The joys, oh the joys, of fictitious capital

by Dave Riley

If you haven't quite had your fill of F-F-F-Financial Market Collapse, maybe you are in the mood for a bit of head down tail up study on the topic of why: Where did this bloody mess come from?

If that be your preferred query -- query away.

And while you're at it, consider this telling phrase from the Communist Manifesto:

"all that is solid melts in the air "

I reckon that phrase is a tad relevant to today's Capitalist Crisis. Phuff! Billions of dollars are gone. Just like that! Seeming in an instant.

But where?

It's a trick question, of course, because the answer is that the 'money' wasn't real in the first place. It may have been stocks and bonds and 'investments' and real estate and mortgages...It may have been, for all intents and purposes,"capital" but it was FICTITIOUS CAPITAL.

I don't want to labour the point too much. (What with me being a Marxist and all, and you may be not). But if you are perhaps seeking an answer -- that's my tip: the capital wasn't there in the first place.

I found this succinct explanation of this capitalist magic trick in (of all places) Arab News -- a Middle Eastern daily in English. It's by Abdelmenem Jamil Addas*

People seem to take it for granted that financial values can be created endlessly out of nowhere and pile up to the moon. Turn the direction around and mention that financial values can disappear into nowhere and they insist that it isn’t possible. The money has to go somewhere... It just moves from stocks to bonds to money funds ... it never goes away... For every buyer, there is a seller, so the money just changes hands. That is true of money, just as it was all the way up, but it’s not true of values, which changed all the way up.
In this fictitious economy, the values for paper assets are only derived from the “perceptions” of the buyer and seller. A man may believe he is worth a million dollars, because he holds stocks or bonds generally agreed in the market to hold that value. When he presents his net worth to a lender, and wishes to use the financial assets as collateral for a loan, his million dollars is now miraculously worth two. If the market drops, the lender, now nervous about his own assets, calls in the note ... the borrower once thought to be worth two million discovers he is broke.

"Fictitious" Capital (Fi) was a term Marx explored in a chapter in Volume III of Capital but since, by the time that came out, he was dead and the phenomenon was one element among many in contemporary 19th Century Capitalism -- a chapter was all it got.

But today! Today it would be more correct to say we live in a "Fictitious" Economy.

I said I wasn't going to labour the point because I'm sure Capital being "fictitious" may be a mind numbing exercise for some. But the key thing you need to grasp is that money isn't everything.

I'm sure your mum told you that some time ago and I guess Mums know.

And what Mums seem to know in their maternal way, is that value is more powerful than money. While money may indeed be the root of all evil -- money without being backed up by solid material goods is a very nasty root indeed.

So let's return for a bit more from Abdelmenem Jamil Addas:

Money transactions related to material goods production, counted 80% of the total (global) transactions until 1970. However, only 5 years after the collapse of the Bretton Woods the ratio turned upside down - only 20% of money transactions were related to material goods production and circulation. The ratio dropped to .5% in 2002.

I should point out here that the actual ratio is uncertain and probably very difficult to calculate. But let's take these numbers on board as ball park figures.

From 1985-2000, production of material goods in the US has increased only 50%, while the money supply has grown by a factor of 3. Money has been growing more than six times as fast as the rate of goods production. The results? In 1997, before the blow-off in the US stock market, global “money” transactions totaled $600 trillion. Goods production was a mere 1% of that.

I hope the penny (in this case a solid, non fictional penny) has dropped and you are now thinking: holy shit!

And yes: You are allowed to be scared.

[Remember the bit where it say: "all that was solid melts in the air "?}

Phuff! Just like the Wicked Witch in The Wizard of Oz:

WITCH:"You cursèd brat! Look what you've done! I'm melting! Melting! Oh, what a world, what a world! Who would've thought a good little girl like you could destroy my beautiful wickedness? I'm gone! I'm gone! I'm going!"

The dough didn't go anywhere. It may have melted, but its value wasn't there in the first place. As Addas writes:

"Fictitious capital is no more than a piece of paper, or an electric signal in a computer disk. Theoretically, such capital cannot feed anyone no matter how much its value increases in the marketplace."

It is, in its way, only as real as Dorothy's merry old land of Oz.

• Read more about Fictitious Capital...

*The irony is that Addas isn't a Marxist. He is a professor of financial markets, at the College of Business Administration. He is based in Jeddah. His POV is formatted by the Islamic opposition to usury -- although, in this instance, he has deployed Marx's analysis of credit to explain the phenomenon and its consequences.