Capitalisation is debt production sui generis

Dieter Schnass writes in the context of the EU’s current aid measures in an article in Wirtschaftswoche that infinite debt is the business basis of the capitalist system: „… Without stimulus from governments and central banks the world economy would be stuck for years „in a deflationary labyrinth“. What is needed, Südekum continues, are tax cuts, public investment – and debts that are „financed as long-term as possible and are pushed further and further into the future by a permanent shifting – i.e. the issuing of new bonds to service the old ones“ … Every payment opens up the prospect of a subsequent payment; and every promise of payment always results in more and more, i.e. in principle an unfinishable number of promises of payment… Compensation for the debts in circulation is explicitly no longer desired in this monetary system – and its stability consists solely in the fact that each one in it refers to the other, because he knows that what he (does not) possess is always (not) possessed by all the others. Controlled bankruptcy thus becomes, as it were, the institution of the new sham economy, deferred insolvency its constitutive factor, systematic indebtedness its accompanying credo. Just like today.“

In my book „Capital and Power in the 21st Century“ I have thematized and described in detail the infinite indebtedness. Here are some extracts:

The fictitious and speculative capital (financial instruments and promises of payment) were present as a kind of embryo from the beginning of capitalism, especially when one considers that the capitalist production of the companies must in principle be pre-financed, and thus debts, which are quasi insured with the goods produced in the future, will ever arise. Accordingly, capital is not to be understood as an (absolute) positive value, as the famous economist Joseph Schumpeter, for example, still assumed, but as a socio-economic relationship in which precisely the intentional negative (debt) is to be understood as a positive condition for capitalist production, as the former GDR Peter Ruben, for example, explains – capital or capitalization is debt production sui generis. (Ruben 1998: 53) In many cases, with the exception of the self-financing of large companies, the capitalist production processes are set in motion uno actu with a credit contract. And the possibility for capitalist firms to pledge their future goods as collateral implies that their products (the right to extract a surplus with them) are potentially capital even before anything is produced and then realized as a commodity. So we have ever been dealing with a financialized capital production and that is why Marx calls his book Capital and not the commodity or the money.

At the same time, the ratio of debt to one’s own means of payment, i.e. the particularly liquid securities such as government bonds and central bank money, has risen sharply in recent decades, so that risky securities are being used more and more. Overall, the business with collateral and pledge has diversified and at the same time multiplied; for example, in 2007 a single pledge secured three different loans. (Ibid.: 5538) Relatively safe debt instruments such as government bonds are now also being used more and more by creditors to secure their own debts, with the result that so-called collateral chains can quickly emerge, chains of insurance and collateral that are constantly growing.

The high cost of the debt crisis has prompted some governments to propose reforms to regulate the financial sector. However, as the financial sector, especially in the USA and Britain, plays a leading role in the economic power of these imperialist states, a reversal seems difficult to achieve. The liberalisation of interest rates, the conditions of production of derivatives and their trade cannot be easily reduced. It can be assumed that the more the state relies on the efficiency of the central bank policy, which consists in the unconditional avoidance of systemic risks, and on its own financial capacities in its budgetary policy, the more likely it is to oppose very specific forms of regulation of the financial markets. In general, it can be assumed that debt today is not only recycled, but is growing in a spiral, because even at the micro level we see that newly created promises of payment can be used again as collateral for further loans, thus endogenously prolonging the chain of credit. A transfer of creditworthiness takes place here.

Whether government budgetary, economic, monetary and structural

The financial markets assess this by, among other things, setting the interest rates on government bonds. In any case, the economic policy of the states and their governments with regard to the financial markets must at least be designed to prove their own creditworthiness (among other things also through the policy of the central banks) on the financial markets and to support the financial enterprises of their own nation, so that one can survive in international competition as a national economy and show the corresponding successes on the world markets, i.e. to strengthen the national economic resources, for example by granting licenses for the exploitation of national raw materials, as well as to support the national financial system and to promote the productivity of domestic enterprises by financing important research projects. The creditworthiness of financial firms is primarily determined by the quality of their financial assets, and, in the case of loans, also by the creditworthiness of their debtors, which in turn is dependent on economic and cyclical processes in which the risk models, price movements and ratings of the financial industry are always integrated. The creditworthiness of states is also dependent on the financial industry, which paradoxically also leads to the fact that, in the event of a state rescue of private banks, the state borrows the funds from these banks, whereby these in turn base their creditworthiness in part precisely on trading in government bonds. The creditworthiness of governments and financial companies is thus closely linked. There is now an implicit subsidisation of private banks by the state’s rescue promises. To measure this subsidisation, the banks‘ financing costs (interest rates with which they pay their debts) are related to their costs that would be incurred without the implicit guarantees of the state. The Bank of England has found that between 2002 and 2007, the amount of annual government subsidies to those private banks operating at a global level in the UK averaged £70 billion. (Sahr 2017: Kindle-Edition: 5699) The mere expectation of state support in an emergency, which is already tantamount to informal and implicit subsidisation of private banks, massively boosted the trade in financial products.

At the economic level, government bonds can only be regarded as „values“ to the extent that the state is able to repay the borrowed money from its own assets, i.e. through future tax revenues. Ultimately, however, the government debt is considered covered today as long as the states find new creditors to match the maturing old debt (interest) with the issue of new government bonds, who make further funds available to them, with which the states can then pay the existing creditors at least the interest on the old debt. This procedure of follow-up financing implies the continuous issuance of government bonds, whereby the states secure additional budget funds under the title „net new debt“.1 What is capitalised there is less the future tax revenues, but rather the money inflows that result from the state’s future borrowing.2 At the same time, the taxes continue to act as a certification of the state’s power to borrow further. If, however, the current practice of indebtedness continues, then in 2040 a large part of the capitalist states would at least have to use the tax revenues purely to pay the interest on their government bonds. (Stelter 2013: Kindle-Edition: 689) For creditors, government debt is also partly covered by the potential value of the state-produced physical and social infrastructure, insofar as privatisation of this infrastructure is always within the realm of possibility. The general dilemma here is the following: If the issue of new government bonds tends to be used more and more to pay back the interest on old government debt, then the state will generate less and less additional money with them, which it can use to fund and stimulate the accumulation of capital. If it nevertheless constantly issues more government bonds, i.e. carries out recirculation (which in itself is not a problem, since government debt is not about repayment), in order to finance all its infrastructure measures and itself, then it risks that creditors gradually lose their confidence in its ability to repay and only buy government bonds at higher interest rates, which can of course enormously restrict the state’s ability to pay. While it is true that as long as states remain within their own wallet, they will be able to

cannot, in principle, go bankrupt, but they must ensure that the growth of their expenditure (taking inflation rates into account) does not exceed the growth potential of the economy.

1 Positive net new debt exists when the volume of new loans taken out by the government exceeds the volume of loan repayments. If the volume of new loans taken out is lower than the loan repayments, this constitutes negative net new indebtedness. The debt ratio, in turn, is the ratio of government debt to GDP. It can be reduced if the growth rates of real GDP are higher than the real interest rates on government bonds, whereby deficits in the primary budget do not compensate for this positive effect.

The future economic growth of an economy, to which the mass of government debt is related, is in principle based on speculation. If the increase in government debt and the future growth of the economy diverge too much according to the assessment of investors (because, for example, the inflation rate is rising and government borrowing continues to increase anyway), then interest rates on government bonds will rise first and then possibly even sales of the paper as a whole will falter. However, it does not depend on the absolute level of government debt whether a country has to struggle with a debt crisis, because the success of the country as a capital location also depends on whether or not it profits from the cycles of the formation of fictitious capital through debt. If a nation’s economic growth, which is supported by various measures, projects and policies of the state, stagnates or if tax revenues fall during a recession, then the state’s financial requirements will also increase. With the use of government debt as fictitious capital and the use of credit marks as means of payment, the relationship between the level of government debt and the economic growth of the country’s companies must be constantly balanced

QE policy does not therefore automatically lead to higher real economic growth, but it does accelerate the rise in stock prices and generally functions in times of recession as a monetary incentive system for speculative capital, which does increasingly risky business with the inflowing money flows. For a certain period, the Fed’s purchasing programs were no longer limited in terms of duration and volume. The Fed held 27% of all US Treasuries in 2012. (Stelter 2016: Kindle Edition: 2473) Without the Fed’s policy, interest rates on US government bonds would be significantly higher. By lowering interest rates and freezing them at a low level, rich investors not only get money cheaply, but also avoid the realization of debt. The granting of cheap loans is called evergreening, which also supports those companies that have hardly any chances on the market. For example, Deutsche Bank analysts complain that the ECB’s monetary policy has „brought disproportionate benefits to borrowers with the lowest credit ratings“ and prevented the process of creative destruction. Low central bank interest rates also reduce the state’s budgetary discipline, leading to asset inflation, the prolonged survival of unprofitable companies and the zombie banks, and finally to the dissatisfaction of savers.1

1 Since 2015 the ECB has lowered the deposit rates for private banks to minus 0.4 and the key interest rates to zero, and in addition has launched an enormous bond purchase programme of 80 billion euros per month, which is currently being reduced to 60 billion euros. On the secondary markets, the ECB can buy the government bonds of EU countries participating in the EMSF and ESM without limit. So far, however, neither an increase in inflation nor higher corporate growth rates have been achieved. However, a further explosion of prices on the stock markets has been pushed up, with very high price-earnings ratios (ratio of market capitalisation of companies to GDP) and further increases in Tobin Q (market asset value of the company). The real estate sector has now also become significantly overheated due to the low interest rate policy of the central banks in Japan, China and parts of Asia and Europe. In addition, the negative consequences of the low interest rate policy for savers, pension schemes and life insurance companies must be taken into account.

Since 2007, the inflation of central bank balance sheets has been driven forward in particular by measures to rescue the existing financial system, while the quality of central bank assets has deteriorated significantly. 1 While central bank assets are by no means at a historical record level in relation to GDP, the criteria for covering the money created by central banks (cash

and reserves) has never been so precarious. In the past, central bank money was backed by gold, then by safe debt (government bonds), but today it is not even backed by safe debt, because the assets of central banks include risky stocks, mortgages and non-tradable credit claims of commercial banks.

Debt only becomes a problem if it exceeds the capacity of companies, governments and households to repay it in the long run. Therefore, if one wants to follow Keynes at this point, the real interest rates of commercial banks should be low enough to allow continuous repayments, whether they result from income, profits or taxes, and there should also be political control of lending, because too high (real) interest rates lead to intensification and extension of working hours, pressure on profit rates and higher taxes. Despite the central banks‘ low interest rate policy and the oversupply of money and monetary capital, however, the real interest rates of private banks have not fallen in recent decades, as the mainstream economy would like to think, but have risen. The low interest rates of the central banks, which are often enough assumed to be the cause of crises, are in part precisely a reaction to the operations of the commercial banks, which are characterised by the expansion of derivatives and not least by high real interest rates, thus leading to the much-vaunted financial bubbles. The interest rates of the central banks and those of the commercial banks do not therefore have to be synchronised at all. And only a few institutions can borrow money from the ECB at zero percent interest rates, while the commercial banks set their own interest rates for lending, always assessing the risk of the debtors, calculating their returns and observing their competitors‘ lending policies. It should also be noted that debtors do have the power to influence the supply of money and monetary policy.

Let us summarize: In a monetary system displaced by gold, legal money is created in the credit relationship between commercial banks and the central bank. The latter obtain fictitious capital when they grant loans to commercial banks that represent payment claims. Since the financial crisis of 2008, this relationship has also shifted. The stability-oriented monetary policy, according to which the commercial banks can only lend central bank money against first-class collateral, has generally been abandoned: today, fictitious capital with a high probability of devaluation accumulates at the central banks instead of first-class monetary claims. In addition, the interest rates at which commercial banks receive loans from central banks have been lowered in recent years to such an extent that, adjusted for inflation, commercial banks have to repay a smaller amount to central banks than the amount originally lent. In fact, it no longer matters what the central banks buy from the commercial banks in order to provide them with additional reserves; it seems that the hope of future economic growth alone is enough, so that at some point the debts could perhaps be repaid.

With regard to the low interest rate policy of the central banks, their supporters argue that it would encourage borrowing by companies and consumers. This has demonstrably failed to happen after the financial crisis of 2008; instead, this policy is increasing demand for companies, securities, shares, real estate, etc., and with it asset prices. Low interest rates generally reverse the relationship between savings and debt incentives: Those who save money receive low amounts of money, those who take out loans, for example to speculate, receive „cheap money“ and at least the option of high returns (Stelter 2013: Kindle-Edition: 834)1 As we have already seen, interest rates and the prices of securities behave inversely to each other. The increases in asset prices resulting from the low interest rate policy make those who already hold enough assets richer, i.e. they prefer above all those who invest their assets in companies, securities, shares, real estate and derivatives. This in turn benefits the financial industry, which not only collects fees, bonuses and commissions by trading the assets, but also obtains credit and realises returns by buying securities.2

Of course, the negative aspects of the zero interest rate policy for commercial banks must also be taken into account, as it reduces the spread between lending and deposit rates. Moreover, commercial banks today have to pay for parking money at the ECB. Due to the bond purchases by the ECB of

park. As a result of the ECB’s bond purchases of government bonds considered stable, interest rates are also falling on these bonds, especially on German government bonds. For example, 80% of all German government bonds no longer receive interest payments from the government to the commercial banks; instead, the commercial banks have to pay interest in order to obtain the government bonds at all.3

As a result of the central banks‘ low interest rate policy, the commercial banks today do not grant significantly more loans; on the contrary, they even leave their reserves today, as there are less profitable uses for them today than before the financial crisis of 2008. Industrial companies, in turn, have to struggle with low profit rates and a lack of effective demand due to the over-accumulation crisis. And when companies‘ profits rise again because, for example, interest rates are low, they often buy enough of their own shares to boost their share price. New investments in production only take place if the profit rate on future investments is expected to rise and demand is expected to increase at the same time.

1 The savings rate in the US fell from 11% at the beginning of the 1980s to 1% in 2015. Borrowed money was used mainly for speculation or even consumption.

2 The majority of long-term corporate loans issued in the euro area in 2015 were used to buy existing real estate, securities and derivatives (‚2.4 trillion). (Häring 2016: Kindle-Edition; 144) With mortgage loans amounting to EUR 3.9 trillion and consumer loans amounting to EUR 1.2 trillion, private households were in debt, with EUR 1.2 trillion going to other financial institutions; EUR 2 trillion of loans went to countries outside the euro area, EUR 1.1 trillion to other euro-area countries. (ibid.) With regard to mortgage loans, it can be said that, as the price of real estate rises, the assets of homeowners also rise, which in turn serve as collateral for new loans, e.g. consumer loans. The low interest rate policy of the central banks also strengthens the commodity and capital markets in particular, while the speed at which money circulates decreases. These are deflationary processes.

3 After the financial crisis of 2008, Germany in particular benefited from the generation of further fictitious capital, because countries such as China or Brazil made extensive investments with the help of the worldwide floating fictitious capital and a considerable proportion of their orders for the required capital goods went to German companies. And because the German capital market was not so badly affected by previous financial crises, financial capital seeking investment also focused more on Germany. In addition, German companies can obtain financial capital relatively easily and cheaply, while the German government can sell its government bonds at negative real interest rates, which, driven by both factors, means that the debt of the German national budget remains lower than in other countries and, as a result, government interest expenditure also falls.

The Fed can of course also buy up the circulating US government bonds itself. At the same time, government debt can generally be monetised relatively easily on the financial markets (the repayment aspect recedes here), thus creating an implicit compulsion for governments to make budget cuts (austerity), because new money has to be borrowed constantly by issuing government bonds, which implies further relatively risk-free investments for the private sector in order to conduct even riskier business (Lee, Martin 2016: Kindle Edition: 2791). This dollar-related optionality also opens up the possibility of increasing the financial liquidity associated with oil, because options can be used to hedge the price of oil and the dollar in such a way that the price of oil can rise without the value of the dollar falling. Oil reserves now become a financial asset in themselves, becoming all the more valuable the more volatile the price of oil is.

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