Monday, 24 June 2013

Storm Clouds Gathering - Part 2

The kind of overproduction of capital described by Marx, and detailed in Part 1, is not what we see at the moment. In fact, in large parts of the globe at the moment we see the exact opposite. In China, and other parts of Asia, as well as in large parts of Africa, far from seeing large quantities of unsold commodities that have been over produced, instead of seeing any kind of over production of means of production, we see rapid growth, rapidly rising demand for means of production, large increases in the demand for labour-power, and large rises in workers wages. Even in the developed economies of North America and Europe, that have suffered from the effects of a political crisis, leading to austerity, in the wake of the Financial Meltdown, we have not seen the kind of large scale over production of capital, leading to massive, widespread unemployment, and unsold stocks of commodities that are the hallmark of the kind of crisis of over production of capital described by Marx. There have been partial crises, for example, in large scale unemployment, in construction, in those economies like Spain and Ireland, that engaged in a frantic property speculation, but the large scale unemployment, even in these economies, is largely the consequence of direct political decisions, to impose austerity, rather than any kind of over production of capital as described by Marx.

What we really have in North America and Europe is the kind of financial as opposed to economic crisis that Marx describes in - Volume I of Capital, Chapter 3.

“The monetary crisis referred to in the text, being a phase of every crisis, must be clearly distinguished from that particular form of crisis, which also is called a monetary crisis, but which may be produced by itself as an independent phenomenon in such a way as to react only indirectly on industry and commerce. The pivot of these crises is to be found in moneyed capital, and their sphere of direct action is therefore the sphere of that capital, viz., banking, the stock exchange, and finance.” (note 1 p 137)

That kind of financial crisis described here by Marx is precisely what we have seen since 2007 within the context of a global economic boom. The roots of that financial, as opposed to economic, crisis themselves reside within the conditions described above, whereby the rising rate of profit, latterly combined with a global economic boom, led to huge quantities of money weighing on money markets, pushing down commodity-values, and interest rates, and the response to that from capitalist states in printing money to prevent deflation.

For orthodox, bourgeois economics, such as the
neo-Austrian School of Mises, it is exchange based
on subjective preferences that is the source of value,
 not actual production i.e. the expenditure of social
labour time.  For them, the exchange of bits of paper
transferring ownership of shares, bonds, property
is tantamount to creating new value and wealth.
 The neo-Austrians are some of the biggest critics
of bubbles, but their own ideology is the root cause
 of those bubbles.
It led to bubbles in stocks, bonds, and property that are the basis to the kind of financial crisis Marx describes above, and what we have seen, at least since 2007, and arguably since 2000, and before. There is a tendency under Capitalism to see profit arising simply from money-capital. Indeed, orthodox, bourgeois economics, which takes many of its examples from the world of financial markets believes that value is created not by production, but by exchange. So, if A and B both have houses priced at £100,000, then if A “subjectively” values B's house at £200,000, or simply more than their own house, and B feels likewise about A's house, they can exchange houses, and for orthodox economics this represents an increase in value! Of course, given that for humans there is always a tendency to believe that “the grass is always greener on the other side”, its quite likely that such subjective evaluation may cause us to make such decisions.

But, the ridiculous nature of this fundamental premise upon which bourgeois economics is founded, is simply to consider that having made this trade, A and B could then immediately make the opposite subjective evaluation, and move back to their original houses, yet this too would be seen as bringing about an increase in value! Its no wonder that with such a ridiculous concept sitting at the base of orthodox economic theory, market participants can delude themselves into believing that in continually swapping bits of paper that transfer ownership of shares, bonds and property they are increasing value and creating wealth. In fact, as Marx points out, the more this delusion takes hold, the more real wealth creation, the task of actually engaging in production, appears itself to be simply an inconvenient distraction from this circulation of capital.

Its no wonder that such societies place the highest status and wages on bankers and financial traders, and least on productive workers, and even upon professional engineers etc. The more it seems possible and desirable to simply make huge “profits” from this kind of financial speculation, the less money is turned into real money-capital to be engaged in productive activity, and the more remains simply as money hoards, swishing around within the circuit of money, hopping from one bit of fictitious capital to the next, one day in this share, tomorrow in another, this week in shares, next week in bonds, this month in bonds, next month in property. A fool's playground. A Ponzi scheme that ends badly once no more bigger fools are available to buy the over priced houses, bonds, stocks or whatever the latest fad is that must always continue to rise in price, because “this time its different”!

That is why at least since 2000, capitalist states have tried repeatedly to prevent that reality impinging. Each time these markets have crashed, they have printed even more money, and come out with other means of trying to attract in “even bigger fools” to those over priced assets. That is exactly what George Osborn is doing with is “Help To Buy” scam, which is a direct repetition of the policies used in the US ten years ago that led to the sub-prime crash of 2008. But, the volatility in financial markets last week is an indication that even that road is now looking to be closed. Nobody knows where to put their marginal pound, dollar, euro or yen even to have some certainty it will not be worth much less tomorrow than it is today, let alone try to make any kind of return upon it. Not even Gold looks safe, because its price had bubbled up, and crashed too. The only safe bet looks to be cash itself.

That indeed was the lesson of the 1929 Stock Market Crash. After it occurred, and prices of shares, property and bonds collapsed, sometimes up to 90%, cash was king. With cash you could buy a formerly $1 million mansion for $100,000. That happened in Japan in 1997, too, when property prices fell by 90%. When prices of fall by that extent, you can become rich over night if you have cash, precisely because you can buy all these things that formerly were beyond reach.

And as I pointed out a while ago - The Bust Without A Boom – there is a thirteen year cycle for stock market crashes, and this year is the next in that line. The falls we have seen in the last week are likely to be only the first rumblings. In reality, adjusted for inflation and currency variation, stock markets are no higher today than they were the last time they crashed in that sequence in 2000. But, the point is that they were already massively over priced in 2000 too. But, far worse than stock markets and the bond markets is the property market. Stock prices were elevated in 2000, and remain elevated today, but at least some of that was justified on the basis of the high rate of profit, and the potential of the economic boom. Bond markets were elevated, but that was because the high rate of profit had created an excess supply of money-capital over demand. But property prices were simply in a bubble. It was a bubble that had built up over at least 30 years, and possibly much more than that. Each time the bubble burst, it was reflated and then some more.

As global interest rates rise, whatever central banks now do, the cheap money and easy credit that blew up those property bubbles will finally come to an end, and the bubbles will burst violently. 

Back To Part 1

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