Friday, 5 August 2011

What The Markets Are Telling Us

Markets are very useful tools. That is why Lenin and Trotsky argued it was necessary for Communists to study them, learn everything they could about them, as a precondition for first being able to use them, then control them, and finally to go beyond them.
Markets tell us what people are really thinking as opposed to what they say. Frequently, the two things are considerably different. For example, people say they want to reduce carbon emissions, yet they continue to buy cars, and often make unnecessary journeys. When asked, people have said that they think that nurses should be paid more than footballers. But, people's actions contradict that. They are prepared to pay £1,000 for a Manchester United season ticket, to buy subscriptions to Sky Sports and so on, and yet baulk at a rise in their taxes to cover additional NHS spending. People often say they want to buy a house, but rather than save money to provide a reasonable deposit, they continue to spend money instead on cars, going out, buying new clothes, the latest smart phone and so on.

This is one of the problems that would be faced by any kind of democratic planning in the immediate future. So long as people continue to see themselves, and to act as individuals rather than as part of a larger collective, their voiced preferences will conflict with their actual preferences as displayed by their spending patterns. In reality, the voiced preferences tend to be expressions of what choices they think society, (essentially everyone else) should make rather than what they as an individual want to make, or else they are expressions of preferences they would have, so long as it did not involve giving up something else to achieve it.
Of course, under Capitalism this type of market, the market for consumer goods, is highly distorted. It is distorted, because the reality of productive relations means that the owners of Capital obtain by far the largest share of income, and control over the distribution of such commodities. That in itself shapes the market, and shapes the kind of spending choices others make, because of the demonstration effect, and of aspirational purchases. But, it is also distorted because of the role of advertising in further shaping that market. However, we shouldn't over egg that pudding. Advertising's main function is to create brand awareness and identity, and to win market share, not to create a market for commodities that otherwise would not be demanded. Remember the Sinclair C-5? Its rather patronising to argue that workers are making choices to buy things they really don't want to buy.

In the same way, the Capital markets tell us what the real thoughts of Capital are, as opposed to the views it expresses. They tell us what the real fears of Capital are.
The last few days have seen an awful lot of fear expressed in those markets. What does that fear tell us about what Capital is really thinking?

There are two views about what lies behind the falls in Stock markets over the last few days, which are an acceleration in the falls which have actually been taking place for the last two weeks. One view is that what lies behind it is fear over the debt crisis. That is that there is a huge amount of sovereign debt in Europe, which is why we have seen the crisis over Greece continue, and why it has now spread to Spain and Italy. There is also fear over the huge US debt and deficit. On this view it is the possibility of default that has spooked markets, and caused the sell-off.

The other view, which was presented on CNBC this afternoon by David Bloom, global head of foreign exchange strategy at HSBC, is that it is all about growth.
Growth in the EU periphery has tanked due to the austerity measures. Growth in the UK has disappeared due to the Liberal-Tory austerity measures. Growth in the US has slowed considerably as the fiscal stimulus has wound down, and now the Tea Party Taliban have forced $2 trillion of cuts over the next ten years on to the Government. In China, growth is still romping along at 8-9%, but has been deliberately slowed by the State, because of fears over inflation. Similar fears have caused the Indian Government to raise interest rates. As David Bloom put it, the concern over growth has gone global.

In reality the two things are not unconnected. If growth in the US and Europe slows, if China and India slow down their rampant advance, then this will be bad for Capital. It will mean lower profits, and slower Capital Accumulation. That would be bad, but not catastrophic for Capital. If, the EU periphery, and more importantly economies such as Spain and Italy fail to grow, or worse, go into recession, then there is no chance whatsoever that they will be able to reduce their deficits let alone cover their debts.
In every country where austerity has been introduced, including the UK, the slow down of the economy has resulted in deficits rising not falling. If that causes a default, or if the slow down fed off itself, because it became widespread, then that would have the potential not just for a “soft patch”, but for a full-blown recession or worse. In those conditions, large amounts of Capital would be destroyed, profits would cease to be made and so it is no wonder that fear of such an eventuality would cause Capital to show its real feelings by selling off.

Whatever individual Capitalists or their representatives say about wanting to cut deficits, reduce Government spending, and state intervention, the reality is that Capital fears the consequences of such action. That is why it is selling shares and other assets. It was, in fact, also spelled out by one of those who for the last few years has been calling for a reduction in that state intervention. CNBC's Rick santelli, a former commodity trader turned TV presenter, is credited with having given the impetus for the establishment of the Tea Party, in this rant a couple of years ago.

The other day, Santelli pointed out that over the last few years, the fact that Capital markets knew that if there was a crisis, the State would intervene, meant that they kept going up. The fact, that in holding the country to ransom over raising the debt ceiling, the Tea Partiers and Republicans had been able to insist on $2 trillion of cuts in the US Budget, meant that a sea change had occurred. As another presenter put it, investors were having to come to terms with the fact that “Momma isn't going to be here to help. Momma's gone away for a while.” In fact, the $2 trillion of cuts over ten years is pretty small beer when considering the size of the US economy and of State spending. Much of it will not even see the light of day. But, as with the Liberal-Tory talking down of the UK economy from early in 2010, and their threats of the austerity to be introduced, it is the fear unleashed, the animal spirits set in motion that do the initial damage, by scaring consumers away from spending, and businesses away from investing.
Moreover, at a time when it is becoming clear that the slow down is requiring an additional fiscal stimulus, just knowing it is unlikely to happen is enough to send the markets into a tailspin, because of the likelihood of that meaning the economy goes into recession.

That people like Santelli are happy to see that happen is not surprising. Many of these reporters and presenters on the business channels are former traders.
As Mandel points out the theorists of the Austrian School, and of Neo-Classical Economics were really ideological representatives of such people (See Marxist Economic Theory p715). Many of the examples, as Mandel says, that they use are drawn from the world of financial markets and luxury production. The basic hypothesis of these theories is that surplus arises not from production, but from Exchange, as one individual exchanges something they have for something someone else has. Each participant in this exchange does so, because their subjective valuation of what the other has is higher than their valuation of what they are giving up in exchange. (See my deconstruction of this argument in Reclaiming Economics Part 4) What better example of this in action is there than exchanges on the financial markets, where a seller sells shares they think are going to go down, and the buyer of those shares buys them because they think they are going to go up.

This view of Capitalism is one in which it is dominated by free markets, where the main characterisation of economies is one dominated by a myriad of small companies, and where monopolies are an abnormality. For those who hold this view, most fanatically by the Austrian School, the market would solve all problems were it not for the interference of the State.
Crashes are caused by the previous intervention of the State, which attempted to prevent some previous crash, and encouraged a crack up boom with cheap money. In so doing the State also encourages moral hazard, and protects those who made bad decisions, and who should have been allowed to go bust. It is responsible for the development of monopolies as a result of these policies, and increasingly because of a personal and fiduciary interest between the bureaucrats who run the monopolies, and the bureaucrats who run the State. The advocates of these ideas such as Hayek draw on the work of people such as James Burnham, who theorised this in his “Managerial Society”, in which he concluded that technological development was causing the societies such as the USSR, and those like the US to converge in a new type of “Bureaucratic Collectivist” society.
That is why the Austrians and their Anarcho-Capitalist (Libertarian Right) supporters describe the US as a socialist society! Its also why the other side of this coin - the Third Campist Left followers of Burnham - describe the USSR as State Capitalist or Bureaucratic Collectivist. In both cases a purely superficial and subjectivist view of the political regime, over rides, the actual class relations of the society, and the class nature of the State.

The Austrian/Libertarian ideas come essentially from the Libertarian views of Rousseau.
Rousseau believed that the ideal type of society was that he had seen in the small peasant villages of Switzerland. These small communities were keen to ensure that they were left alone by the State, which they largely were. They were self-sufficient, providing their own entertainment and so on. Its not surprising then that these ideas about liberty, self-sufficiency etc. were able to take hold in other largely peasant societies such as the US, and the UK of the 18th Century, when this Classical Liberalism was at its height. At the time, these ideas were revolutionary compared with the domination of life by the feudal state monopolies, and the lack of personal liberty.
As Marx says, they form the basis of the ideological revolution of the rising bourgeoisie against the old Feudal Class. But, we are not, however much the Libertarians want to believe we are, living in that kind of world dominated by small producers, and we are not going back to anything like it. The revolutionary ideas about social solidarity, self-reliance etc. that Rousseau identified can now, as Marx outlined, only be exercised by workers acting collectively, to establish their own co-operative property, and beginning to develop their own self-government.

So, the Austrians, who have many followers amongst the stock market traders, have no problem with the idea that such a crisis would bring down many of the Monopolies as well as reducing the role of the State. But, of course, Capitalism is NOT what they would like to think it is.
Capitalism is dominated by those very Monopolies they see as an aberration, and those Monopolies have arisen not because of State intervention, but due to the normal operation of the laws of Capitalism, which as Marx demonstrated lead to the centralisation and concentration of Capital in ever larger units, the ultimate version of which is the State Capitalist Monopoly. And, the increasing role of that Capitalist State in the economy is not a sign of the victory of Socialism, but merely a sign that this kind of modern Capitalism REQUIRES a large state presence, and intervention in the economy, precisely to create the conditions of long-term economic and social stability that these huge fractions of Capital require for their long-term planning, and in order to fulfil its function in ensuring the necessary reproduction of labour-power for Capital.

It is ironic that there is, in fact, a symmetry of view between the Austrians and much, if not most, of the Left. The Austrians see something unnatural, non-Capitalist, about the large role of the State in the economy, and much of the Left agrees with them. Much of the Left adopts the position that Capital seeks to minimise the role of the Capitalist State, and that is why it repeatedly attempts to introduce cuts. But, of course that is nonsense. Capital is interested in maximising profits, and, if the way to do that is through State intervention, that is what it will do, and has done repeatedly.
There is no natural drive for Capital to reduce the role of the State, which is why that role has continued to rise in all developed capitalist economies. There is a drive to do that from the smaller sections of Capital, and the Middle Classes and sections of workers, who see that the cost of its maintenance falls on them in the form of taxes. There is a drive to do that by the Conservative Parties whose electoral success is often predicated on winning the votes of this section of society. And, of course, there is a drive to try to ensure that State provision is efficient, and that if it isn't that an alternative form of provision is introduced.

So, however much the stock market traders, the Austrians, or even the politicians such as George Osborne argue to the contrary, indeed however, much some of the Capitalists themselves say they want austerity, the actions of Capital in selling off in fear of what that actually means discloses their real feelings on the matter.
A look at the last week demonstrates that. Markets have been selling off for the last fortnight. During that time, data has been coming in showing that economic activity was slowing down. More importantly, the circus over the US debt ceiling was holding out the possibility of a technical default. Yet, the sell-off was muted. Having done the deal, including the agreement to cut $2 trillion out of the Budget, the sell-off intensified. Yesterday, the markets took a dive. It came after comments by Jean Claude Trichet, president of the ECB, another supporter of the Austrian School. He let it be known that the ECB has been buying Bonds, but he also made it clear that the ECB would only buy Spanish and Italian Bonds, if their Governments intensified their austerity measures.
The connection could hardly be clearer. Those economies that were introducing austerity were seeing growth tank, and here was Trichet effectively blackmailing Spain and Italy, which already have stagnant economies to intensify their austerity measures. Markets went into a nose-dive.

Today, markets revived sharply as US Non-Farm payroll data came out showing a sharp improvement. Private sector jobs rose by 145,000, while Government jobs fell by around 30,000. The DOW rose by more than 100 points, a clear sign again that Capital's main concern was with growth. But, within a few hours, it had reversed again falling almost 200 points, an even bigger points reversal. The reason seems to be a realisation that one month's figures are not very meaningful, if austerity measures bring the economy to its knees. The day's data was backward looking not forward looking.

But, its not the first time we have seen this. When the Greek crisis first broke last year I wrote about the market reaction at the time. What we saw was that when it was announced that an EU intervention was to be launched, and the ECB was to provide liquidity for Greece, global stock markets soared. Within a week, when it was announced that the other side of this was that Greece would have to introduce draconian austerity measures, and that the ECB monetary intervention would be sterilised by withdrawing liquidity from elsewhere in the system, markets crashed even more!

We are seeing a range of conflicts playing out at the moment with the ranks of Capital itself. Large sections of Financial Capital, which have held considerable sway over politicians, particularly Conservative politicians, have come to believe that myth perpetrated by Austrian and neo-Classical economics that surplus, derives from exchange.
They see that they lend money out, at risk, and that it comes back in larger quantities, suggesting that it is this risk which creates the profit received. It is, of course, nonsense. The profits they have made, for the most part, are merely a share of the surplus created in production by productive Capital, in part a result of the vast money printing by the Capitalist State, which has created paper Capital Gains as asset prices have risen – the same delusion that makes people believe they are financial geniuses because the price of their house has risen. In fact, both are a form of leaching off productive capital. Financial Capital may think it can make profits without productive capital engaging in productive activity, it may think it can simply shift its speculation to other areas. In fact, without productive profits, it would soon find it was mistaken. But, more importantly Productive Capital KNOWS it cannot make profits without engaging in production, and doing so on an increasing scale. It has no interest in unnecessarily provoking a crisis through hasty austerity measures. That is what is being reflected in the markets. I suspect it may also be being reflected in the attacks on the more reactionary and nationalistic sections of the gutter press too.

1 comment:

Yusef Asabiyah said...

I came over on the link from Lenin's Tomb. This is great analysis, and I favorited this blog. I look forward to reading future posts, (and will definitely be reading previous posts.)