Thursday, 7 June 2012

Why Higher Bond Yields Don't Matter - Part 3

As Engels pointed out, the advent of the large companies, the Trusts etc. means that the element of planlessness within Capitalism ends. Goods and services continue to be traded via markets, which adjust prices to ration out a given Supply to variations in demand. But, with production now requiring investment of tens of millions of pounds for commodities like cars, the decision to increase production via new investment cannot be taken on the hoof, as a result of some temporary market behaviour. Investments are planned for many years ahead based on extensive market research, demographic analysis and so on, and linked to other forms of business planning to ensure adequate financing etc. Moreover, unlike the small firms of the first half of the 19th Century, upon which the Neo-Classical model is built, these large companies do not need to make such drastic decisions to grab market share. In fact, the Game Theory, which many of these oligopolies use to guide their operational analysis and decision making mitigates against it.

The mechanics of the current situation are quite simple. In the US, UK and Western Europe (some parts more than others) what we have is (a large number of) workers who are heavily indebted. That debt has been built up over the last thirty years, as they were encouraged to maintain their living standards by taking on credit to compensate for stagnant real wages. The process was facilitated by the build up of fictitious capital as previously discussed. As I have pointed out elsewhere this situation should not be considered to apply to all workers, because within this process some older workers have been placed in a far more favourable condition.

The partial collapse of some of these bubbles and the Financial Crisis of 2008, meant that this could not continue. The collapse of the bubbles in house prices, and in Stock and Bond Markets is only being prevented by unsustainable levels of low interest rates, and massive amounts of money printing. But, with interest rates only able to rise from here, and with wage and job prospects precarious, along with real wages being squeezed due to inflation arising from that very money printing, it is not surprising that workers/consumers seek to 'de-leverage', that is to reduce their levels of debt. In those countries such as Spain and Greece where unemployment is already at Depression levels, this curtailment of consumption is severe, and passes through into corresponding reductions in economic activity creating a vicious downward spiral. A lack of international competitiveness, together with flat economic activity in their main markets (the EU) prevents a solution to this situation via exports.

The situation in this respect is not so severe in other countries within the EU or in the US, which is why they continue to grow or experience only mild recessions. A continuation of the austerity measures by the UK Government could, however, begin to reproduce some of the problems of Greece and Spain here. So far, only about 6% of the austerity measures have been introduced so much more damage to the economy is yet to be inflicted compared to that which has already caused it to move sharply downwards from the growth they inherited, to the recession they have now caused.

But, in conditions of consumers attempting to reduce their debt by curtailing consumption (a process which will require several years, and is likely to bring about a structural change in consumer behaviour) no large scale business is going to ramp up those long term investment plans any time soon. The components of Aggregate Demand, the total demand for goods and services in the economy, are Consumption, Investment, Exports minus Imports, and finally Government Spending. The first is being constrained, as consumers reduce debt and try to build up savings for fear of what the future may hold. The second is being constrained because there is no point investing in new or additional production if consumers are not spending, and if your main export markets (EU, US) are experiencing similar conditions. Yet, the area of the economy which could step in to fill that gap – Government Spending – is instead itself being cut with the consequent effect on Consumption and Investment.

The solution here seems simple even in Capitalist terms. If the Government were not fixated on the idea of low interest rates (which in part are maintained to benefit the powerful Money Capitalists who have influence in the Tory Party) and therefore the need for austerity (which they only advanced for populist reasons to garner votes at the election) then they could take advantage of the current exceedingly low interest rates, and Financial Repression to bring about much needed modernisation and restructuring of the British economy. The Government themselves have recognised the potential. George Osborne has floated the idea of issuing a Government Bond with a 100 year maturity – something no one in their right mind would normally buy. The options the Government could choose include the following:

1) They could sell a large quantity of these very long dated bonds – 100 years, 75 years, 50 years, 30 years. Part of the proceeds could be used to repurchase shorter dated bonds – 2's, 3's, 5's and 10's, some of which because of when they were issued might even have a higher Coupon than those of the longer dated Bonds. This would be a variation of the Operation Twist implemented by the Federal Reserve. If the Bonds purchased were those in private hands the effect would be to potentially reduce immediate interest costs, and certainly to reduce the costs of redemption on shorter dated Bonds, by restructuring the debt to far in the future.

2) Given that the underlying problem is not an overproduction of Capital, nor a low and falling Rate of Profit, nor a lack of viable investment opportunities for Capital, (viz. The list of new technologies previously cited) but a lack of confidence of consumers and productive Capitalists, combined with a lack of purchasing power by some consumers (because of existing debt, squeezed real incomes, the property bubble putting houses out of reach etc.) the key to unlocking this dilemma rests with the Government, which has an historic opportunity to use these record low interest rates, and create confidence whilst also creating the conditions for a more productive and competitive economy. I have set out in the past the outline of the basic measures that could achieve that. They are a focus on measures that quickly put people back into stable employment and which also have a rapid turnover of Capital, thereby putting Value quickly back into the economy. Such measures would include:

a) Enhancing secondary education and skills training

b) A programme of road repairs and maintenance (as opposed to construction) particularly on strategic roads

c) For the same reason, abandonment of HS2 (which will be out of date by the time its finished) and instead investment in existing track, provision of new rolling stock, creation of new hubs, and integrated transport systems.

d) As an increasing amount of new exchange value is digital, a 21st. Century Internet backbone is needed. Current plans are woefully inadequate in scope, quality and time scale. An integrated national grid of fibre optic, wi-fi, and microwave is required that should guarantee everyone a minimum 100 mbps in the next 2-3 years, with a target of 1 gig. for all conurbations within five years. Some countries like S. Korea and Singapore already surpass this.

e) In the US, the “Pickens Plan” involves moving all the country's commercial vehicle fleet from expensive and scarce oil on to cheap and plentiful natural gas. A similar scheme would be easy in the UK because of the existing national grid for gas.

f) The above could be just part of a comprehensive scheme of energy conservation measures. Rather than home-owners having to apply for insulation etc. it should be done free, as well as investment in photo-voltaic cells and other forms of local (for example, Combined Heat and Power Generation) and micro generation systems. These would provide immediate employment, help kickstart green energy production, and reduce energy imports. By reducing household energy costs they would reduce the Value of Labour Power enhancing competitiveness.

g) Developments in medical science mean a great deal is now possible, which is not being done. Private companies are offering screening using body scanners etc. for a couple of hundred pounds. Hospitals have invested tens of millions of pounds in MRI scanners, and the marginal cost of their use is minimal. There should be a programme of mass scanning, and health screening for everyone so that any potential health problems can be dealt with early, which is more cost effective, and medically effective than waiting until more extensive treatment is required.

The benefits of this are several fold. It means vast investments already undertaken are fully utilised (a three shift system could be introduced providing more employment for radiographers), demand for additional scanners (the type of high value, technical industry the economy requires) would be created, medium and longer term health costs would be reduced, less time from work would be lost through sickness. Health is now an important commodity and such expansion could facilitate selling these services within the European single market, thereby raising funds for the NHS.

Similar programmes could be developed that would help stimulate the new industries involved in genetics and bio-technology, which would help create employment in these high value, high wage sectors.

Far more programmes of this kind could be developed, which create immediate employment and have short term payback times. Yes, this involves additional borrowing and spending, but as has already been demonstrated, the UK currently, faces negative real interest rates. Paying positive rates would hardly be an imposition and would, in any case, be more than repaid by the improvement of competitiveness, and the much higher tax receipts generated by sustainable economic growth. Anyone who doubts that should look at the experience from the past in similar circumstances. There have been two obvious similar situations in Britain's history. At the beginning of the Industrial Revolution, and after WWII Britain's debt to GDP ratio stood at around 250%, as opposed to the current figure of just 70%. Both periods, were associated not with the implementation of austerity, but with increased Government spending on various forms of infrastructural investment. Yet, the consequence was not a diminution of economic growth, or a further expansion of the debt, but the opposite as economic growth both helped to pay down the debt, and also expanded the denominator of the fraction i.e. GDP.  In fact, today we have had another example of that.  Francois Hollande has announced that he intends to engage in a programme of Keynesian stimulus to encourage growth in the French economy.  French Bond Yields have been rising over the last year.  Yet, on the back of Hollande's proposals, when France auctioned additional Bonds today, the Yields on those Bonds were LOWER than previously.

The period after 1800, where the debt figure was expanded due to the Napoleonic Wars, was the period when the Capitalist State was in the process of formation. It brought with it the expansion of Municipal Authorities, the development of the Civil Service, the introduction of a Police Force etc. It later saw the investment in communications infrastructure, and through the Municipal Authorities the provision of things such as Public Parks, Swimming Baths, drainage and sewerage systems, and a huge expansion of Public Health in general. All of that State expenditure was funded largely through additional borrowing, despite the fact that the debt to GDP ratio was more than three times the current figure. Similarly, after WWII, when the figure was again around 250%, having been expanded due to the War, the State engaged in a massive expansion to create the Welfare State, to nationalise bankrupt core industries, to build large amounts of Public Housing etc. But, as with the earlier period of expanded State spending, the result was not a contraction of growth, or an expansion of the debt. The consequence was the exact opposite. The nationalisation of bankrupt industries, meant that a programme of investment and restructuring of the industries was conducted in the interests of Capital in General. It meant British industry was provided with much cheaper and more efficient Coal, Steel, Transport etc. than would otherwise have been the case. That was partly because of the improvements in efficiency of these core industries, and partly because the Capitalist State ensured that these core industries supplied the Private sector with commodities at low prices, at the cost of their own profits. The same was true of the Welfare State, which in conditions of relative labour shortage, ensured that Labour Power was reproduced in the most efficient manner for the time. Once again, the provision of cheaper housing, cheaper and more efficient provision of Education and Healthcare, reduced the Value of Labour Power, and thereby facilitated the expansion of Relative Surplus Value. It was on this basis that growth was facilitated during the post War Long Wave Boom, which in turn ensured that the debt could be repaid, and that with an expanded figure for GDP, the ratio of debt to GDP was bound to fall.

In fact, the expansion of debt is typical of any period of rapid growth, whether we are talking about the economy in general, or of particular businesses or industries. With the huge amounts required to finance investment on a large scale, it is impossible to generate this solely from internal sources. Borrowing becomes inevitable as a means of financing the necessary investment to ensure growth, and increased competitiveness. A look at the world's fastest growing economies today once again demonstrates that. All of the Asian Tigers, for instance, borrowed huge amounts of money to finance the investment that today has made them the most efficient global producers. Not all of that went into investment in production. Large amounts also went into infrastructure projects without which, the investment in productive capacity would have been wasted. It is one of the reasons that today countries like S. Korea and Singapore have Telecommunications systems way in advance of those in Britain.

The employment created and the change in economic climate would not change the fact that some consumers need to pay down debt, but it would give confidence to business that things were not going to get precipitously worse. In other words it would set in motion the 'animal spirits' which Keynes described. In turn additional business investment would stimulate further employment setting in place the kind of multiplier effect that Keynes theorised.

Clearly, even within the confines of Capitalism it is not true to claim as the Liberal-Tories do that There Is No Alternative, which was the Thatcherite mantra of the 1980s (a period when that claim was true). The Keynesian solutions set out above are not Socialist solutions, which would involve workers taking over the existing means of production, and the establishment of Co-ops across Europe, and the gradual development thereon of the increasingly planned integration of their activities. That is why socialists argue for the latter rather than the former. But we are not for that reason agnostic about the solutions which Capital and its representatives choose either. Marx makes that absolutely clear in his article - Political Indifferentism.

Marx writes,

“The first socialists (Fourier, Owen, Saint-Simon, etc.), since social conditions were not sufficiently developed to allow the working class to constitute itself as a militant class, were necessarily obliged to limit themselves to dreams about the model society of the future and were led thus to condemn all the attempts such as strikes, combinations or political movements set in train by the workers to improve their lot. But while we cannot repudiate these patriarchs of socialism, just as chemists cannot repudiate their forebears the alchemists, we must at least avoid falling back into their mistakes, which, if we were to commit them, would be inexcusable.”

Its not that Marx in any way repudiates the vision of the Utopians, not at all. He and the International set it as their goal, and also set the establishment of Co-ops etc. as practical tasks the workers needed to achieve in the process. What Marx rejects is the sectarian notion that nothing less than this ultimate goal will do, and that anything else is a distraction from it. As he says,

“ It cannot be denied that if the apostles of political indifferentism were to express themselves with such clarity, the working class would make short shrift of them and would resent being insulted by these doctrinaire bourgeois and displaced gentlemen, who are so stupid or so naive as to attempt to deny to the working class any real means of struggle. For all arms with which to fight must be drawn from society as it is and the fatal conditions of this struggle have the misfortune of not being easily adapted to the idealistic fantasies which these doctors in social science have exalted as divinities, under the names of Freedom, Autonomy, Anarchy.”

The Keynesian solutions are not Socialist solutions, just as a strike is not a socialist solution. Both entail acceptance of the existing system, and bargaining within it. Both a Keynesian solution and a strike can only be effective even within those terms under certain circumstances. As Engels pointed out,

“The history of these Unions is a long series of defeats of the working-men, interrupted by a few isolated victories. All these efforts naturally cannot alter the economic law according to which wages are determined by the relation between supply and demand in the labour market. Hence the Unions remain powerless against all great forces which influence this relation. In a commercial crisis the Union itself must reduce wages or dissolve wholly; and in a time of considerable increase in the demand for labour, it cannot fix the rate of wages higher than would be reached spontaneously by the competition of the capitalists among themselves.”

Engels Condition of The Working Class in England p243

Forward To Part 4
Back To Part 2

No comments: