Debtors and Creditors

D.L. boddhisatva at
Fri Apr 9 17:33:51 PDT 1999

C. Liu,

There are two competing models here. In one, bank credit is used to fund industry, which throws off large amounts of excess cash in both company profits and higher worker savings. Profits funs expansion and savings allow more bank credit. That is the Japanese and European model. The other model is where businesses go directly to the bourgeoisie for credit through the debt securities markets. Banks and other financial firms are underwriters and/or holders of *readily sellable* debt securities (and even loans - in the swaps and derivatives markets). The environment of higher-yielding and liquid debt attracts foreign capital as money supply struggles to keep pace with credit growth. That credit is used to grow businesses and put them up for auction on the equities market. There the bourgeoisie gets back a portion of their investment in the form of paper wealth on top of the agreed-upon interest. Companies favored by the bourgeoisie in the equities market also use that paper wealth (their inflated stock price) for acquisitions. De facto, credit thereby flows to the companies with the capacity to reward the bourgeoisie fastest in the equities markets.

Since the U.S. has the most liquid and transparent equity markets based on the most liquid and transparent debt markets (debt markets, although unexciting, are vastly larger than the equities markets), It has the best engine for rewarding the bourgeoisie and making them rich, if largely on paper.

However, worlds are conquered with that paper. Cash, which *was* the key to power, has now taken a back seat to credit. A dated materialist assessment of the world situation would assume that the creditor nations are running the show. That is clearly not so. The reason is that they have no leverage against the big borrower. They have no alternative to the best capitalist remuneration scheme there is. They cannot create credit as fast. Credit, not cash, allows for the most rapid economic expansion and evolution. The leverage of credit is completely essential for the modern economy to work.

Let the E.U. and Japan sell their U.S. Treasuries and see what would happen. It would be their catastrophe as well, and even worse for them. Undermine the U.S. Treasury and you undermine the main credit creation engine in the world. Without that expansion in the world money supply, the clock turns back to a time when only bankers decided what industries would live and what would not. In fact, that is where Japan is right now. Their banking community has decided the fate of the whole national economy. When they were expansive, things were great. When they were too expansive, there was a bubble. Now things are terrible. The bankers cannot lend their way out of their bad debt situation. They are strangling the country with their bad debt and because they control both the cash and the credit in the nation, no one can move forward. The Bank of Japan has opened its coffers to the bankers and they still cannot invest their way out of the present crisis. Banking the old Japanese way is simply an inadequate leverage on Japan's tremendously ample cash supply. The bankers have done all that they can and more than they can. Until the bourgeoisie opens its checkbooks more directly to industry, nothing will move forward in Japan.


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