The depth of financial crisis and of the resulting recession is the direct consequence of an increasingly disproportionate distribution of wealth, whereas the timing is due to the periodic coincidence of various debt cycles. The wealth produced by a nation is split three ways. Governments tax a share, employees get what they can, and the rest is a return on investments, in the forms of rent, interest and profit. Over the past couple of decades, the respective parts of each group have been completely modified. The end of the Cold War and of the soviet model made Big Government and redistribution redundant, so that taxes on high incomes have been reduced progressively ever since. Over the same period, wages and social benefits stagnated, while the return on investments reached unprecedented heights as, carried by the numeric revolution, the amount of wealth produced increased prodigiously for the sole benefit of dividends. The problem was that all wealth produced must ultimately be consumed, that mass production needs mass consumption, and that supply had increased while wages stayed the same and taxes were reduced. Some of the return on investment was being consumed, of course, mainly by the middle classes. But their share was laminated by the dotcom bubble. Most of the return on investments was being reinvested, thereby increasing the concentration of investments and the returns they received into fewer and fewer hands. The only way out, other than redistribution, was to grant credit to everyone and give them a spending spree. So there was credit to buy houses and cars, credit for travel, clothes and home videos, and credit to make war on terror.
Investing wealth instead of consuming it increases the future production of wealth without distributing the wherewithal for its consumption, except in the form of credit. But credit merely brings forward future incomes to be spent in the present. And, being spent, those incomes will be lacking when future demand is needed. Unless the credit is renewed, which it was. Debts piled up, and up, the daily and weekly ones, and the decadal, and all the in between ones. When several renewal points coincided in time, as they regularly must, things started to go terribly wrong. This massive roll over of credit overstretched the banking system and exposed the shoddiness of its reserves. To be able to grant ever more credit, banks must increase their funds. But, instead of secure reserves, such as Treasury bonds that pay a miserable interest or none at all, banks bought complex derivatives with high returns. Most of which have turned out to be either subprime, downright toxic or Ponzi swindles.
The unlimited investment of wealth, was made possible by the mechanisation of production, and was the foundation of capitalism. The insufficient demand that is the result of this process can be resolved however, if the excess consumer supply is traded for investments on the world market. This transformation of consumption into investment by foreign trade had benefited the developed nations since the Industrial Revolution. They drew in all the raw materials of the planet, and shipped out their beads and guns in exchange. Contradicting Henry Ford’s idea, workers need not earn enough to consume all they produce as consumption traded directly for investments. This is obviously not a game that can be played by all. It was the monopoly of the most industrialised nations. And, even so, they regularly made war on each other. While their various satellite dominions just had to submit. However, over the past ten years or so, new major players have joined the field. China in particular has been flooding the planet with consumer goods, and investing at an unprecedented rate. This reversal of the flow of consumption first affected Japan, then the US, and finally Europe. The Japanese seem to dislike credit, so Japan was the first to go into recession. Americans had no such misgivings, and took on debts recklessly. This resulted in a consumer boom, to which Europeans participated belatedly, some more than others. An ever greater part of the wealth produced was invested, while consumer demand expanded proportionately on credit. And when the renewals coincided, the overloaded structure collapsed.
Bail out the megabanks, they are too big to fail. Bail out the major insurers and the car manufacturers. And who will be next, Boeing, IBM? And what happens to those small enough to fail? Is de facto state ownership of most of the economy the only solution? And, if so, how can the guarantees that governments are offering be transformed into actual cash? The Bank of England (and now the Fed) is experimenting something called “quantitative easing”. The British central bank is offering the commercial banks cash for the Treasury bonds they are holding. The idea seems to be that this will put some liquidity into the system, while maintaining the high prices of Treasury bonds and their subsequent low interest rates. A crucial point when budget deficits are increasing at such an unusual rate. The trouble with this is that banks do not need cash to grant credit. They need securities, such as Treasury bonds, to back the credit they are granting. So that the Bank of England will buy all their old Treasury bonds, at a price so high it can only drop, and the commercial banks will get bundles [£75 ($100) billion is on offer and could be doubled] of fresh cash to buy the new massive issues, at a far more interesting rate. The British central bank is about to “print” money to finance the expanding public debt. But, as it is not allowed to make such a transaction directly, it must use this slight of hand, and pass through the intermediary of commercial banks at a predictable loss. The British government has decided to finance its budget deficit by printing money. To hide this inflationary move a commission will be paid to the commercial banks. The exact size of this commission (the loss of value of the old bonds as they catch up with rising interest rates) will only be known at the end of the year. By which time the whole banking system may have been nationalised anyway, with the government printing larger and larger denomination notes to keep up with rising prices.
Inflation is the only way to cancel the vast accumulation of debts, and start a new cycle of growth. Everyone must realise this evidence, but nobody dares admit it because of the lenders. All that Treasury paper is about to lose a lot of value, provoking considerable collateral damage. But no government can afford to admit that inflation is the way forward. Public debt is held domestically and internationally, so there will be anger all round, with recriminations and nasty finger pointing, social unrest and diplomatic tensions. The total impact of the process that is just beginning is difficult to estimate. Its dimension is global, and this universal involvement increases the scale of the crisis. But it may also help the solution. The whole of humanity is concerned, which might avoid war between nations and put the focus on class struggle. That really would be unprecedented.
KENNETH COUESBOUC can be reached at: email@example.com