Crises Analysis– 1847, 1857, 2008, 20?? (8)
c) 2008 - continued
The expansion of debt, described in Part 87, had two aspects. Firstly, as the fall in global commodity values proceeded, the expansion of credit led to a fall in the value of money tokens, which prevented the fall in values being manifest as a global deflation of commodity prices. But, this same process, led to an unprecedented inflation of financial asset prices. Between 1982 and 2000, the Dow Jones Index rose from 1,000 to 10,000, a percentage rise way in excess of the growth of the US economy during that period. Similar rises took place in other stock markets, and bond markets. In addition, property markets, in several countries, experienced the same kind of bubbles. The bubbles in these asset markets were, in turn, the unsafe collateral on which individuals were encouraged to take on even more unsustainable levels of debt.
Secondly, these growing levels of debt were the means by which the increasing gap between the exports of the US and UK to Asia, and their imports from Asia, was bridged. China and other Asian economies produced masses of cheap commodities, a large proportion of which were sold to the US and UK. These commodities contained large large amounts of produced surplus value, but to realise it, US and UK consumers had to buy those commodities, despite stagnant or falling real wages. They did so by taking on ever larger levels of debt, collateralised on increasingly outrageous valuations of their houses, shares and bonds.
The credit was provided in large part by those same Chinese and Asian producers, who recirculated the dollars they received into the purchase of US and UK bonds. In doing so, they ensured that they could continue to sell their commodities into these economies. This situation described in Part 74 is similar to that described by Marx in Capital III in relation to that in the 19th Century, concerning China and India, except the situation is reversed. Then, Mill and Ricardo etc. argued that Britain was not overproducing, but China and India were under-consuming. So, Britain forced its loans on China so that it could continue to consume British exports. Today, no one is forcing Britain or the US to borrow from China, but the end result is the same. Chinese over production is allowed to continue for so long as the loans keep flowing to finance the consumption. At some point, when the flow of profits declines, so that the supply of money-capital declines relative to its demand, then global interest rates will rise.
When interest rates rise, borrowers default. When borrowers default, lenders also go bust and become loathe to lend. But, those who have borrowed to consume can no longer continue to do so. The producers of the commodities they bought from now find their market has dried up, and their overproduction becomes manifest. Nor can Central Banks remedy this situation of insolvency by printing money. Marx says,
“Ignorant and mistaken bank legislation, such as that of 1844-45, can intensify this money crisis. But no kind of bank legislation can eliminate a crisis.”
In a system based on credit, a crisis must occur when its not available. Bills represent sales, and purchases,
“whose extension far beyond the needs of society is, after all, the basis of the whole crisis.”
In a message to today's politicians and central bankers, he continues,
“The entire artificial system of forced expansion of the reproduction process cannot, of course, be remedied by having some bank, like the Bank of England, give to all the swindlers the deficient capital by means of its paper and having it buy up all the depreciated commodities at their old nominal values.”
“Incidentally, everything here appears distorted, since in this paper world, the real price and its real basis appear nowhere, but only bullion, metal coin, notes, bills of exchange, securities. Particularly in centres where the entire money business of the country is concentrated, like London, does this distortion become apparent; the entire process becomes incomprehensible; it is less so in centres of production.”
Once the mass of potential money-capital begins to fall relative to its demand, the consequent rise in interest rates cannot be reversed by increased money printing, because under these conditions, the devaluation of the currency simply results in inflation. Suppliers of money-capital then demand even higher rates of interest to compensate. But, this is to get ahead of ourselves.