[S5.5 E07] The Question of Debt in Our Lives

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Last week Professor Harvey pointed out that the basic means by which consumerism is developed in such a way is to be consistent with the growth of an economy based upon profit seeking was to expand indebtedness. But it turns out that the credit system and the circulation of interest-bearing capital on the development of indebtedness has another very strong role. And therefore there is a double force which is concentrating upon the credit system. And that double force is related to the fact that increasingly in the history of capital, capital has required more and more fixed capital, fixed capital within the factory in the form of machines and plant and all the rest of it, but also fixed capital of what Marx called fixed capital of an independent kind - that is fixed capital that would be used in common. Professor Harvey traces the development of fixed capital and the credit system to understand the financialization of our economy today.

David Harvey's Anti-Capitalist Chronicles is co-produced by Politics in Motion. Politics In Motion is a nonprofit organization founded in May 2023 by Prof. David Harvey and Prof. Miguel Robles-Durán, along with Dr. Chris Caruso, instructional technologist, and noted writer and art curator Laura Raicovich. Our anti-capitalist media platform offers piercing insights and thought-provoking analyses on political, social, spatial, cultural, environmental and economic issues through a range of engaging mediums, including YouTube streams, podcasts, and live events.

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David Harvey's lastest book "A Companion to Marx's Grundrisse" (Verso 2023):

https://www.versobooks.com/products/2930-a-companion-to-marx-s-grundrisse

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#profit #capital #finance #consumerism

Welcome to the Anti-Capitalist Chronicles, which are a production of politics in motion. I want to continue talking a little bit about indebtedness and the role of indebtedness in the development of economic life.

Hi, I am Chris Caruso, director of Politics and Motion. I am a popular educator, community organizer, and educational technologist. Politics in Motion is a new anti-capitalist media platform, founded in May, 2023 by David Harvey, Miguel Robles Duran, and myself. We're working to create an intellectual strike force from the left. Our collective aim is to unsettle and combat the ideas of the billionaire class. We are assembling leading thinkers on our podcast to redefine strategies to build socialism in a transdisciplinary, non-sectarian way. We're proud to offer our Patreon supporters exclusive monthly live question and answer sessions with our podcasters. Questions will be submitted in advance as well as live so that our supporters can dialogue directly with our team. Podcasts from Lara Avik and from Ecuador, Anna Rodriguez will be launching soon, and we're thrilled to announce that we have new podcasters joining our team from Brazil, Raquel Rolnick from the uk, Andy Maryfield, and from the US Willie Baptist, Sierra Taylor, and John Russell McCoy. Our aim is to have all our podcasts launched by the end of 2023. Please consider supporting us at patreon.com/politics in motion. Thank you.

Last week I pointed out that the basic means by which consumerism is developed in such a way is to be consistent with the growth of an economy based upon profit seeking was to expand indebtedness. But it turns out that the credit system and the circulation of interest bearing capital on the development of indebtedness has another very, very strong role. And therefore there is, if you like, a double force which is concentrating upon the credit system. And that double force is related to the fact that increasingly in the history of capital, capital has required more and more fixed capital, fixed capital within the factory in the form of machines and plant and all the rest of it so that you can rarely understand the economics of that, but also fixed capital of what marks called fixed capital of an independent kind. That is fixed capital that would be used in common.

We think of, for example, the sorts of infrastructures that are required, roads and ports and harbors and all those kinds of things which are going to be used by capital but are used very often on a common basis. So that fixed capital of an independent kind and the fixed capital of an independent kind can be divided into two parts, which is one part which is immobile and embedded in the land. And the other part is mobile and therefore capable of being moved around at will. The best way to think about this is to think about investment in a transport network. You have the rails and the roads and the ports and the harbors, which are fixed in the land. Then you've got the ships and the trucks and the aircraft and all the rest of it that can mobile so that if you said what's the fixed capital in common, you would say something like a transport system is a very good example of that.

And part of it is fixed in the land and part of it is moving. So an increasing amount of fixed capital of this kind is terribly important because that is one of the ways in which you increase the productivity of labor. The productivity of labor depends upon having fixed capital of an independent kind, embedded in the land or in motion, and that therefore that fixed capital is significant. Now, the other aspect is the same thing applies in the world of consumption, that in fact a lot of consumerism is fixed over time. And Marx calls this the consumption fund. And the biggest items in the consumption fund are housing, for example, workers, housing and automobiles and so on. And by talking about that, we also see that there's a possibility of not only a collective use but joint uses. Marx points out that a road can be used for production or it can be used for taking walks and that therefore there's a dual use problem here, an interesting problem, so that all of this is therefore part and parcel of the development of capital.

That capital depends more and more upon fixed capital employment. And then the question arises, how is it funded? Who funds it? And what do we do with a railway system that is built and will last 50 years or a hundred years? What do we do with housing which we built maybe for 50 years before it needs to be renewed? What do we do with all of these items which have a very long life and which somehow or other have to be financed? And the answer is of course, that they're financed on credit that if I had to save up all the money I needed to buy a house, it would take me a long, long time and I'd have a lot of money stuffed under the mattress, a vast amount of money stuffed under the mattress. And then after I'd saved maybe let's say $300,000, I would be able to go out and count out my $300,000 and buy the house.

Well, obviously that's not workable at all. So one of the things that happened in the Great Depression was recognizing the significance of this as a form of a consumption. They introduced the 30 year mortgage in the United States and said basically you can make a down payment of maybe 10% on a $300,000 house and you can pay off the mortgage over 30 years. So the credit system becomes very, very important in terms of consumption. Same thing in terms of production. And then there's something here in production, which is terribly a very interesting feature, which is what we call leveraging. Now, leveraging works like this, and it's actually quite complicated, but I'll try and make it as simple as possible. If I buy a house with $300,000 and if I then rent it out at 6% or something, rent it out, and I can get a return of say, 6% on my $300,000.

Okay? Now what happens if instead of me putting $300,000 down, I actually put down let's say 50,000, let's say a hundred thousand dollars, and I borrow the remainder another $200,000 and I pay 5% on the $200,000. Now notice I'm going to get a return of 6% on the whole thing, but I borrow money at 5%. Well, that means that actually what I can do is I can leverage the buying of the house in such a way that I get a huge rate of return on the amount that I have invested as opposed to the rate as if I get 6% rate of return on the total and I'm paying 5% of interest, then actually I can end up getting about 25% on the amount of money I have put in unless it counts for something. It accounts for the fact that capitalists are very reluctant to invest their cash.

They want to always borrow money, they always want to work on borrowed money because they can leverage in this way with a 6% rate of return overall, they can get money for themselves at the rate of 25%. So this leveraging becomes significant. So it was interesting when Elon Musk purchased Twitter for $40 billion. He didn't pay cash for it. He borrowed the money. He borrowed the money because he could leverage it. And everybody works on leveraging so that the capitalists love the financial system because it allows them leveraging and leveraged buyouts are very, very common. That is somebody wants to buy a soccer club like Manchester United, which is an actual case.

The family that bought it, the Glazer's, they bought it, leveraged buyout. That is, they bought the thing for I don't know how many billion dollars, but they bought it, but they borrowed all of the money. And then the difference between what their actual rate of return is in Manchester United and what they have to pay in interest yields them a tremendous amount of money, and then they gradually pay off the debt. Now, the interesting thing here is of course, the more equity you hold, the less valuable the thing comes. You maximize your income when you are maximally leveraged as you get to the end of maybe 10 or 15 years of it. Typically what you would do is you'd renew it, you'd re-leverage it again, you'd refinance it. So what you start to see here is that the whole production of a built environment, the whole production of fixed capital and consumption fund is crucially dependent upon the credit system.

And Marx actually makes this point in the Grand Rouge. He says, well, the logical response and the logical endpoint of investments in the built environment, which the logical endpoint of this is such that you may more and more leveraged and more and more investment funds, which are actually lending you money to buy things. So that pretty much every takeover that you see going on or every merger that you see going on is done with leveraged money. And therefore, as Mark says, the development of the fixed capital and the consumption fund, that development is contingent upon the development of an adequate financial system and the operation of that credit system in such a way as to allow maximal leveraging mark's. Actually half points this out in the grand rea. Now notice here we start capital accumulation on a cash basis, but over time we more and more turn it into something that is based on credit.

And furthermore, maximal leverage is maximally profitable so that as you become, get more and more equity in whatever you've bought, so it is less and less useful to you so that you therefore refinance if you have to. So that we end up with an economy which is more and more focused on the credit system. Now, what this has said, as I said in the last podcast, if financialization is absolutely essential to cover the problem of expansion of consumerism to match the expansion of production so that credit becomes more and more important as time goes on. And now we have another thing which says credit is important in terms of fixed capital formation. In the initial stages of capital accumulation, fixed capital was relatively small and they were relatively remote and a lot of it was indeed cash financed. But as time went on, fixed capital became more and more elaborate.

You needed more and more of it, things became more expensive. You're expanding the nature of the machines and having big plants and machinery and huge factories and things of this kind so that the more you do that, the more you rely upon fixed capital. And then you start to leverage and you start to use it even more so that we are living now in a highly leveraged economy with an extreme dependency upon financialization. And again, I want to emphasize that this is an important argument because many people write about financialization, but treated as if, well, oh, isn't it interesting it just happened? No, it did not just happened. It was actually built into the logic and the logical structure of a capitalist mode of production. And it was built in from the very outset. So that where we are in our right now was if we actually read marks right and developed the model, we would've seen this would've happened 150 years ago.

Now we see it happening and we kind of say, well, it's inevitable. It seems to be inevitable. It's unstoppable. Yeah, well, yes it is, but there's a very good reason why it's unstoppable and a very good reason why it may be the death of us, and it may be the death of capital. Because at a certain point, this leveraging starts to create a huge amount of indebtedness. And as I mentioned again last week, indebtedness is a claim upon future labor. Now, the claim upon future labor, which now exists is so huge that you really can't imagine that it could ever be paid off. And if you want an analogy of course of this claim on future labor, ask any student who has a huge amount of student debt in a sadness, in a sense, they accumulate student debt and then there's a claim on their future labor for 10 15, in some cases, 20, 30 years.

And some people never get paid off. So the claim upon future labor starts to become untenable at a certain point, particularly if people can't afford to pay the whole thing off. But what this means is that leverage will also pile upon itself that there is a sense in which we are looking at a situation where almost everything is Ponzi financed. That is you accumulate debt and in order to pay off the debt, you borrow more to pay off the debt so that you're actually accumulating claims of future labor. And the claims are greater and greater and greater and huger and huger and huger. And therefore there is a real, real problem of how this debt is going to be valorized. And it's extremely interesting to me to listen to a lot of the discourse of, for example, the Republicans in the Senate and in the House of Representatives go on and on and on about how all of this indebtedness is mortgaging the future of our children and so on.

And of course they are correct in a way. But the thing is that what they're doing is they're looking at state indebtedness and state indebtedness was a very important thing. And of course, Keynes used state debt as part of the way to recover from the slump of the 1930s to jack up demand and all the rest of it. So Keynes was very strong on that. And we had in the 1950s and 1960s, a sort of Keynesian debt led economic development, which was relatively stable actually until the 1970s when it became unwound. But now of course, we're in this other world in which debt finance has become absolutely critical to the point where this accumulation of wealth now seen is now dependent upon an accumulation of debt. And that this is, if you like something which looks to be increasingly unpayable. The debt figures which came up from the IMF the other about two or three years ago, took the total debt indebtedness in the world and then divided it by the global population so that every person on planet earth is in debt, was at that time indebted to the tune of something like 80 or $85,000.

And now that's a huge, but it is rapidly increasing exponentially. And if you look at the debt growth craft graphs, what you see is an indebtedness, which she's growing, and that's an indebtedness which is attached to profit making. In other words, the very fact of profit making means increasing indebtedness. Profit making is dependent upon increasing the productivity of labor, which depends upon more and more fixed capital, which requires a certain amount of consumption, and therefore consumerism becomes important. And then we have to develop long-term structures of consumption, of housing, of automobiles. Look at the fixed capital of a middle class kitchen, for example, number of gadgets that you have and so on is again immense so that the consumerism has to expand and has to expand to keep pace with the expansion of profit making. So this is the world we live in, and we have to understand that the only way in which we are going to be able to get off this train is to recognize what the train is about, where it comes from.

And it comes from, of course, the necessity of the profit motive. If we take away the profit motive, how will the economy work? The only way in which the profit motive can be validated is by an infinite expansion of consumerism, which is an infinite expansion of indebtedness. And all of that means in terms of future labor and to the degree that future labor is dependent upon future labor, which is dependent upon future, future labor, we are ending up in what you might call a Ponzi economy in which you using, you are paying off today's debts by borrowing on tomorrow's market so that the Ponzi scheme, if you like, the Ponzi finance scheme, which seems to be emerging out of this, is something that at some point or rather is going to be fed. And if the Republicans are right and they actually do retire the debt, which I don't think they're very serious about, I never will do, but if they really did it, that would be the end of capital. That would be the end of capitalism. And so it's interesting to see how these guys who come on the television and go on, and we cannot continue this, and well, okay, try stopping it and see what happens to you, then you will see the explosion. And we'll then have to discover some entirely alternative way of organizing production and consumption so it meets people's needs rather than meeting the needs of the greedy financial barons and so on, who are currently running politics and running everything else.