More Conflicting Data

There was more conflicting economic data yesterday. On the one hand the UK Treasury was unable to sell all of its 40 year Bond offering. Normally such auctions are oversold by anything between 50- 100%, as Pension funds and others buy up these Bonds, which give them a given rate of interest over various durations – this one for 40 years, along with the potential of making a Capital Gain should Bond prices rise. These Bonds are the means by which the Government borrows money to cover the gap between its spending and tax income. This offering was 7% undersubscribed, and could reflect that lenders are beginning to worry about Britain’s creditworthiness as massive amounts of borrowing are undertaken. I think that’s unlikely. More likely other factors were involved. For one thing this was a 40 year Bond, and at a time when State’s around eh world, including Britain are engaged in massive increases in money supply it is inevitable that down the road there is going to be massive inflation. Tying your money up for 40 years might not be a good idea, because it leaves a long time for the value of the money tied up in the Bond to become worthless. In addition, the day before the Governor of the Bank of England, Mervyn King, had made a Public statement effectively saying the Government should not engage in any more fiscal stimulus, chiming in with similar sentiments coming from Germany and France. In addition, King has created doubts about how much further Quantitative Easing – that is physically printing more notes, and then using them to buy the above Bonds from Banks, and thereby giving the banks more cash, he is prepared to do. As these Banks and financial institutions have been rather counting on such money coming their way, and now find it may not, its no wonder they stood back from the auction.

King’s comments provoked Liberal Economics spokesman, Vince Cable, to describe his actions as a “Very British Coup”, with King effectively asserting his control over Economic Policy. His comments come not just on top of similar calls for restraint in further fiscal stimulus by spokespeople in Germany and France, but increasing hostility from sections of the financial community in the US to further fiscal stimulus. What this represents is fractures within the Capitalist class as different sections look out for their own interests. Its important to understand the State and its relations with the ruling class not as some kind of conspiracy, or even to see its role as “Executive Committee”, being one in which it sits down and discusses these things before coming out with a single decision. The process is far more complex. Different sections of the ruling class have different interests, and those interests get expressed via a range of channels. This is picked up, chewed over and processed through the various corridors of power, and so on, and becomes reflected in the views expressed by the various functionaries of the State at its higher echelons. Its also important to understand the difference between the State Power and the Governmental Power. The Governmental Power even under the control of a bourgeois party has to reflect to some extent the vox populi, whereas the State Power itself can more directly reflect the interests of the dominant sections of the ruling class. It is always, of course, the latter which dominates at the end of the day. This is why statements such as King’s which run counter to the positions of the governmental power are made.

Not only is European Capital seeing an opportunity to weaken its main global rival – US Capital - and thereby saying “You are in a mess that you created, you sort it out”, but it is also hoping that by forcing the US into that course of action, it will itself benefit. In reality, EU Capital will have to go down the same route as the US, because its interests ultimately dictate it, in a global economy. Its for similar reasons that China and Russia have now poked a stick at the US too, suggesting that the role of the dollar as World reserve Currency must end, and a new world currency created by the IMF should be set up. That won’t happen and they know it – in fact the IMF has since it was set up had such a world currency the so called Special Drawing Rights – and for China it would not currently be in their interests. The huge Chinese lending to the US held in US Government Bonds would be decimated over night were the dollar to lose its current status, because its only that status which has enabled the dollar to defy gravity, and not go into free fall. The dollar is finished, but the new world currency in five years time, as George Soros has predicted, will be the Euro.

One of the reasons that sections of Capital are taking fright is because of the increasing danger of inflation. Banking Capital was happy as long as the State was simply stepping in to bail them out for the losses that arose from their greed, and bad mistakes. But, its now going way beyond that. The State is being increasingly forced to respond to public pressure to control those financial institutions in the face of the remarkable sight of those same bankers paying themselves huge bonuses and pensions – AIG in the US, Fred Goodwin of RBS in the UK. Worse, than that from their perspective, the State is now having to print vast amounts of money to bail-out the auto-industry, and to spend directly in fiscal stimulus packages. The inevitable result is inflation.

Inflation is not good news if you are a financial capitalist. Nor is it good news for those sections of society who tend to have a similar mindset, the small capitalists, the upper middle classes, and the Stock Market traders and investors. Suppose you lend £1,000 to someone. If inflation is 2%, and they pay it back to you in ten years. The £1,000 you get back is now worth 20% less (a bit more than 20% actually if the interest is compounded). That is okay, provided you have been charging them 3% interest. But, even then you only actually get 1% real return on your money for risking not getting it back, and you might have got a much better return somewhere else. But, assume that inflation runs at 20%, or 50%, or more! Then unless, you charge excorbitant rates of interest, they will pay you back a sum of money, which in real terms means you have lost money. Inflation always benefits debtors at the expense of Creditors, and as the business of financial capitalists is Credit, they are the losers. The middle classes tend to lose out too, because when inflation rises, organised workers are often able to bargain up wages to mostly catch up. The upper middle classes tend not to be organised, and get squeezed. The same is true for the small capitalists. Wages rise, their big Capitalist suppliers and customers can use their monopoly power to squeeze them etc. And for similar reasons the stock market traders don’t like it.


The main beneficiaries are the big industrial capitalists. With high inflation the debts they incurred to buy large scale investments get inflated away, they pay back the money capitalists, the bond holders and so on with funny money, worth only a fraction of what it was, pulled in by the rapidly rising prices for their goods. In this last period there has been a big shift of power away from Money Capital towards Industrial Capital, Money Capital is fighting back.

The other data out yesterday showed more signs of some recovery. US durable goods orders – that is order for big ticket items – rose unexpectedly after six months of declines. The report showed that durable goods orders jumped 3.4 percent in February after falling by a revised 7.3 percent in January. Economists had been expecting durable goods orders to fall by 2.5 percent compared to the 4.5 percent de crease that had been reported for the previous month.


And on the front that is important for a resumption of consumer spending – housing – there was further surprising strong data. The Commerce Department said that new home sales rose 4.7 percent to an annual rate of 337,000 in February from an upwardly revised January rate of 322,000. The results surprised economists, who had been expecting sales to fall to 300,000 from the 309,000 originally reported for the previous month. IN addition there was last month a surge in new mortgage applications as people sought to refinance at new lower rates.

ADVFN comments,

“After hovering in positive territory for much of the morning, stocks showed a substantial turnaround over the course of the afternoon amid a negative reaction to the release of the results of the Treasury Department's auction of $34 billion worth of five-year notes. The auction drew a yield of 1.849 percent and a bid-to-cover ratio of 2.02.

With the bid-to-cover ratio, an indicator of demand, coming in below the 2.21 from the Treasury's previous auction of $32 billion in five-year notes last month, the auction results raised some concerns about demand for U.S. government debt. The major averages subsequently pulled back well off their highs and into the red.”

Today’s UK Retail sales data on the other hand was weaker than expected following several months when it has defied expectations, and remained strong. CNBC comments,

“The Office for National Statistics said sales fell 1.9 percent in February, nearly five times the 0.4 percent fall expected by analysts. That took the annual rate of growth to just 0.4 percent -- its weakest since September 1995 and well below forecasts for 2.5 percent.”

But, as the report goes on to say the Office for national Statistics and other commentators put these figures down to bad weather during the month.

UK Retail Sales

It’s a number of these “green shoots” that are beginning to turn some of the market commentators positive.