Tyler Cowen has an interesting take on Larry Summers talk at the IMF on so-called “secular stagnation”. According to Cowen, if Larry Summers is correct, the economy is probably contracting.

He writes:

“I do very much agree with the claim that lower rates of return make recovery more difficult and for the longer haul as well. […] I cannot, however, agree with the central arguments about negative real interest rates, and the necessity for negative natural rates of interest […] As I frame the data, we have had negative real rates on government securities, but positive rates on many other investments in the U.S. The difference reflects a very high real risk premium, which of course we would like to lower, and the differences also reflect some degree of investment segmentation. The positive rates on these other investments are evidenced by recent broad stock market gains, observed rates of productivity growth (low but clearly positive), high internal corporate hurdle rates, and so on. “

Cowen admits real rates on treasuries may indeed be negative, but this can not true for other areas of investment, since it would mean the total capital within society is contracting:

“In my view very negative real rates of return would not be a “natural rate” giving rise to full employment through a better equilibration of planned savings and investment. Given a pretty flat employment to population ratio, very negative real rates of return across the economy as a whole would have to mean negative economic growth and other attendant difficulties.”

Additionally, Cowen states, no one has an explanation for how capitalists would invest knowing their invesmtent would lead to losses:

“On top of all that, I worry about the apparent “out of equilibrium” assumptions embedded in a model that has both a) negative real rates of return on investment and b) those investments being made in the first place”

These comments make a very valid point: why would capitalists invest if by making an investment they are almost guaranteed a loss? Of course, there is always a risk that any investment may result in a loss, but our capitalist would not invest unless there is at least the probability a profit will be made. If later, despite his best effort, he finds that his calculations were wrong, that is how the process works. Still no capitalist would undertake investment on expectation that a loss was inevitable.

Cowen’s argument doesn’t eliminate the problem, however. What has to be shown is why even assuming overall negative return on capitalist investment, there is still capitalist investment. Obviously, in the case of overall negative return on investment, investment must still be profitable for the capitalists.

As Cowen’s argument demonstrates, bourgeois simpletons lump “investment” in treasuries with other forms of capitalist investment. In fact, lending money capital to the state is not investment at all, since the state does not produce any surplus value. The money capital loaned to the fascist state is simply consumed and never repaid to the lender. All of the investment of the capital in treasuries is actually lost, although the money capital continues to exist as an asset on the capitalist’s ledger book and on the state’s ledger book as debt. The asset on the ledger of the capitalist is entirely fictitious and the loss of capital on the “investment” is 100%.

But here the odd thing: despite the fact that the loss on the capital lent to the state is 100%, capitalists keep loaning their money capital to the state. This occurs because although the real value of the money capital is consumed by the fascist state, its nominal (face) value is not affected. The capitalist class extends to the fascist state credit to purchase some commodity — e.g., to produce an aircraft carrier — and is repaid in fiat dollars. The real capital is consumed in the manufacture of the aircraft carrier, but the capitalist is repaid in valueless fiat tokens. The bourgeois simpletons, who conflate value with fiat currency treat the transaction between the capitalist and the state as just another of a series of credit transactions.

The lending capitalist has no concern whatsoever what use is made of the lent money capital or its purpose. His only concern is that he lent some quantity of capital with a certain face value to the state and should receive in return a mass of capital with a larger face value. This process is described in the labor theory function M => M’, where M is the money capital lent out to the state and M’ is the fiat repaid to the capitalist plus interest. In a normal loan, between M and M’ is where the production of surplus value takes place — part of which becomes means to repay the loan to the money capitalist. What appears to the money capitalist as M => M’ is, in fact, a very complex production and exchange process that is the premise of repayment of the loan plus its interest.

However, none of this process takes place when the money capitalist loans his money capital to the state, since the state engages in no production. The actual process is exactly as it appears to the money capitalist: M => M’. The real capital advanced to the state is consumed and replaced in circulation by a mass of fiat equal to the face value of M’. In one exchange, two events have occurred:

The real value of the advanced capital has been consumed without replacement; and The nominal loan is repaid by a mass of fiat currency equal to M’.

The nominal value of the total capital of society has been apparently increased by M’ minus M, even though its real value has actually contracted by M. The process by which M is destroyed and replaced in circulation by fiat with a nominal value of M’ is a seamless operation that doesn’t register in the analysis of the bourgeois simpletons, because they conflate value with fiat currency. It, therefore, becomes inexplicable why “investment” can occur when the real rate of return on investment is negative. In fact, the answer is obvious: the real rate of return (profit) can be negative so long as the nominal rate of return (nominal profit) is positive.

This has to be clear: the capitalist will never, under any circumstances, invest knowing he will make a loss on his investment. The process described above assumes that the real loss on investment is borne by society, not the capitalist. The process, which has, in other contexts, been described as “private profit and socialized losses”, extends beyond the crisis itself. It now includes the normal functioning of the mode of production, where the losses incurred on investment are converted into public debt.

If the loans extended to the fascist state now require a negative rate of interest, this is because, on assumption of the premises of bourgeois simpletons, the deficits of the fascist state are insufficient to meet the needs of the mode of production for the real destruction of capital. As Cowen notes, if the interest the state must now pay is negative, bourgeois economic policy recommendations for increased deficit spending are simply an argument for accelerated destruction of the productive forces via fascist state deficits:

“it ends up being a call for output destruction, which, while I do understand how in some models at some margins that can help, I don’t think at current margins is going to be anything other than an unmitigated disaster.”

Cowen seems to sense, the fascists have a much bigger problem at this point: Fascist state deficit spending is much more than simple destruction of some portion of the newly produced surplus value, since it implies the state’s share of surplus value must grow faster than the total mass of surplus value — eventually requiring the state to consume all newly produced surplus value.