Fictitious Capital

The Credit Strategist - May 2023

An economy based on debt is inherently unstable because it depends on value yet to be produced.   This is particularly true when future value is compromised by forces such as inflation and currency debasement.  Those dark twins are two sides of the same evil coins minted by governments who survive by reducing the value of their debt obligations through massive Ponzi funding schemes. 

I recently discovered a term that captures the essence of our debt-based global economy – fictitious capital.  Coined by Cedric Durand, a Professor of Economics and Development Theories at the University of Paris, fictitious capital is “the monetary creation of capital by way of the credit system, without any counterpart in the terrain of real resources.” This is a bit of an overstatement; there is always a counterpart to debt “in the terrain of real resources” though increasingly those resources are intangible or inflated in value.  But the fictitious capital that dominates the financial system is “an accumulation of drawing rights on wealth that is yet to be produced, which takes the form of private and public indebtedness, stock-market capitalization and various financial products.”  Debt and other financial products draw their value from events that have yet to happen which renders that value inherently contingent, speculative or, in Professor Durand’s words, fictional: “capital is fictitious to the extent that it circulates without production yet having been realized, representing a claim on a future real valorization process.”   

Even more significant, that value relies on the largesse of central banks: “[t]oday this fictitious capital can rely on public authorities’ support, in particular the support of central banks.  As they take action in favor of financial stability, these latter effect a social pre-validation of the accumulation process by way of fictitious capital.”  Central banks “pre-validate” the value of financial assets before that value materializes in the real world through the creation and support of artificially low-cost debt, creating a situation in which they are trapped into perpetuating this debt creation or risk seeing the system collapse.  In this way, “fictitious capital’s anticipation of future accumulation implies a radical form of fetishism liable to mutate into unsustainable phantasmagoria.  The mass of accumulated fictitious capital can, then, assume proportions incompatible with the real production potential of economies.” (55)  The term “unsustainable phantasmagoria” aptly describes phenomena such as NFTs, SPACs, egregiously overvalued stocks, absurdly overpriced residential and commercial real estate, and negative yielding bonds – financial assets that investors clamored for during the height of the financial bubble.  But investors are learning again as they do in every cycle that “the over-accumulation of fictitious capital will inexorably lead to crisis.” (55)  The collapse of crypto exchanges, banks, and commercial real estate loans are the leading edge of this crisis. The only question is how much worse conditions will get as the system is forced to adjust to the higher cost (i.e. higher interest rates) of the fictitious capital known as debt that drove this entire phenomenon.

The term “fictitious capital” points to the speculative and unstable basis of wealth in a debt-engorged world.  In such a world, the value of all financial assets including stocks and bonds is suspect because it is inflated by borrowed money.  In the most recent bubble, which is bursting regardless of bloated equity indices and the huffing and puffing of Wall Street talking heads, equity values were fictitious because they were grossly inflated by zero interest rates that distorted the discount rates used to value them and lured investors into a psychological state of complacency and delusion. Because these low rates persisted for over a decade, they created a mistaken belief that they would persist indefinitely (even though a decade is a blink of time, it is eternity in financial markets).  The combination of zero rates and dependency on future events to vindicate their value rendered these equity values among the most highly questionable in history.  This explains the devastation of many stocks that lost virtually all their value since the peak of the bubble and serves as a warning to stocks whose valuations are unsupportable by fundamentals and are likely to suffer similar fates.  Just because these stocks haven’t yet succumbed to the end of zero rates doesn’t mean they won’t if they can’t vindicate the promise of future profits upon which their stock prices depend. 

In living off debt we are living off hope in the future, hope in our ability to engage in successful economic activity in the future.  But as the burden of debt grows increasingly heavy, it renders our very ability to do that more difficult.  The hope reflected by debt is contradicted by the debt on which it depends.  Such is the inherently contradictory nature of our debt-based system.  It’s enough to make a grown man cry.