Having stopped a banking
collapse, there was absolutely no reason to continue money printing
to prevent a collapse of stock markets, bond markets, or property
markets. On the contrary, for the reasons I set out recently -
The Circuits Of Money & Capital – such a collapse should have been welcomed.
In the US, a fall in
property prices of around 60-70% meant that the houses once more
returned to more reasonable historical levels. It meant people could
once more begin to afford reasonable levels of deposits to buy those
houses rather than have to take on astronomical mortgages.
 |
| Houses like this luxury, six bedroom property were up for sale, in Florida, a year ago for around £70,000. Its an indication of just how ridiculous the property market in Britain has become, and how far prices will have to fall. |
A
collapse in share and bond prices, again means that workers pension
contributions go further to buy the shares and bonds they require to
fund their retirement. Pension funds should pay pensions out of the
income they earn on their share and bond holdings, not from
speculative capital gains. There is no reason a fall in share prices
should cause a fall in profits. So, even with a stable level of
income in the form of interest and dividends, lower bond and share
prices mean a higher yield.
But, also with large amounts
of money being printed, it has to go somewhere. It went where the
Federal Reserve and Bank of England wanted it to go; into once more
inflating those bubbles. US house prices are rising fast again as a
result not of buying by home buyers, but buying by speculators.
Share and Bond prices have risen to astronomical levels, despite the
fact that economies have hardly grown, and the underlying
productive-capital has expanded only marginally. Yet none of these
things like property, shares or bonds produce any value. None create
any new wealth. On the contrary, they divert potential resources
away from investment in productive-capital that could create new
value and real wealth, into purely speculative activity.
The argument is that by
blowing up these asset price bubbles, consumers will feel more
confident and will once more begin to borrow money so as to spend,
and thereby stimulate firms into increased investment. But,
consumers already have huge and unsustainable levels of debt. They
are maxed out, and all these bubbles do is mean that their resources
do not go as far. In fact, at a certain point, they become
inflationary. Only for so long can workers real wages be squeezed by
things like rising housing costs, as the costs of buying and renting
rise relentlessly. At some point, the effect on increasing the value
of labour-power, feeds through into higher wages. Workers who are
finding that their pensions do not go as far, and who have to pay
higher contributions, because share and bond bubbles have been
inflated, will seek higher wages out of which to make those
contributions.
Instead of stimulating
economic growth, through productive investment, all that QE is doing
is stoking up asset price bubbles that are making the situation much
worse. I wrote some months ago that QE had already hit the buffers - QE etc..
Watching events over the last week or so confirms that. Back in
November last year, the Japanese central bank announced that it was
going to double the country's money supply, to try to create
inflation. It sparked a massive stock market rally. The Nikkei rose
by 45%. But then, just over a week ago, the realisation came over
investors that if they succeeded in creating 2% inflation, then the
large amounts of Japanese Bonds they held would actually be providing
them with a negative rate of return.
Instead of Japanese interest
rates falling as a result of the money printing, they trebled!
Rising yields on Japanese Bonds then sent a shock wave through the
stock market. Within the space of a week, the Nikkei has lost more
than 50% of the gains it had made since November. But, similar
concerns have started to affect the US markets. Just over a week
ago, when Bernanke was giving testimony to Congress, a suggestion in
his speech that the Federal Reserve might slow down or “taper”
its money printing in a couple of months time, caused US stocks to
sell off by 100 points. Then when, in the same speech, he seemed to
row back from that position they rose by 100 points. In the last
week, US share prices have been up and down like a fiddler's elbow,
as the instability caused by money printing results in speculator's
and investors not knowing where to put their money for fear that any
day they might lose a huge chunk of it.
You can think about that at
an individual level. After Northern Rock, governments introduced
deposit guarantee schemes to protect savers funds under €100,000.
Without it, savers would have flocked to withdraw their funds. After
Cyprus, even that guarantee looks pretty worthless. But, even if you
believe it, then the 30% of people in Britain now estimated to have
wealth of more $0.5 million, will be looking for several accounts
over which to spread their savings. That is not as easy as it seems
when you also take into account the need to try to obtain some kind
of minimal return on those savings. Most banks and building
societies are offering “introductory” bonus rates on deposits,
but these last for just a year, before the rate returns to just a bit
more than bugger all. In the last year that has got much worse. A
year ago, you could get around 3% with one of these introductory
offers; today with the Government bribing banks to encourage people
to go into debt, by giving the banks cheap money, you are lucky to
get much more than 1%, as the banks have less need of depositors.
Its increasingly a picture of whack-a-mole, or sticking fingers into
every more porous dykes.
That leads to all sorts of
absurdities. On Thursday last week, the non-farm payroll data was
issued. It measures how many new jobs have been created, or lost.
It is, all things considered, a fairly insignificant metric. Yet,
the markets waited on it with baited breath. The reason, if the
figure was very good i.e. lots of jobs had been created, this would
mean that there was more likelihood that the Federal Reserve would
slow down its money printing faster. If the number was bad the
opposite would be the case, but it might mean the economy was
becoming weaker. So, the markets favoured a number somewhere in
between, but preferably worse rather than better! When the number
came out about where they hoped, the stock market soared 200 points.
But, the real import of the jobs number is actually what it means for
interest rates, independent of what the Federal Reserve does. If, as
seems to be the case, the US is creating more jobs, albeit slowly,
that means the demand for capital is rising. As Marx says capital is
a social relation between capital and wage labour, an expansion of
capital is an expansion of the number of wage labourers.
That expansion will in part
be a consequence of the ending of the Long Wave Spring, and start of
the Long Wave Summer, where economic growth continues strongly, but
productivity growth slows, so more workers are increasingly required
to bring about a given amount of additional production, or else
considerably more has to be invested in machinery to bring about
higher labour-productivity. Either way, this increased demand for
capital means that upward pressure is placed on interest rates.
Although, stock markets rose
sharply, bond markets sold off, and interest rates rose. In fact, a
tug of war now exists between bonds and stocks. As bonds fall, the
yield on them rises. That means bond buyers earn more on what is a
low risk investment. That means they are more likely to hold bonds
than shares. On the other hand, because interest rates are likely to
rise, and bond prices fall, that means people are likely to sell
bonds, because they don't want to get caught, holding an investment
that could fall quickly. If inflation rises, share prices rise,
because firms nominal profits rise along with their nominal prices.
But bonds suffer, because they pay a fixed rate of interest which
becomes worth less, in real terms, as does the capital value of the
bond, as inflation rises. Bond prices fall to reflect that, so that
their yield rises.
This level of volatility as
investors and speculators increasingly find nowhere safe to put their
money is a direct result of the money printing. The key here is
bonds. If bond prices fall sharply, interest rates rise sharply.
That would cause share prices to sell off sharply, as well as
property. That would not just be the case in the US, it would apply
in the UK, Europe and elsewhere, because it would mean that all bond
prices would adjust accordingly. This is one reason the Federal
Reserve has continued to buy bonds on a massive scale. But, Alan
Greenspan, who started this process in the US more than 20 years ago,
said the other day on CNBC that it has now reached a dangerous level,
where if bond investors begin to sell, the Federal Reserve will not
have enough fire power to stop it.
Well it could, in theory.
It could simply print enough money to buy up every single bond, but
in that process it might have to start buying foreign bonds with that
money too. In practice, that can't happen because it would
completely destroy the dollar and lead to hyper inflation. Greenspan
is right, the situation is now very dangerous. Interest rates are
rising, productivity is slowing, the sell off in the bond markets is
so far manageable, but it could, and probably will turn into a panic.
There seems little the Federal Reserve or any other central bank can
now do to stop it.
But, the reality is that the
policy of money printing has been a mistake from the beginning.
Money printing works by the central bank, buying up government and
other bonds from the banks. The banks then receive money from the
central bank, which they can use to lend. This is the opposite of
what usually happens, when the state issues bonds to finance its
spending, and those bonds are bought by the banks who give it money
in exchange, thereby reducing the money they have to make loans, and
create credit.
Rather than using the
conditions that led to low interest rates to print money and blow up
asset bubbles, what was really required was for the state to have
absorbed some of the excess supply of capital, and use it to invest
in things like infrastructure that would have provided the basis for
future economic growth. That is what happened under similar circumstances when the Industrial Revolution began, or after WWII, when huge sums were spent by the state out of surplus value to restructure industry and create the Welfare State. Central to future economic growth in the
West is the development of highly educated and skilled workers. The
policies that have been adopted of increasing the costs of education,
have been crazy. Western governments should have used low interest
rates to borrow money to invest in education by providing free
further and higher education.
Governments and central
banks cannot lower real interest rates when the demand for capital
exceeds the supply. Printing money under those conditions only
creates inflation, so that interest rates are forced up, as the
demand for capital in nominal terms rises along with the inflation.
But Government's can prevent interest rates from falling too low
where the supply of capital considerably exceeds demand. They can do
that by fiscal policy, taxing the excess surplus value produced, so
it does not hang over the system. The Government can either run a
budget surplus by such means, thereby paying down the National Debt,
or it can use those funds, in the way described above, to provide the
necessary infrastructure to ensure the efficiency of the economy in
future years. That is what the state in the US, in the UK, and in
Europe should have been doing over the last 30 years, and certainly
the last 20 years.
Low interest rates are
actually bad for the economy. Especially under conditions where
those running businesses are not the providers of money-capital, but
only bureaucrats acting on their behalf, cheap money, as Marx sets
out, encourages those bureaucrats to make rash investment decisions.
Businesses that are not really viable are encouraged to set up, or
continue in business, when their capital would be more effectively
used elsewhere. Moreover, where that cheap money leads to large
speculative gains, it encourages money that would have become
productive-capital, to instead be used for speculative purposes. Low
interest rates, also encourage people to consume rather than save, so
a greater proportion of the economy tends to be devoted to meeting
the needs of consumption rather than investment, so the basis of
expanding production is itself undermined.
The US has avoided the
mistakes of the UK and Europe in that it has shunned austerity, but
the fiscal expansion in the US has not been sufficient to soak up the
surplus capital. Instead that has provided the basis of money
printing, that has fuelled speculative bubbles that sooner or later
will burst. Those bubbles are not just in the US, but because of the
role of the dollar, have been inflated worldwide. The consequences
of that were demonstrated by Cyprus, but Cyprus is small fry. The
only question now is who will be next – Slovenia, Luxembourg, Malta
– or what will spark the crisis that arises from bankruptcy of
European Banks like Deutsche Bank, which holds €53 trillion in
derivatives as a means of hiding its indebtedness. Its no wonder the
UK government wants to sell Joe Public shares in UK banks, because
they are even more bankrupt. Not only are they tied into this global
debt, but they are massively exposed to hugely overvalued property
portfolios in the UK itself.
The financial meltdown of
2008 was the result of 30 years of money printing to blow up these
asset price bubbles. In the four years since 2008, a much greater
amount of money has been printed, and the asset price bubbles have
been inflated to an even more irrational degree. When they burst,
the consequence must be an even bigger bust than happened in 2008.
As I set out several years ago -
A Momentous Change
– I believe that central to that will be what happens to property.
We have already seen that in part in the US, in Ireland, and partly
in the rest of Europe. In fact, the measures taken to avoid that
denouement, so far, have only made that situation worse, in the sense
that the bubble has simply been inflated even more, and made thereby
even more dangerous.
Central to that has been the
policy of money printing pursued by Bernanke and adopted by other
central bankers. The Federal Reserve is now caught in a Catch 22.
It cannot keep printing money forever, and the more it does, the
worse the consequence will be when it stops. But, it dare not stop
because even the hint of slowing down the money printing, let alone
stopping it, or god forbid reversing it, leads to a huge sell-off in
the markets, and spike in interest rates. But, for the reasons
previously set out, whether central banks continue printing money or
not, the conditions now exist for interest rates to rise anyway.
When that happens the serial bubbles that now characterise the
economy will burst. That will be bad news for bankers, but it may
well be very good news for the rest of us.
No comments:
Post a Comment