Monday, December 15, 2008


(Week 19 - Monday, Dec. 15)

With the current "debt" crisis, the economy is turning towards a new mode of operation. If we define whatever form it has taken on heretofore as "capitalism," then we can say that it is moving beyond capitalism. "Capitalism" has become a term that is used in myriad ways by different people, depending on their point of view. For many it is an emotionally and/or ideologically charged expression. I don't wish to take any part in those arguments. For purposes of this discussion I will define capitalism as the economic practice of linking physical capital with monetary capital in a symbiotic relationship that allows trade to be conducted and the enterprise pursued without undue resort to barter. The choice between the public or private creation and issuance of money, therefore, is essentially about which mode more truly serves this relationship.

In the last few columns I have described how, within the present system, money is created and issued when a borrower brings something of value into a bank and puts it up as security (collateral) for a loan. The only practical way this can be made to work over time is for people to bring ever greater amounts of collateral into the banking system against which new money can be issued, thereby expanding the monetary pool so that "interest" payments on old "debt" can be made and an adequate money supply maintained in circulation.

Proponents of the current system will say that there is no problem with this arrangement because an expansion of economic enterprise financed by new loans will create more wealth out of which interest payments can be made. They picture the loan proceeds as seed money, which will in due time beget more seed, much like the plantings of a farmer. Furthermore, supposedly, the necessity of having to cover the interest payments spurs the economy on to greater heights of economic activity, while also serving as a needed discipline to insure that such money is borrowed only for enterprise that is truly productive. They point to the fact with the private-bank-money system in place, the nation has lived through almost a century of what has been on the whole a period of explosive economic growth in real terms.

Critics of the system may say that while the contribution of modern banking practice has indeed made money available in unprecedented amounts, and has therefore played an important role in modern economic development, a high cost in human and financial trauma has been extracted because of the "debt"-based nature of the process. Furthermore, they say, there is no practical mechanism built into the system for limiting the compounding of "debt" paper (save a partial deflation of the "debt" bubble attached to the currency occasioned by bankruptcies), and the real physical and human economy cannot be expected to keep pace with the need to service compounding "debt" forever.

What this current financial crisis is telling us, evidently, is that the "debt"-expansion process has reached its limits. In fact, it may have reached its natural limits some years ago, as indicated by the expansion of borrowing to finance the daily necessities of living (e.g. groceries and gas) via revolving consumer "debt" (particularly credit cards), and the proliferation sub-prime lending schemes. Investment in new production is in precipitous decline, and so monetary increase based on a symbiotic expansion of real enterprise (the defining characteristic of capitalism as given above) is no longer possible.

This leaves it up to the government to be the borrower of last resort to keep the economy from collapsing, a role which it has evidently taken on. I suggested in the previous column that the effective collateral for this huge "debt" expansion is the very land, lives and progeny of the People, and that this raises troubling questions as to what a future government might feel compelled to do to keep the monetary system from collapsing.

As the "debt" bubble against the economy continues to compound, however, even this concept of "collateral" becomes more than a bit abstract. The numbers have become so huge that correlation with any physical and human reality is becoming difficult to picture. It is at this juncture that what is commonly called "capitalism" is moving beyond itself into a new form. I will call it "debt-ism." By this I mean the "debt"-based monetary system has effectively left the real economy behind. It has embarked on a new course where any pretense of seeding productive economic enterprise has been all but forgotten.

As a case in point, how much of the $700 billion "rescue plan" is contemplated as seed money for new productive activity? As far as I can see, virtually none. President Bush has indicated that perhaps a small portion of these funds should be dedicated to rescuing the auto industry, but even in that case it is questionable as to whether the money would be used to create any new product, or merely to shore up the industry's tottering financial structure. Similarly, I find it difficult to identify much new productive capacity that was seeded by the "tax rebate" program earlier in the year, or the proposed "stimulus package" that seems to be gathering political support.

This raises the question, if this immense amount of new borrowing is not secured by economic collateral that is substantive, how can it be supported? The answer is that it no longer needs to be. The "debt"-based financial infrastructure itself has taken on a life of its own to such an extent that it has effectively broken away from the real physical and human economy, and in a certain sense no longer needs it. Money, in effect, has come to do business of its own account. The "debt"-based workings of the money-creation machine have become so complex and inexorable that they have effectively escaped human control. "The system" is leaving behind, not only the laborer, but also the banker. This is why both ""Main Street" and "Wall Street" are being decimated, with no one coming forward that seems to know quite what to do about it.

To be sure, this is a relative, not an absolute, statement, but the extent to which it is true is sobering to contemplate. It is in the vital interests of both the worker and the financier to open up a conversation on this matter. What we are witnessing in the economy is a movement beyond the partnership of wealth creation and money creation (i.e. capitalism) from whatever perspective one might be inclined to think about it. I will begin to describe what I see as the basis and workings of this transformation in the next column.

Richard Kotlarz
1904 1st Ave. S, #12
Minneapolis, MN 55403


The complete set of columns from this series is posted at the following websites.