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The Real Economy and the Bubble Economy

We recently received a very thoughtful letter from Ted Trainer, an Australian ecological socialist (author of Abandon Affluence! and Saving the Environment) who teaches at the University of New South Wales, asking us about the “surplus problem” and its relation to borrowing in the present economic crisis. We wrote a short reply with our answers.

The Editors

Dear Monthly Review,

I have written and taught from a radical left perspective for a long time and am especially concerned with the significance of the “surplus problem” in explaining core elements in the global situation. However, I am not clear about how best to analyze its significance in relation to the global financial crisis. A recent MR article was helpful, pointing again to the importance of debt in keeping the capitalist economy going. Here is my confusion; I hope you can briefly point me in the right direction.

Obviously the system’s core problem is to find profitable investment outlets for the ever-accumulating surplus. Obviously ever-increasing levels of debt have been crucial in enabling the spending that keeps the factories in operation. But the naïve question is: If there is so much surplus, why is there any need for borrowing? Don’t the corporations have too much capital to place, i.e., a problem of surplus…if so, why do they need to borrow?

Presumably the answer is in terms of the debt and borrowing being the means whereby that surplus is put into (hopefully) profitable use. That is, when they lend “recklessly,” the banks are actually placing the surplus in what they hope will be profitable ventures. Is that it?

Ted Trainer


Dear Ted,

The problem that you pose here can only be answered by distinguishing between what economists call the “real economy,” associated directly with GDP, and the speculative or financial economy, connected to the bidding up of asset prices or paper claims to wealth. (Alternatively, we can refer to the productive base and the financial superstructure.) If the massive borrowing were primarily in order to finance investment in production (the real economy) you would be entirely right in saying that, with the existence of large corporate surpluses—both actual and potential—such borrowing would be unnecessary.

However, in our view, the chief contradiction of accumulation at present is a shortage of profitable investment outlets within production—a problem endemic to the mature, monopolistic economy. (See “Monopoly-Finance Capital and the Paradox of Accumulation,” Monthly Review, October 2009.) Investment-seeking surplus that is unable to find sufficient profitable investment outlets translates into losses in the (real) economy as a whole and hence a slowdown of growth. Corporations and capitalists seek to hold onto and increase their money capital in these circumstances by shifting the surplus at their disposal into speculation in asset prices. The result is a dramatic expansion of FIRE (finance, insurance, and real estate) and the entire financial superstructure of the capitalist economy. The plethora of money capital entering finance creates added opportunities for speculative growth, which banks and other financial institutions accommodate through new financial innovations (today taking the form of such exotic instruments as collateralized debt obligations, credit default swaps, structured investment vehicles, etc.). Various “wealth effects” (whereby increases in asset prices translate into increased consumption and investment) partially compensate for stagnation and temporarily stimulate the real economy, without, however, materially altering the underlying conditions.

Insofar as the financial system is growing not by servicing production, but through a process of money simply begetting more money (in Marx’s shorthand M-M′), without the intervening production of commodities, this takes the form of a financial bubble, or an unsustainable explosion of credit/debt. This means that the speculative process depends for its very continuation on the piling up of greater and greater amounts of debt, and in order to do this, it needs to have constant cash infusions from the real economy to provide additional capital that can be “leveraged up.” Marx, in his day, had already pointed to leveraging of 10:1 (debt to capital ratio) associated with the Crédit Mobilier, the prototype of today’s giant banks, founded in France in 1852. In the most recent financial bubble, major banks often leverage at a rate of 30:1. Financial profits in these circumstances expand rapidly. Non-financial corporations too come to rely more on debt leveraging and create their own financial subsidiaries to take advantage of the bubble. But insofar as the underlying system remains stagnant, the bubble eventually bursts—typically after a speculative mania in which the rapid rise in quantity of debt leads to a marked decline in its quality. The result is a return to the underlying crisis conditions and real world repercussions.

Right now we are being told that the system has once again found its footing—that finance and even production are recovering. But since the stagnation-financialization trap remains operative, we have no doubt that what we are seeing right now is merely a brief pause—if that—in the developing structural crisis of global monopoly-finance capital. The problems of the system are only getting bigger.

The Editors

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