New debts pay off old ones and their interest. Borrowing to spend and pay interest corresponds to the system made famous by Charles Ponzi. At some point lenders realise what is happening, stop lending and ask for their money back. Today’s lenders, however, have so much money that they literally do not know what to do with it. Giving it away goes against the grain, so they must find somewhere to place it and watch it grow. The basic choice is between shares and bonds. But dividends are uncertain because they depend on the fluctuations of company profits, whereas interest is fixed for the duration of the loan. Lending is therefore the favourite investment, and not just Treasury and corporate bonds, also mortgages and a wide range of consumer credit. Unfortunately for lenders, interventions by central banks have brought interest on Treasury bonds way below the rate of inflation, so there is nothing to be gained there. Twelve years ago, mortgage lending overflowed into subprime regions and collapsed. Squeezed out of Treasuries by central banks, today’s lenders are turning to the junk-bond market to get some sort of return, though that may end up just like the subprime loans, with a multiplication of defaults. When bond prices rise and interest drops proportionally, the share market follows suite with prices going up and dividends proportionally down. But presently dividends are rare and getting rarer by the day. It seems that the only way to make a profit is to speculate on ups and downs. Buy to sell or sell to buy. Having been reduced to nothing, the actual incomes generated by these two sorts of investments no longer count. Gains and losses depend on guessing the trend rightly or wrongly.

The world has been spending its future by an extravagant accumulation of debts. This has resulted in an incredible concentration of wealth. Instead of paying taxes and wages, lend money to governments and grant workers credit. And add interest to all those profits. A perfect scheme, except that no one knows how far into the future the spending can go. It has passed three years of global income, and the present borrowing spree may bring it up to four. Will it go on to five, ten, fifty or a hundred? Is there a limit? Governments cannot default on debts in their own currency, as they control these currencies and can produce more at will. Under the obscure terminology of quantitative easing, central banks have bought government debts with monetary creation, and have in fact paid them back, so that more borrowing could follow. However, governments can default on debts in foreign currencies, and it would happen quite often were it not for the financial interventions of the International Monetary Fund and the World Bank. And corporations, businesses, artisans, households and individuals are susceptible to bankruptcy if things go wrong. Some debts fail, while others are paid by printing money. In the first case, the payment does not materialise and must be written off. In the second case, payments materialise out of nothing. But in both cases the money has been spent and is circulating on the market. In the first case the lender’s investment has been consumed. In the second case it has also been consumed but it is returned as newly created money. An investment turns out to be consumption, or it is returned by increasing the amount of money in circulation. Then there is the question of who the lender is and who is being lent to. Persons who lend their savings may end up with fewer savings, but a bank lends virtual money that is a multiple of its actual money reserves. When there is default, a bank must fill the gap with real money from its reserves and thereby reduces them, which in turn increases the multiple of its virtual loans. So that, wherever that multiplier has a legal limit, defaults force banks either to reduce their lending or to restore their reserves by cutting dividends. As for paying debts by printing money, the effect on prices is inflationary. But that inflation will only concern the domains where the loans have been spent. Over the past decade governments have spent their borrowing on bailing out the financial system and on military expansion. The stock market, real estate and weaponry have seen prices soar, but elsewhere prices have stalled because of stagnant wages and shrinking pensions.

Future incomes are being spent at an alarming rate. And the concentration of present incomes is fuelling all those debts. Humanity’s tomorrows are mortgaged, and the weight of that mortgage is growing faster than ever. It will never be paid off, but it is a weapon of mass oppression. Debt is a form of bondage that replaces the chains of slavery. There is no violence, as the victim agrees to be bonded, though the force of circumstances, job losses, health costs or worse, can be extremely violent. Debt subjects people to a second master. Their employer is joined by their banker, and both take a part of their life-force and its produce. This modern serfdom was marred a decade ago by the subprime crisis and managed to get going again. Today’s pandemic has put a spanner in the works, and throwing more debt at it will not chase it away. The global lockdown put the brakes on production and consumption, with some sectors coming almost to standstill. This massive loss of incomes will not be recouped, and its final extent is unknown as the viral havoc is far from over. And it is quite conceivable that the more affluent population will never go back to its care-free travelling and socialising in bars, clubs and restaurants. However, most of those who fall seriously ill and almost nine out of ten of those who die are over sixty-five. This could lead to the isolation of older populations, while the rest all go back to a masked and gloved semblance of previous normality. What seems certain is that the world will be poorer and the debt load will be even harder to manage. Capital accumulates with debt and environmental plunder. To optimise its profits it has sold the future and desecrated the planet. The denial of consequences derives from the ownership of capital by mortal individuals rather than perpetual associations. After a disastrous military defeat, the French king Louis XV’s mistress is said to have exclaimed, “Après nous, le déluge”. And that is probably in the minds of many ruling klepto-pluto-gerontocrats, as they cling on to their power and wealth to the very end. However, the gigantic structure that raises them above common mortals is cracking everywhere, as it is buffeted by social rebellions and by environmental and meteorological catastrophes. A microscopic virus may turn out to be the proverbial last straw.