Sunday, 23 June 2013

Storm Clouds Gathering - Part 1

Last week global stock markets fell sharply, though for some reason, most news channels other than the business channels said little about it. More significantly, global bond markets also tumbled. The US 10 Year Treasury has now risen from around 1.5% yield to 2.54%. The UK 10 Year Gilt, has risen by a similar amount. These may not be large rises in absolute terms, but in percentage terms they are huge. On Thursday, some traders were saying that if the US Ten Year Treasury went above 2.5%, programme trades already in place, could see it sell off even more sharply sending interest rates even higher. On Thursday, it was still just below 2.4%. On Friday, it closed above 2.54%. This rise in global interest rates confirms the point I have been making for several months, we have seen a conjunctural shift in the Long Wave Cycle from Spring to Summer. It means the Rate of Profit from here will be trending downwards, for that reason, it also means that the supply of capital will fall relative to the demand for capital, so interest rates will rise, whatever central banks do in relation to money printing. The rise in interest rates is the reason that stock markets are tumbling, and next to fall will be bubbled up property markets.

There are a number of misconceptions both amongst orthodox economists, and some on the Left, which means that they are failing to properly analyse the current situation. Global interest rates began a secular down trend from the mid 1980's that has lasted until recently. Marx writes,

“It is indeed only the separation of capitalists into money-capitalists and industrial capitalists that transforms a portion of the profit into interest, that generally creates the category of interest; and it is only the competition between these two kinds of capitalists which creates the rate of interest.”

In other words, the rate of interest is determined by the demand for and supply of money-capital. The immediate reason for the fall in the rate of interest in the mid-1980's was that, in conditions of economic slump, the demand for capital fell. But, the reason that the rate of interest continued to fall was that, as always happens during the Winter Phase of the Long Wave, the Rate of Profit rose. Defeated workers saw their wage share fall, and the bringing into the global work force of hundreds of millions of Chinese workers saw a fall in the global value of Labour-Power, thereby increasing the production of Relative Surplus Value. Large rises in productivity, as new technologies began to be introduced, further reduced the value of constant capital, bringing a further rise in the rate of profit.

Source: Doug Henwood, LBO News
As, the Long Wave entered its Spring Phase around 1999, this rise in the rate of profit was accompanied by a significant increase in the volume of surplus value too, as global GDP doubled in a decade. Finally, the same increase in productivity also brought about a steady rise in the rate of turnover of capital. I have recently calculated adjusted rates of profit from 1947 to take account of the approximate increase in the rate of turnover. I will be detailing this in a further, more exhaustive analysis. But, in summary, assuming a 2% cumulative rise in the rate of turnover, consistent with a similar rise in productivity, the adjusted rate of profit for today would be three times the unadjusted rate! In other words, where some estimates of the current US Rate of Profit, put it at 7% -  – the adjusted rate, to take account of the rise in the rate of turnover, would be 21%.  That is the real rate of profit would be about 5 times higher today than it was back in 1950!

The consequence is that this real rate of profit rose massively during the 1980's up to now. It brought with it a huge increase in the volume of available money capital, which, in accordance with Marx’s analysis of the rate of interest, meant that global interest rates were continually forced downwards, because, even allowing for the doubling of global GDP, in the first decade of this century, and the accompanying doubling of fixed capital formation, the supply of money capital continued to exceed demand for it. It led to the build up of huge money hoards in the form of large cash position on the balance sheets of global corporations running into trillions of dollars, and into the formation of huge sovereign wealth funds in a range of economies that ran massive trade surpluses.

The other evidence of this trend is what happened with global prices. Despite the huge falls in the value of almost every commodity resulting from the massive rise in productivity, market prices in most cases failed to fall in tandem. The reason is that governments around the world printed massive quantities of money so that the value of these money tokens fell by at least as much as the value of the commodities whose value they measured. In other words, central banks prevented this massive rise in productivity bringing about a generalised deflation that would have necessitated huge reductions in nominal wages, and would also have sparked damaging price wars between oligopolistic companies. The same money printing led to the inflation of massive bubbles in the prices of all those things whose value had not been reduced as a result of increased productivity i.e. stock, bond and property prices.

The dominant industrial capitals of today, like Apple,
 have enjoyed high and rising rates of profit since the
mid 1980's.  They employ relatively little constant capital,
 and lots of highly skilled, complex labour.  The huge volumes
of profit have enabled them to amass huge cash hoards,
 from which to finance their capital expenditure.  Apple has
around $140 billion of cash on its Balance Sheet!
Yet, part of the rise in share prices, that occurred during the 1980's and 90's is also a reflection of the increase in the rate of profit itself. The view of orthodox economics that the low rate of interest is a function of money printing by central banks, is therefore, wrong. Interest rates are low, because massive rises in productivity brought about a large rise in the rate of profit, which created an excess supply of money capital over its demand. The same rise in productivity brought about a massive reduction in the value of globally traded commodities, which would have had damaging effects for monopoly capitalism had it led to deflation, so it was combated by large rises in money supply to reduce the value of money tokens.

Money is not Capital.  Money only becomes money-capital,
according to Marx when it is allocated to buy Productive-Capital.
Otherwise, it is simply a money hoard, that can circulate as money,
buying commodities, or being used for speculation to buy shares,
bonds or property.  It is the weight of real money, arising
from the massive growth of surplus value, that explains the
last 30 years of falling global interest rates, not money printing.
But, some on the Left also misunderstand the nature of overproduction of capital. The fact that Capital experienced this massive growth arising from this increase in productivity, and thereby experienced this huge rise in the rate of profit, some of which could not be productively invested, is not the same as an overproduction of capital. Indeed, as Marx describes in discussing the formation of such money hoards in Volume II of Capital, the very fact that this surplus value is transformed into a money hoard, itself means that it is not transformed into Capital, and so cannot be over accumulated or over produced to begin with!

When Marx talks about an over accumulation or over production of Capital, what he means is that money-capital has been used to buy productive-capital, which in turn has produced commodity-capital, which cannot be sold at prices that increase surplus value. Marx writes,

Throughout the 1920's, Ford saw its rate of profit
rise, as it continually revolutionised production, and
extracted more relative surplus value.  But, eventually that
very rise in productivity meant it had produced, and was
continuing to produce so many cars that the market to sell
them at prices that would reproduce its capital, and increase
its profits no longer existed.  It was neither "under consumption" -
 as Marx points out capital can be overproduced even as
demand continues to rise - nor a falling rate of profit, that explained
the crisis that hit Ford and other US industrial capitals in the
1930's, it was simply that capital expanded so fast that it exceeded
the capacity of the market to absorb the use values it produced,
at prices that increased its profits, or even reproduced its capital.
“There would be absolute over-production of capital as soon as additional capital for purposes of capitalist production = 0. The purpose of capitalist production, however, is self-expansion of capital, i.e., appropriation of surplus-labour, production of surplus-value, of profit. As soon as capital would, therefore, have grown in such a ratio to the labouring population that neither the absolute working-time supplied by this population, nor the relative surplus working-time, could be expanded any further (this last would not be feasible at any rate in the case when the demand for labour were so strong that there were a tendency for wages to rise); at a point, therefore, when the increased capital produced just as much, or even less, surplus-value than it did before its increase, there would be absolute over-production of capital; i.e., the increased capital C + ΔC would produce no more, or even less, profit than capital C before its expansion by ΔC.”

But, perhaps his clearest statement of what he means by over production of capital is given in another context in Vol. II in reference to the production of Fixed Capital. There he writes,

“The opposite case, in which the reproduction of demises of fixed capital II in a certain year is less and on the contrary the depreciation part greater, needs no further discussion.

There would be a crisis — a crisis of over-production — in spite of reproduction on an unchanging scale.”

In other words, Department 1 has continued to produce the same level of fixed capital, but for whatever reason, Department II fails to buy it all, does not retire the normal amount of fixed capital. The consequence is that Department I has over produced capital. The same would be the case if there were expanded reproduction, and Department 1 produced more means of production than were required by Department 2.

In general we have not seen this kind of overproduction of capital. In large parts of the globe, the Long Wave Boom continues to power economies forward with high rates of growth, and even in the developed economies after the financial meltdown we have seen slow growth and stagnation rather than large reduction in growth year after year, and little sign of actual over production of capital. What we have seen, as will be described tomorrow in part 2, is more like the kind of financial or monetary crisis that Marx describes in Volume I of Capital, than the economic crisis of over production he describes in Volume III. The signs of last week are that this financial as opposed to economic crisis is likely to reassert itself again. The bursting of the bubbles in property, bonds and stocks are, in fact a precondition for ending the period of economic weakness.

Forward To Part 2

No comments: