Moreover, the conventional thinking is that money printing by the Federal Reserve causes interest rates to fall, and vice versa, and yet, immediately after the decision was announced the yield on the US 10 Year Treasury fell. It has since risen, but only marginally. In the last year, the 10 Year Yield has risen from around 1.6%, up to around 2.7% in the weeks before the Fed decision, despite the fact of continued QE. Compared to that almost doubling of the interest rate, in that time, the 10% rise in the yield after the introduction of the taper has been modest.
These movements illustrate the analysis made by Marx, which distinguishes between money-capital, and money. Money has existed for thousands of years, arising shortly after the beginning of commodity-exchange, as nomadic tribes began to exchange commodities, and sought some commodity, which could act as a universal equivalent form of value. But, money-capital can only arise with the development of capital itself. Capital is a social relation based upon the extraction of surplus value from wage labour. Money-capital is the money equivalent of the commodity-capital produced by productive-capital, at that point where it is used to reproduce the capital consumed in production, and to expand that productive-capital. The money realised in the sale of the commodity-capital is not money-capital, but only money. Its future is uncertain. It only functions as money-capital if it is thrown back into circulation to buy productive-capital. If, instead it is used simply to buy commodities to be consumed by the exploiting classes, or to be used as speculation in the purchase of shares, bonds, or property etc., then it is only money. It acts then, not as a part of the process of the self-expansion of value, but only as a means of exchange. This is true, as Marx points out whether this money is an actual money commodity such as gold, or whether it is some money token thrown into circulation as its representative, including credit money. That is clear in so far as it is used merely to buy commodities for personal consumption, but the illusion is created that it expands value via speculation in stocks, bonds, property etc., only because at times such speculation results in sizeable capital gains.
But, in fact, these capital gains are not a part of the process of self-expansion of capital. On the contrary, such capital gains are impossible without the self-expansion of value resulting from the productive process. Capital Gains do not create additional value, they only redistribute surplus from one hand to another. Over the last 30 years, the huge rise in the volume of surplus value produced in the global economy, not only provided the capital for the creation of huge new economies in China, other parts of Asia, and the rise of new economies in Latin America and Africa, it provided the capital for the rise of whole new industries in information technology, biotechnology, space technology and so on. But, the rise in the volume and rate of profit was so huge, that in addition to this large expansion of capital, particularly as the new long wave boom began, that it produced huge money hoards, that have swished around the global economy, from the surplus economies in the East to the debtor countries in the West like the US, and UK, and the peripheral economies of the EU.
It financed not only the increasing indebtedness of those economies, but in the process it also led to a transfer of surplus value from one set of hands to those of another via the creation of huge capital gains arising from speculation in the stock, bond and property markets. It is a process seen many times before, such as that described by Marx and Engels in relation to the same phenomena in the 1840's when such excess surplus value financed speculation in the Railway Mania. But, such excesses always end in the bubble being burst, because they are built not upon the basis of real capital expansion, but merely upon fictitious capital. The bigger the bubble, the bigger the bust when it arises, and the bigger the financial crisis it gives rise to.
Interest rates fell for the last 30 years, not because of money-printing by central banks, but because the supply of potential money-capital arising from this surge in the volume and rate of profit, created an excess of supply over the demand for money-capital. All that QE can do is to influence specific interest rates, as the central bank buys particular bonds. But, like a game of whack a mole, in so far as it reduces the yield on the bonds it buys, it tends to raise the yield on other bonds, because speculators buy the bonds supported by the demand from the central bank, and sell those that are not, or at least buy fewer of them. Moreover, for the reasons set out previously, of the difference between money and money-capital, where the central bank simply prints money tokens to throw into circulation – actually it just electronically increases credit – to buy these bonds, rather than the increase arising from an expansion of capital, the consequence is either that the velocity of circulation of the money declines, or else the money in circulation becomes devalued leading to a rise in inflation. But, speculators when they see inflation, then demand a higher rate of interest on their money to cover its future depreciation.
In fact, both these phenomena have been seen. There is clear evidence that QE has become less and less effective and that the velocity of circulation has declined. Money pumped out from central banks to commercial banks has sat on their books rather than being lent out, as those who would borrow are often bad credit risks, whilst those who are worthy of credit already have huge cash hoards on their balance sheets themselves. In Europe, there is now clear evidence that the Long Term Refinancing Operations by the ECB, have resulted not in banks lending into the economy, but only those banks using the funds to buy European sovereign bonds. Given that as interest rates rise, some of these sovereign bonds themselves become of dubious character, the stage has been set once more for a European banking and sovereign bond crisis.
But, there is also evidence in the rise in yields on longer dated securities compared to the short end of the yield curve – a so called steepening of the yield curve – that bond speculators have become increasingly concerned about the potential for inflation further down the road as a result of the vast amount of money printing undertaken.
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