Lehman's Plus Five - Part 5

All of the previous large events have occurred at the conjuncture of one long wave phase with the next. 2008 did not represent such a conjuncture. That conjuncture arose in 2012/13. A look at all of the conditions currently existing, and the fact that the real contradictions that led to 2008, have not been resolved, but only exacerbated suggests that the real financial crisis is yet to strike. In the series of stock market crashes, 2013 is the next in line, but that does not mean it will happen this year. It does mean, as with the San Francisco earthquake, its due, and it will happen sometime.

I now want to look at the conditions set out at the beginning to look at how that might arise.

A look at the way house price bubbles are followed by
equally large busts, is shown in this chart going back to
1975.  Prices bubbled up from 1977 to 1979, then crashed
back to where they started by 1981.  The effect of Thatcher's
money printing is seen in the late 1980's.  Again in 1990, prices
 crashed back to their original level, and kept falling until 1996.
The latest huge bubble started in the foothills of 1997.  It is a
much bigger bubble than all the previous bubbles.  It dropped
in 2008/9, but was then reflated.  On past experience, prices will
fall back to near the 1997 level, a fall of about 75% from
current prices.

The transition to the Summer phase of the long wave, means that completely new conditions impose themselves. Massive money printing could continue during a period when large quantities of cheap manufactured goods flooded markets, because they kept consumer price inflation low, whilst the money printing fuelled asset price bubbles that acted as collateral for yet more borrowing. But, as productivity slows, and cost prices for commodities, from China and elsewhere, start to rise, additional money printing will push up inflation. In turn, higher inflation causes lenders to seek higher interest rates. The current bubble in bond prices will inevitably burst. But, when the bond bubble bursts, market interest rates will surge, and that means that the low interest rates on which the property market relies will disappear, causing the property market to collapse. But, the banks only appear solvent, because their balance sheets are stuffed with fictitious capital, in the form of property and shares. When the price of property collapses, the banks will be exposed as bust, but a collapse of the banks will mean a collapse of share prices in general. How quickly these new conditions impose themselves no one can say, and they will not occur in a straight line, but it is always the case that it takes longer to blow up a bubble than it does for it to burst. The current bubble has been repeatedly inflated for the last 40 years. That is the biggest bubble in history. The bursting of that bubble will be on a suitably large scale.

A look at the current situation in relation to bonds, and therefore, real interest rates illustrates the point. A look at UK and US 10 year Bond Yields, for instance, shows that they have doubled from around 1.5% to over 3%, in the last 6 months. That upward trend looks set to continue. But, its not just Sovereign Bond Yields that are rising. In my series - The Rates Of Profit, Interest and Inflation – I pointed out that the rise in interest rates would be the result of a falling rate of profit on productive-capital, together with a relative rise in the demand for money-capital. I've pointed out the examples of the falling rate of profit manifest, for example, in the continued fall in the profit margin of companies such as Apple.

But, we can also see that the demand for money-capital is also rising. The banks are being told to recapitalise their balance sheets, for example. Economies like Germany, even, are being shown to need large injections of capital, for infrastructure projects, without which its capital will find its transportation and other costs rising sharply. German roads are deteriorating badly, and its Internet provision is woefully inadequate. But, other developed economies need large amounts of fixed capital investment for similar reasons.

However, its not just these kinds of activities that require additional capital. Verizon, the largest telecom company, in the US, has just bought out the share of Vodafone, in its US operations. As part of raising the cost of financing the purchase, Verizon has just launched the world's largest ever bond sale, to raise $49 billion. It issued bonds of varying durations, but, in order to sell them, it has had to offer a yield of 5.19% on its 10 year bond. That gives some idea of the kind of market rate for bonds that could be seen in the near future. If the yield on bonds continues to rise at that kind of rate, then any hopes that George Osborne might have of keeping the property market in bubble territory are lost.

Its true, demand for the Verizon bonds rose sharply, after they were put on sale, but that is probably due to buyers not being able to get an initial allocation. In the last few months, the prices of most corporate bonds have continued to fall, raising rates. According to the FT, last Friday, “Funds investing in fixed income securities have experienced large redemptions, leaving investors facing their first negative year of performance since 2008.” The same edition contains a story about the large number of 'hybrid' bonds being issued by European companies. These are bonds that can be converted into shares. The amount being issued is at the highest level since 2007. And, in order to try to borrow at lower rates, companies are looking to borrow in China. French energy giant Total has just raised 1 billion Remnimbi. But, it too has had to provide a yield of 3.75% compared to the situation in 2011, when corporates were borrowing with yields on their bonds as low as 1%.

But, its not just in the shape of bonds that capital is being raised. Twitter has just announced that it is to sell shares via an Initial Public Offering that could suck in $10 billion. Its important, to make a distinction here. As Marx sets out, where money is spent to buy existing shares – or bonds or property – the money so spent does not represent capital. It is only money. Nor do the shares, or bonds or property bought with that money represent capital. The shares and the bonds are merely a claim to a share of the income produced by the actual capital. Property is only capital if its used capitalistically, for example, if its rented out, or used for productive purposes. If its just used to live in, then its just a house, a commodity purchased for consumption, no different than a car or a fridge.

If the price of any of these things goes up or down, therefore, it does not change anything, as far as the real economy is concerned. It does not change the value of the actual productive capital used in the economy. Any gains or losses resulting from such price changes reflect only a transfer of money from one set of hands to those of another. One person gains as much as another loses.

Similarly, when a company issues new shares, the money used to buy these shares represents money-capital, to the extent that the proceeds from the share sale are to be used for the purchase of new productive-capital. It is no different than had the company gone to the bank to borrow money-capital to buy a new machine or build a new factory. The shares obtained again do not represent capital, but only a claim to a share in the income produced by the actual capital. But, the machines, the factories, the materials, the labour-power that the firm buys with the proceeds of the sale do represent productive-capital.

So, to the extent that firms are selling new shares, or issuing bonds as means of raising money-capital, so as to buy productive-capital, this does represent an additional demand for money-capital. It is this additional demand at a time of relatively diminishing supply, as rates of profit fall, that increases interest rates.

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