By LUIZ GONZAGA BELLUZZO & MANFRED BACK*

US and Chinese public debt: Two models, two risks, and why mainstream economic debate ignores Marx's lessons on fictitious capital

1.

In a previous edition, the headline that sweetened the newspaper's title page Folha de S. Paul announced: “The United States and China, the two largest economies in the world, are on explosive trajectories for increasing their public debts.”

The Americans exceed 100% in relation to GDP (Gross Domestic Product) and the Chinese will reach this mark at the end of this year (today it is at 96,3%). In both, there has been a strong recent acceleration, with an upward trend.

In view of the increase in public debt in the largest economies on the planet, the subject of Sheet points out threats to the rest of the world with pressure on central banks: keeping interest rates high in order to attract financiers for their debts. If the peripheral countries do not do their homework, the two giants will suck money from the world to roll over debts.

Comparing the American financial system to the Chinese system ignores the peculiarities of each system. The Chinese financial system is closed and has exchange rate controls, all monetary variables are controlled by the Chinese Central Bank, quite different from the North American system, where capital flows are completely free.

O People’s Bank of China does not follow an inflation targeting regime, has the lowest interest rate on the planet, compared to American interest rates. Devalued currency, discount rate 2,65% per year, and base rate varying between 3,1% per year and 3,6%, in yuan.

Currency significantly devalued in relation to the dollar, interest rates are very low. Since the second half of last year, the Chinese Central Bank has been reducing the compulsory deposit rate and the rediscount for banks. 80% of the Chinese banking sector is made up of public banks, which finance the provinces, which have autonomy for spending and financing.

China has deflation and therefore there is room to lower the base interest rate and finance the public debt. For the neoliberals on duty, it is worth remembering that the Chinese public debt is denominated in local currency, not in foreign currency. In fact, China with its 3,2 trillion in reserves is a net creditor in dollars.

2.

In the case of the public debt of Uncle Sam, until recently, the safe haven of world money, worth trillions of dollars, a victim of uncertainty and distrust in Trumpism, lost its long-term financing capacity in 30-year treasuries, where the rate has risen and global demand has fallen.

The matter of Folha de S. Paul suffers from the chronic disease of single-minded thinking mainstream. Freedom of the press and freedom of expression are non-negotiable values ​​in democracies, however, it is necessary to deepen studies regarding the formation of financial markets in all periods of capitalism.

Regarding public debt, it is worth recalling the heterodoxies set out in Chapter XXXIV of The capital. “Public debt becomes one of the most powerful levers of primitive accumulation. As if with a wave of a magic wand, it infuses sterile money with creative force and thus transforms it into capital, without the need for it to be exposed to the efforts and risks inseparable from industrial and even usurious investment. In reality, the State’s creditors give it nothing, since the sum lent is converted into easily transferable debt securities, which in their hands continue to function as if they were the same sum of cash… The great role that public debt and the tax system play in the capitalization of wealth and the expropriation of the masses has led a number of writers, such as William Cobbett, Doubleday and others, to erroneously seek in debt the main cause of the misery of modern peoples.”

The quote highlights the importance of the asset-liability issued by governments in the transition between assets immobilized in land and movable and liquid wealth. Thus, the Bank of England mediated the tremors and expropriations of primitive accumulation and created the monetary space indispensable for the emergence of modern property, the industrial economy and the freedom to undertake.

Public debt is the guarantee and backing for all credit operations in the banking system. Without the guarantee of public debt, there is no bank credit that can be sustained, and it would be very difficult to price the interest rate. Furthermore, in times of uncertainty and distrust, public debt is the safe haven that guarantees liquidity for private wealth.

Let us abuse Karl Marx: “What the creditor of the State possesses is: (i) a public debt security, say for £100; (ii) the right, which this debt security confers on him, to participate in the annual revenues of the State, that is, in the annual product of taxes, up to a certain amount – say, £5 or 5%; (iii) the possibility of selling this debt security of £100 to others whenever he wishes. If the rate of interest is 5% and the guarantee offered by the State is good, owner A can, as a rule, sell the debt security to B for £100, since it makes no difference to B whether he lends £100 at 5% per annum or, in return for the payment of £100, secures for himself an annual tax of £5 from the State. But the capital, of which the payment by the State is considered a fruit (interest), is, in all these cases, illusory, fictitious. The sum that has been lent to the State has already been does not exist. Moreover, it was never intended to be spent, invested as capital, and only its investment as capital could have converted it into a value that is preserved. For the original creditor A, the part of the annual taxes that falls to him represents the interest on his capital, just as for the usurer the part that falls to him of the prodigal's estate, although in neither case has the sum of money lent been spent as capital. The possibility of selling the public debt security to the State represents for A the possible recovery of the principal amount. As for B, from his particular point of view, his capital was invested as interest-bearing capital. In reality, he only appeared in the place of A, whose public debt security he bought. No matter how many times these transactions may be repeated, the capital of the public debt remains purely fictitious, and from the moment that the debt securities cease to be saleable, the illusory appearance of this capital is undone. Nevertheless, this fictitious capital has its own movement, as we shall see later.”

“The final sentence is illuminating: “Nevertheless, this fictitious capital has its own movement.” This makes the remuneration of capital in general “appear” in the form of interest. This “apparent” form is at the same time an illusory form, in the sense that it conceals the fundamental connections of this mode of production, but it is also a necessary form as an expression of the relations of production “transformed” by the process of accumulation of monetary wealth.

Interest appears as a form of remuneration for capital sans phrase and its formation in the markets of movable wealth depends on the demand and supply of money capital transfigured in the form of interest-bearing capital, property capital. This is the most general form of capital's existence, its “true” form, in the sense that it is the most developed. “It is evident [says Karl Marx] that in interest-bearing capital, capital completes itself as a mysterious and self-creative source of its own increase…. it is capital par excellence".

* Luiz Gonzaga Belluzzo, economist, is Professor Emeritus at Unicamp. Author, among other books, of Keynes's time in the times of capitalism (countercurrent). [https://amzn.to/45ZBh4D]

*Manfred Back He has a degree in economics from PUC-SP and a master's degree in public administration from FGV-SP..

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