Debt has received a lot of attention during the global financial crisis. Occupy sites abounded with theories about “debt slavery.” Governments, and international financial institutions, justify harsh austerity measures by pointing to government debt.
We must examine debt closer: what is its purpose? Who does it benefit? Is it necessary?
Fictitious capital: Necessary evil for capitalism
Debt is a form of “fictitious capital,” capital not generated by production. Mainstream economists define fictitious capital as the value of “future cash flow.” Given the present financial crisis, triggered by the collapse of loans that could not be paid back, defining debt as “future cash flow” seems a little optimistic.
Marxists argue rather that fictitious capital is a claim to property ownership, by the lender. A mortgage is a claim on property, and until it is paid back the bank owns the house. In The Limits to Capital, Marxist political economist David Harvey notes the strange importance and universality of fictitious capital:
The money capitalist is indifferent (presumably) to the ultimate source of revenue and invests in government debt, mortgages, stocks and shares, commodity futures or whatever… [Marx] wishes to alert us to the insanity of a society in which investment in appropriation (rents, government debts, etc) appears just as important as investment in production (The Limits to Capital, David Harvey, p269).
However, Harvey also warns against drawing a simplistic line between finance and “real” production. While some (often anti-semitic) conspiracy theories suggest that bankers are perverting the natural course of capitalism, profitable financial institutions are necessary to generalised capitalist production. Banks centralise the means of exchange, and lend out the initial capital for private production:
When the system of exchange is relatively simple, the personal knowledge and trust of individual capitalists may guarantee the quality of debts incurred, but in a complex market system this cannot form an adequate foundation for the credit system. The bank seeks to institutionalize what was before a matter of personal trust and credibility (ibid, p247).
Banks and financial institutions must also make a profit – which means interest, predatory lending, speculation, incentives to gamble with workers’ savings as poker chips. Although they can be regulated or stabilised, predatory financial institutions are a necessary evil for capitalism.
Neoliberalism: Attacking wages and expanding fictitious capital
Capitalism is not driven simply by debt. To understand the basis of debt, we must understand the organisation of work and production – the way society is structured to meet basic needs (or to deny basic needs).
Capitalists have two main ways of increasing productivity: improving production methods, and intensifying exploitation. In Aotearoa/NZ, the ruling class has generally intensified exploitation, rather than investing in production. In 2010, research and development totalled 1.3% of GDP, about half the OECD average.
Instead capitalists have raised productivity by working people harder. According to the Department of Labour, 34.79% of full-time workers work “long hours” of 50 or more. At the same time, around 6.5% of workers are unemployed, with the situation particularly bad for youth. Long hours and underemployment coincide, an irrationally uneven organisation of work designed to divide workers. Suzanne Snivelly, member of the Reserve Bank Board of Directors during the crucial reform period of 1985-1992 states:
It was a manageable thing for the Reserve Bank to use employment, and unemployment, as the way to get wages down. It was far easier than any other means of getting inflation down. So they used it.
Neoliberal capitalism has responded to declining profitability by cutting back on labour costs, and by expansion of fictitious capital. Along with union-busting and casualisation, the “spatial fix” of outsourcing has driven down workers’ incomes in core countries. Real wages have fallen 25% in the last 30 years, (Fig 1) while extension of private loans has covered the short-fall in savings.
Government and household debt
Aotearoa/NZ has a “national debt” of around $75 billion. However, “national debt” as a category obscures different kinds of debt; private debt, government debt. Although these are both basically fictitious, they serve different purposes within capitalism.
Household debt patches up short-falls in income and savings. If someone takes out a mortgage on an existing house, only the bank profits from the transaction, and nothing is produced in the process. Student debt is an extension of private debt into education, although managed by the state. By contrast, government debt is incurred to make investments that boost productivity: building roads, telecommunications networks, and other infrastructure. Therefore a government, unlike a household, can generate productivity by taking on debt (see Is the Whole World Going Bankrupt?, Rosa Luxemburg Foundation, December 2012).
National has emphasised government debt to justify their piecemeal “death by a thousand cuts” policies. In a Close Up appearance, defending cuts in the 2012 Budget, Prime Minister John Key explained government debt in terms familiar to anyone who has used a credit card: “If you keep borrowing money and spend more than you earn, you eventually not only have to pay that back, but you have to pay it back with interest.”
More recently, New Zealand Initiative executive director Oliver Hartwich argued that asset sales are necessary to relieve debt: “Without the asset sales we will definitely go further into debt.” Advocates of the unpopular policy claim it will ultimately save $6 million for the government, although the government has already spent $26 million on the policy without yet selling any assets.
Government debt is actually relatively low in this country, although it has increased since the onset of the global financial crisis. Government debt makes up 37% of GDP, compared to private debt which makes up 166% of GDP. By not distinguishing between government and private debt, the government obscures the nature of the crisis, and finds a justification for the upward redistribution of wealth.
Global financial crisis: Private debtors come home to roost
In reality, the global financial crisis is primarily an issue of private, or household debt. It’s well-known that in the US circa 2008, the housing boom collapsed, leading to mass foreclosures. Aotearoa/NZ has not been so drastically affected, although mortgagee sales have increased significantly since 2008 (Fig 2).
While we have not yet seen the mass foreclosures of the US, 90% of private debt is in housing. The Labour Party has proposed a policy of building 100,000 new “affordable” homes, an investment into the growth of fictitious capital (see Kiwibuild and housing in the modern capitalist economy, The Spark, February 2013). In opposition to this pro-capitalist agenda, socialists demand significant investment in state housing under democratic planning. In a real sense, isolated struggles against eviction in Glenn Innes and elsewhere are struggles for the whole class; workers and progressives must support them.
Many continue to labour under the burden of private debt. While finance companies such as South Canterbury Finance were bailed out, (to the tune of 1.8 billion in that case) indebted workers largely remain indebted. Occupy Wall Street’s “Strike Debt” group recently launched a project called Rolling Jubilee, which purchases private debts and then cancels them. While this will provide needed relief, and may help to de-stigmatise debt, it does not fix the system that continues to indebt people.
Debt amnesty for workers and students would be a meaningful reform to fight for. However, private debt cannot be permanently overcome within the profit system. All struggles against parts of capitalism; student debt, declining real wages, the housing crisis; must be united into a struggle for socialism. We must build conscious, independent revolutionary socialist groups to help unite these struggles into one.