Monday, 30 September 2013

Another Mistake By Marx On The Rate Of Profit

I've previously pointed out that Marx, in Volume III of Capital, makes a mistake in discussing the countervailing forces to the tendency for the rate of profit to fall. Marx said that there was a limit to how much increases in productivity could offset the tendency, because the working day is limited to 24 hours. So, he says, 24 workers producing just 1 hour of surplus value will produce more surplus value than 1 worker producing 23 hours of surplus value.

His mistake here is that he does not distinguish between concrete and abstract labour. There are indeed only 24 hours of any concrete labour in a day. For example, a joiner or a dentist can only work for 24 hours in a day, as an absolute maximum. But, value and surplus value is measured not in hours of concrete labour, but in hours of abstract labour. In terms of abstract labour hours, the labour of the dentist might equal twice that of the joiner. So even if the joiner's labour was equal to abstract labour, the dentist could work the equivalent not of 24, but of 48 hours of abstract labour in a day. So, the 24 hour day does not, in fact, act as an absolute limit for the amount of surplus value that can be extracted.

But, Marx makes a further and related error in discussing the rate of profit, in Capital III, Chapter 13. There he writes, discussing the situation comparing two different countries,

“Let a capital of 100 consist of 80 c + 20 v, and the latter = 20 labourers. Let the rate of surplus-value be 100%, i.e., the labourers work half the day for themselves and the other half for the capitalist. Now let the capital of 100 in a less developed country = 20 c + 80 v, and let the latter = 80 labourers. But these labourers require 2/3 of the day for themselves, and work only 1/3 for the capitalist. Everything else being equal, the labourers in the first case produce a value of 40, and in the second of 120. The first capital produces 80 c + 20 v+ 20 s= 120; rate of profit = 20%. The second capital, 20 c+ 80 v+ 40s= 140; rate of profit 40%. In the second case the rate of profit is, therefore, double the first, although the rate of surplus-value in the first = 100%, which is double that of the second, where it is only 50%. But then, a capital of the same magnitude appropriates the surplus-labour of only 20 labourers in the first case, and of 80 labourers in the second case.” 

But, this is wrong, and at odds with what he says in Volume I. There, Marx sets out the way in which the introduction of machinery by particular firms, acts to make the labour of its workers the equivalent of complex labour in relation to that of the firm's competitors. In other words, say there are five firms in an industry, and they take on average 100 hours to produce 10,000 units of a commodity. Now, firm A introduces a machine, which means that its workers produce 20,000 units in 100 hours. The firm will continue to sell these units at the market value determined by the average for the industry. The consequence is that it is as if an hour of firm A's workers' labour produces twice as much value as an hour of labour by workers in all the other firms. Unlike actual complex labour, however, firm A's workers will only be paid the normal wage for the industry.

But, Marx points out in discussing international wages that this situation applies also to the different levels of productivity of different countries resulting from the different degrees of development of their productive forces. The consequence is, he says to create a modification of the Law of Value, so that in the same way as above, an hour of labour in one country produces more value than an hour of labour in some other country, where labour productivity is lower.

“In every country there is a certain average intensity of labour below which the labour for the production of a commodity requires more than the socially necessary time, and therefore does not reckon as labour of normal quality. Only a degree of intensity above the national average affects, in a given country, the measure of value by the mere duration of the working-time. This is not the case on the universal market, whose integral parts are the individual countries. The average intensity of labour changes from country to country; here it is greater, there less. These national averages form a scale, whose unit of measure is the average unit of universal labour. The more intense national labour, therefore, as compared with the less intense, produces in the same time more value, which expresses itself in more money. 

But the law of value in its international application is yet more modified by the fact that on the world-market the more productive national labour reckons also as the more intense, so long as the more productive nation is not compelled by competition to lower the selling price of its commodities to the level of their value. 

In proportion as capitalist production is developed in a country, in the same proportion do the national intensity and productivity of labour there rise above the international level. The different quantities of commodities of the same kind, produced in different countries in the same working-time, have, therefore, unequal international values, which are expressed in different prices, i.e., in sums of money varying according to international values.” 


It is, in fact, as Marx points out there, the very fact that the more productive labour in one country acts as though it were complex labour, compared to the labour in the less productive country, that enables wages in the former to be higher than in the latter, and yet for the former to still be more competitive. The fact, that the labour is more productive in the former, does not mean, however, as Carey believed, that wages were proportionately higher or lower depending upon the level of productivity. Capitalists in the former country are able to pay higher wages, and provide a higher living standard for their workers, and yet still extract a larger volume of relative surplus value, precisely by not passing on the full benefit of the higher productivity to their workers. It was precisely on this basis that during much of the 20th. Century, Fordism acted to increase productivity, raise workers real wages, and yet still extract an every increasing amount of relative surplus-value.

If we proceed on the basis of what Marx says in Volume I, we arrive at a completely different conclusion to that he describes in Volume III.

He sets out that in the one case the capital is comprised 80 c + 20 v, and in the other 20 c + 80 v. In the former country a total of 40 hours of labour processes £80 of constant capital. In the latter, 120 hours of labour process just £20 of constant capital. On that basis 1 hour of labour in the first country processes 12 times as much constant capital as an hour of labour in the second. On a purely value basis then, labour in the first country is 12 times as productive as that in the latter. But, this underestimates the difference. As Marx repeatedly points out, as the technical composition of capital rises, the organic composition rises but not in the same proportion, because the constant capital becomes cheaper, it is used more efficiently, and fewer better machines replace a larger number of less efficient machines.

But, let us proceed on the basis that labour in the former country is just 12 times more productive than in the latter, and that, therefore, on the basis of what Marx sets out in Volume I, the value of an hour's labour in country 1 is equal to 12 hour's of labour in country 2. In that case what we would actually have is.

Country 1

c 80 + v 20 + s 460 = 560, s' = 2300%, r' = 460%

Country 2

c 20 + v 80 + s 40 = 140, s' = 50%, r' = 40%.

So, in other words, the workers in Country 1 undertake 40 hours of labour, but because the value of an hour's labour for country 1 is equal to 12 hour's of labour in country 2, this 40 hours creates a value equivalent to 480 hours of labour in Country 2.

If the workers in Country 1 were only paid the value of their labour-power they would be paid £20, which, as with the example Marx gives, of the firm that enjoys the advantage of being the first to introduce a machine, means that the capitalists in Country 1 would make an even greater rate of surplus value.

In fact, the consequence would likely be that workers in Country 1 would seek improvements in their real wages, which is why workers in these countries tend to have higher living standards.

Sunday, 29 September 2013

Liberal-Tories – Desperate and Desolate

Campo, Osborne and Cleggy.  Last of the Summer Whine.  They
 are desperate to win votes, and desolate of ideas. 
The decision of David Cameron to bring forward stage 2 of the help to buy scam by three months to next week, is an indication of just how desperate the Liberal-Tories are to shore up their flagging support, and just how desolate of ideas for doing so, and for growing the economy, they are. The Liberal-Tories now seem prepared to go to almost any length in ruining the economy, just so long as it may win them a few extra votes. Its a strategy that can only end in economic and political disaster. The good thing about them bringing forward the second stage of the Help to Buy Votes scam, is that it thereby brings forward that disaster.

Over the last few weeks, there has been a marked change in the sentiments expressed in the business media. Until then, the talk was about rising house prices being a sign of recovering confidence, and the basis upon which the economy might begin to recover, as consumers, with this new confidence, went out to buy more goods etc. But, in the last few weeks, the business media have instead begun to talk not of rising house prices, but of an already existing house price bubble. The difference in wording is important. Rising house prices have always been portrayed as providing a warm cosy feeling, whereas any mention of a bubble, has signified that trouble is on the way, and its time to take appropriate action.

And, the reality is that no one can deny that there is a bubble. The average London house price, is now more than ten times average household income, whereas the historic ratio is 3.9! That represents a massive bubble. Moreover, it hides an even worse situation. That historic ratio of 3.9 reflected the situation when the average household was made up of two wage earners. Even as late as 1971, married couples made up 70% of households, with single person households making up just 21%. Today, households made up of married, or co-habiting couples, comprise only 52% of households, whereas the number of single person households has rocketed to 41%.

Not, only does this doubling of the number of single person (including lone parent) households explain why it is that there is talk about a shortage of homes, when in fact, the number of houses per head of population is 50% higher today than it was in 1970, but, it also explains why it is harder for people to raise even minimal levels of deposits. It is obviously going to be more difficult for a single person household to raise the necessary deposit than for a two-person household. Furthermore, a house that is 3 times average household income might be affordable for a two-person household, but in real terms is twice as expensive to buy for a single person household. So, a more realistic figure for house prices to average household income would today then be more like 2 rather than 3.9. On that basis the average London house price is about five times the price it should, be.

The reason London prices have bubbled to these levels is complex, but a major factor is that large amounts of foreign money has come in to buy expensive properties, purely for speculation. Buyers are now touted for from all over the world, not for them to live in, but purely on the expectation that their empty apartment buildings will be worth more next year than they are today. But, of course, there have been no shortage of Russian, Chinese and other billionaires prepared to buy up multi-million pound properties to live in, for part of the year, either. Finally, despite the damage caused to the global financial system, and economy, by the bankers, the Liberal-Tories over the last few years have seen to it, that their friends in the City have continued to do well. The policy of easy money has meant that the bankers and investment managers have continued to obtain multi-million pound bonuses, and that has fed into buying up property at inflated prices.

Even the Bank of England, in its analysis, has concluded that it has only been the top 10% that have benefited from QE. QE has blown up asset price bubbles in property, shares and bonds, and it is the rich that are the biggest holders of these assets. At the same time, QE has pushed up inflation, and reduced the value of the pound. That has reduced the living standards of the other 90% whose wages have been frozen, or barely budged. It has reduced the living standards of all those pensioners, dependent on obtaining an income from their savings, which today receive an interest rate that is only a fraction of the rate of inflation. It has reduced the living standards of all those in rented accommodation in London, who with rising property prices also then face higher rents, and for whom the possibility of buying a house is made even more remote.

But, while the Liberal-Tories have blown up another huge property bubble in London, they have only just about managed to prevent the bubble in the rest of the country from busting. On CNBC the other day, one comment pointed out that in the North-West, house prices were falling, and that the Help to Buy scheme had caused a distortion. It meant that new build properties were being subsidised compare to existing houses up for sale. If there are two £100,000 houses, but one is a new house covered by HTB, then it is put in a privileged position compared to the other. The result has been the the price of the new house has risen slightly, but the price of the existing house has fallen, because the seller has to try to make up for the subsidy to the new house. Moreover, they pointed out, where people had come to sell houses, they had bought under HTB, this very fact meant that they were now left in a position that they could only sell the house for less than the price they had only recently paid for it !

The second stage of HTB, which provides a deposit guarantee for all house purchases up to £600,000 will avoid that. But, unlike Part 1, it is totally unrelated to any requirement for a new house to be built. It will lead to not one single new house being built, and will simply be a means of inflating an already massive house price bubble even further. But, even that is likely to be uneven. If you have the resources, then you might be able to take advantage of this scam, and that means that the main place where it will be taken up, and where it will inflate the bubble further, is again in London. But, as Will Hutton pointed out recently, in most of the rest of the country, people still see no prospect of more jobs, certainly not more decent jobs, nor of their living standards rising. Many are already over burdened with student debt, and credit card debt etc. The chance that huge numbers of people in such circumstances will be bribed into buying houses through this scam outside London is probably remote.

If they have any sense they will not. The Liberal-Tories desperate attempt to keep the property price bubble inflated looks like a last gasp of a drowning man. They may entice a few more potential buyers into a market that is already way past its sell by date, but after that the game seems certain to be up. The only gambit they would have left after this would be to get the Bank of England to print even billions more pounds, and then simply give it away to anyone who would be prepared to pauperise themselves by purchasing massively overpriced houses which inevitably will collapse in price.

Its a bit like the way stores push up the price of things so that they can reduce them in the sales. Anyone who buys a house at the current inflated prices must have more money than sense, and they will end up being separated from it, as prices collapse. The Liberal-Tory policy might pull in a few more suckers before that happens, but the policy is fatally flawed, just as was the same policy adopted in the US via Freddie Mac and Fannie May, which resulted in the sub-prime crisis of 2008.

The Liberal-Tories have gone from telling us that their raison d'etre was to deal with the level of debt, to a situation where they are blowing up the biggest debt bubble in history, along with their US equivalents. Moreover, the Liberal-Tories clearly know that that is what they are doing. George Osborne has passed responsibility for the effects of HTB to the Bank of England. But, he has made sure that they can only look at whether it has caused a bubble once a year, starting a year from now!!!! The world is heading for the biggest financial crisis in its history that will make 2008 look mild. The Liberal-Tory policies are part of creating that crisis. Bringing forward the second stage of HTB brings forward the day when that crash happens. The consequences are likely to ensure not only that the Liberal-Tories do not win the 2015 election, but that they do not win another election for many generations to come.

Thursday, 26 September 2013

Paul Mason – A Northern Soul

A couple of years ago, Paul Mason contacted me to point out that we shared two passions – Political Economy, and Northern Soul. So I was keen to watch his documentary about the latter on BBC's  Culture Show  last night. I wasn't disappointed.

There have been several documentaries about Northern over the years, many of them by the same talking heads that have done programmes about a past most of them are too young actually to have been a part of, or to have known much about. That was what was different about Paul's. Though he's not as old as me, and some of the older generation that started at the Wheel, Torch, Catacombs, Dungeons, Up The Junction and so on, back in the 60's, he was part of that Casino generation, when if anything, Northern was at its peak, and he was, like me, part of that generation as a young, working-class man, fully immersed in the music, the dancing and the culture. In fact, what came out for me, watching Paul puffing and sweating, having pulled off a few decent spins – that I reckon he'd be practising for some time before filming, else he did a bloody good job for someone who says they haven't done any for 30 years – and a valiant attempt at a back drop, was that as much as anything, this film seemed to be about him reconnecting with his youth. For those of us, who were there back then, the time in between does not matter. As soon as you hear the first few opening bars, of some decent dancer, as soon as your feet touch that dance floor, you ARE 16 or 17 again.

It would be good to see a real in depth documentary about Northern, going back to the roots in the 1960's, because far too much has centred around the heyday of the Casino. It would be good to go back and interview people about how clubs like the Torch emerged from being Mod clubs, and so on. A year ago, I started writing a novel that sets that time as the background, and I keep coming back to it, when I have time. But, in terms of what it set out to do, this was a good documentary.

There were one or two things I'd disagree with though. For example, about where the actual dance style came from. One contributor said she thought it was from Bruce Lee. I can see what she means, but its wrong. We were doing all this stuff back in the 1960's at the Torch, and similar stuff before that at the Twisted Wheel. The Bruce Lee phenomena didn't arise until the mid 1970's. That was when all the Kung Fu, clubs started to be set up. Before that all martial arts in Britain were focussed on karate and judo, with a bit of aikido. 

In fact, I picked up one of my main steps back in the 60's from one of the girls who worked in the cloakroom at the Torch. One night I saw her dancing round, looking like she had rubber legs. I couldn't work out how she was doing what she was doing. After watching for some time, I had to ask. In nearly every dance step, it involves moving one foot, and then the other with some kind of beat and rhythm dictating the pace of each – for example slow, slow, quick, quick slow. But, the secret to what she was doing was that both feet moved at the same time. They changed place almost through a jump. In fact, later many people exaggerated precisely that aspect of the move.

Once you'd got the grasp of that you could dance at virtually any pace you liked. No matter how fast the record, provided you had the stamina, and your legs would move fast enough you could keep pace. In fact, one night when I was having a dance off at the Top Rank with another dancer, the DJ put the record on at fast speed, and both of us just kept going! But, one you'd got the grasp of the step, you could ad lib all sorts of other steps into it, you could change direction at will, you could throw in foot slides, spins, reverse spins, as well as all the back drops etc.



But, I picked up lots of steps simply from watching old films with classic dancers like Gene Kelly, Donald O'Connor, and especially all the black jazz dancers like the Nicholas Brothers. Pretty much all the moves are contained in what is still the best dance sequence in any film provided by the latter.

There were lots of other sources. Lots of the moves, including the back drops, spins, slides and so on were developed by Jackie Wilson. In fact, Michael Jackson, said most of his dancing had been learned from watching Jackie. But, you only have to think about all of the dances that come from Northern classics. I'm sure I'll miss some, but just off the top of my head:

Temptation Walk, The Duck (Jackie Lee)

Slow Fizz (Sapphires)

Cool Jerk (Three Caps)

Humphrey Stomp (Earl Harrison)

Uncle Willie (Astors)

Barefootin (Robert Parker)

The SWIM (Bobby Freeman)

Monkey (Major Lance)

The 45 (Sharpees)

The '81 (Candy and the Kisses)

and so on.

All of these had bits that were picked up and ad libbed to a developing style. But a lot had to do with where the music came from that was picked up in Britain in the 1960's. It was largely black US, servicemen, stationed in Britain, who brought it with them. Some of them even were singers and musicians who performed here in clubs while they were stationed. That's one reason why some of the music that was picked up was not even mainstream Motown. Along with the music went a history of dance steps going back some time.

The basic steps for Northern dances can be traced back to the Lindyhoppers, jitterbuggers, and jivers, though where these often danced as couples, in Northern the individual elaborations took full flight. As well as in the moves of people like Jackie Wilson, and to some extent James Brown, many of the steps, and certainly things like the back drops can be seen in the 1960's in the stage performances of people like Sam and Dave. But, like every phenomena it developed according to its own dynamic from those roots.

Anyway, whatever it was, it was great, and continues to be great as Paul showed in his film. Today, Northern has become once again a global phenomenon, with clubs all over the world, attracting a new generation of devotees. Its perhaps not surprising that both my sons are into it, but after my youngest son worked as camera crew on the Northern Soul film “Soul Boy”, filmed in Stoke, a number of his friends have also got into it, whose parents never were.

I hope Paul is encouraged to renew his membership of the Northern Soul Church. Keep The Faith.

Capital II, Chapter 8 - Part 1

Fixed Capital and Circulating Capital


1) Distinctions of Form


Fixed capital loses a portion of its use value, as a consequence of wear and tear. In the same proportion, it transfers value, as constant capital, to the product it helps create. The proportion of its use value lost, and the proportion of its value transferred to the product, is calculated as an average. A machine that lasts, on average, ten years before it has to be replaced, loses a tenth of its use value, on average, each year, and transfers a tenth of its value, each year, to the products it helps create.

The products, created by the instruments of labour, leave the sphere of production as commodities and enter the sphere of circulation. A part of the value of the instruments of labour is embodied in them, but the instruments of labour themselves never leave the sphere of production.

“Their function holds them there. A portion of the advanced capital-value becomes fixed in this form determined by the function of the instruments of labour in the process. In the performance of this function, and thus by the wear and tear of the instruments of labour, a part of their value passes on to the product, while the other remains fixed in the instruments of labour and thus in the process of production. The value fixed in this way decreases steadily, until the instrument of labour is worn out, its value having been distributed during a shorter or longer period over a mass of products originating from a series of constantly repeated labour-processes. But so long as they are still effective as instruments of labour and need not yet be replaced by new ones of the same kind, a certain amount of constant capital-value remains fixed in them, while the other part of the value originally fixed in them is transferred to the product and therefore circulates as a component part of the commodity-supply. The longer an instrument lasts, the slower it wears out, the longer will its constant capital-value remain fixed in this use-form. But whatever may be its durability, the proportion in which it yields value is always inverse to the entire time it functions. If of two machines of equal value one wears out in five years and the other in ten, then the first yields twice as much value in the same time as the second.” (p 161)

In a sense, all capital is circulating capital. It is just that the total value of fixed capital takes much longer to circulate. Only a portion of it circulates at a time. A machine that lasts ten years will circulate a tenth of its value each year, so that after ten years, all of its value will have been circulated, i.e. each year, a tenth of its value will have entered the value of the commodity, which will then have been converted into money, C-M, which is the equivalent to a tenth of the value of the machine, and so can be used to reproduce it. 

But, unlike raw material, which enters bodily into the commodity, it is not the use value of the machine that enters the commodity, but only the value. The machine can only continue to function, indeed, if it remains fully intact.

“It is this peculiarity which gives to this portion of constant capital the form of fixed capital. All the other material parts of capital advanced in the process of production form by way of contrast the circulating, or fluid, capital.” (p 161)

Back To Chapter 7

Forward To Part 2

Tuesday, 24 September 2013

Capital II, Chapter 7

The Turnover Time and the Number of Turnovers

The entire turnover period of capital is the total of the time of production and time of circulation. The objective of this process, under capitalism, is not the production of commodities, of items of consumption, but of surplus value, the self-expansion of the capital. Once capitalist production has commenced, it does not just reproduce what it has consumed, in the productive process, but must also reproduce capital i.e. reproduce the very need to expand.

In the three circuits of capital, this self-expansion is manifest, in the circuit of money-capital, M – M'. It is manifest in the final term, but also in the expansion of this circuit to show that surplus value has been created. In the circuit of productive capital, P...P, it is again manifest in the expansion of that circuit, to illustrate the production of surplus value. But, neither of these circuits demonstrate that this expansion is more than a potential. In M – M', we do not know what happens to M. The capitalist could shut up shop. In P...P, we know that M has been reinvested to buy P, but again there is no reason that the second P should represent more capital than the first. However, in the circuit of commodity capital, C' – C', we have from the beginning a statement that the advanced capital has been expanded. Whether or not the surplus-value arising from that is consumed or accumulated, the second term also indicates that capital has expanded.

“If the process is renewed on the same scale, M is again the starting-point and m does not enter into it, but shows merely that M has self-expanded as capital and hence created a surplus-value, m, but cast it off. In the form P ... P capital-value P advanced in the form of elements of production is likewise the starting-point. This form includes its self-expansion. If simple reproduction takes place, the same capital-value renews the same process in the same form P. If accumulation takes place, then P' (equal in magnitude of value to M', equal to C') reopens the process as an expanded capital-value. But the process begins again with the advanced capital-value in its initial form, although with a greater capital-value than before. In form III, on the contrary, the capital-value does not begin the process as an advance, but as a value already expanded, as the aggregate wealth existing in the form of commodities, of which the advanced capital-value is but a part.” (p 157)

However, for this reason, this third circuit is no use for analysing the turnover of capital. The first circuit, M – M', is useful in certain conditions, and where the value of the money-capital is held constant. But, where that is not the case, and, therefore, for analysing things such as the rate of profit, it is the second circuit P...P, which is relevant, because it is based upon the value of the advanced capital in its commodity form, as productive capital, and it is that which has to be physically reproduced. The circuit M – M', in that context, is only relevant in respect of analysing newly invested capital – including that arising from surplus value i.e. of accumulation.

“Of the circuits I and II, the former is of service in a study primarily of the influence of the turnover on the formation of surplus-value and the latter in a study of its influence on the creation of the product.” (p 157)

In general, economists have viewed things only through the lens of the circuit M – C - M'. That is because it is on that basis that individual capitalists have calculated their specific profits.

The problem here of that, as Marx says, M – C - M' only provides a potential for the reproduction of the capital. As stated, there is no reason why the money-capital here reproduced would be invested. The capitalist could simply take all their money and spend it. But, that would be to present a view of capital alien to its nature, as self-expanding value. The whole point of the circuit of productive-capital, P...P, is that it illustrates the true nature of industrial capital, and its need to continually reproduce itself i.e. to continually reproduce its physical components, in the form of the various commodities – machines, raw materials, labour-power etc. - whether it does so only at the level of simple reproduction, or of expanded reproduction.

Its in this context, of the need during the year, to be continually reproducing these commodities, as they are consumed, in the production process, that makes the analysis of the rate of turnover of this capital important.

“Just as the working day is the natural unit for measuring the function of labour-power, so the year is the natural unit for measuring the turnovers of functioning capital. The natural basis of this unit is the circumstance that the most important crops of the temperate zone, which is the mother country of capitalist production, are annual products. If we designate the year as the unit of measure of the turnover time by T, the time of turnover of a given capital by t, and the number of its turnovers by n, then n = T/t. If, for instance, the time of turnover t is 3 months, then n is equal to 12/3, or 4; capital is turned over four times per year. If t = 18 months, then n = 12/18 = ⅔, or capital completes only two-thirds of its turnover in one year. If its time of turnover is several years, it is computed in multiples of one year. 

From the point of view of the capitalist, the time of turnover of his capital is the time for which he must advance his capital in order to create surplus-value with it and receive it back in its original shape.” (p 159)

Back To Chapter 6

Forward To Chapter 8

Back To Volume II Index

Sunday, 22 September 2013

Financial Armageddon

"If the banks are shutting their doors, and the cash points aren't working, and people go to Tesco and their cards aren't being accepted, the whole thing will just explode.

"If you can't buy food or petrol or medicine for your kids, people will just start breaking the windows and helping themselves.

"And as soon as people see that on TV, that's the end, because everyone will think that's OK now, that's just what we all have to do. It'll be anarchy. That's what could happen tomorrow."

Gordon Brown, quoted by Damian McBride, as he relates how Gordon Brown considered putting troops on the streets in 2008.

This is the latest bit of information that illustrates just how fragile the global financial system has become after 30 years of money printing, and the inflating of one asset price bubble after another. It provides another glimpse into just why central banks continue to keep those asset price bubbles inflated, by continuing with the policy of money printing on an ever larger scale. It illustrates why Ben Bernanke pulled back from even just reducing the amount of money printing he was doing, for fear that it would cause a meltdown in financial markets.

Back in 2002, Gordon Brown sold nearly 400 tonnes of Britain's gold reserves. He did so at a time when the price of gold was rising, having been in a 20 year bear market. At the time, it was obvious that the price of gold had hit rock bottom, and was starting to rise. Brown sold the gold at prices between, $256 and $296 an ounce. The low price for gold came in 1999, at $250 an ounce, and from 1999, gold, like other metals and raw materials, saw its price rise relentlessly, as the new global, long wave boom got under way. By September 2011, gold had hit its peak of $1943 an ounce, or almost 7 times the average price Brown had sold it for. The Liberal-Tories have liked to portray this as just an example of Brown's economic incompetence. It was far from that. In fact, Thomas Pascoe argued, in this Daily Telegraph article last year, that it was part of a necessary conspiracy to protect the banks, whose speculative activities were already threatening to throw the world financial system into chaos, at that time, a chaos that erupted anyway, in 2008, and from which we are still suffering today.

As Pascoe sets out, a number of very large banks had made big, short bets against gold, bets that were going bad, as the price of gold began to soar. Because many of these short bets are undertaken using leverage, i.e. the bank or other speculator borrows huge amounts of money to finance the trade, in the expectation that they can close out their position at a profit, before they need to make good on their margin call, a number of these banks were threatened with bankruptcy. 

This was the problem these banks faced with gold. For years, after 1980, the price of gold had gone in only one direction – down. The general view of financial analysts was that gold was an historical relic. Unlike even silver, it had few industrial uses. It was used for jewellery, and not much else. Global trade was financed now by dollars not gold. Unlike shares, or bonds, or even a cash deposit, gold paid no dividend or interest. Therefore, if you were going to hold it, it could only be if its value was going to rise to give you capital gain, but given the aforesaid, why would it. No wonder its price had kept falling for 20 years. It was a one way bet, and speculators love one way bets. It is what provides the basis of the kind of carry trade that Pascoe describes.

So, it is not surprising that these banks had exposed themselves, to such a massive degree, in short gold positions. Remember that this is not long after Long Term Capital Management, in the United States, had gone bust, and had to be bailed out, by other banks, to the tune of $3.6 billion. It too was supposed to have developed an infallible algorithm for making money. It was also not long after the Asian Currency Crisis, and the Ruble Crisis, and slap bang in the middle of this process came the Stock Market crash of 2000, that wiped 75% off the value of the NASDAQ index. Just before that crash, as happens now with property, there were no end of analysts, newspaper column writers and others, who claimed that the market could only ever go up, because this time it was different from every other bubble! 

No wonder governments and central banks were worried. No wonder they decided to engage in some market manipulation, to ensure the banks did not go down. In fact, such manipulation and intervention is nothing new. In Hong Kong, the state has for many years directly intervened in both the stock and bond markets, buying shares when the stock market looked like it was going to fall sharply. The US Federal Reserve and Treasury deny that they do the same, and its probably illegal for them to do so, but many rumours abound that they do on a regular basis, coming in at the end of the trading day, when they can have most effect, for example. And, in the last few years, there has been no doubt that the US Federal Reserve and Bank of England, as well as other Central Banks have directly intervened in the market. That is what Quantitative Easing is. In fact, the Bank of England, and Federal Reserve, have intervened so much, that both own around 30% of the total debt, issued by their respective governments, and buy up around half of the newly issued debt. 

The Central Banks are now like a hamster on a treadmill. They have now pumped so much money into circulation that unless they continue to do so the financial system will implode, because as soon as the amount of money printing is even slowed down, money will fly out of those bonds that the central banks have been buying, yields on those bonds will rise, but also the money prices of other financial assets will collapse. It is money printing that has bubbled up the price of property, and shares for, example. But, as with the situation in respect of gold, the banks balance sheets themselves depend on these asset prices continuing at these inflated prices.

When, a bank makes a loan, for example a mortgage. That appears in its books as an asset. The person who has taken out the loan is a debtor to the bank. But, the value of this asset depends on the likelihood of the debtor actually repaying the loan. Ultimately, the value depends upon the value of the collateral the debtor puts up for the loan, such as a house. But, as was seen in the US, in Ireland, in Spain etc. where house prices are in a massive bubble, this flatters the financial position of the banks. All of these hugely inflated properties, make it look as though the bank has substantial assets. On the back of that apparently solid and solvent position, the bank is then able to make even more, even larger loans. But, when that property bubble bursts, and when lots of the people who have taken out those loans start to default, the real value of the banks' assets becomes revealed.

As the banks try to sell off the property that acted as collateral for the loans, that situation is even more clearly revealed. Large amounts of property dumped on the market results in all property prices collapsing in a firesale. If the property on the banks' books is valued at this market value – marked to market – rather than at its paper value as established when the loan was made – marked to book – it becomes apparent that the banks are insolvent. The more the banks assets are devalued, the less the bank is entitled to lend. Banks have to pull in large amounts of their loans, which means even more people are unable to pay. The sharp contraction of money-supply results in interest rates spiking, as a credit crunch develops.

At this point, the kind of situation described by Gordon Brown develops. That indeed is what happened in 2008. But, as I set out - Lehman's Plus Five – the situation today is far worse than in 2008, precisely because instead of dealing with the underlying problem, money printing has been used as an alternative, and it has simply exacerbated all of the problems of 2008 as a result.

Back in 2007, central banks had started to try to rein in the money printing, as I set out at the time – Buy Gold and Baked Beans. But, as soon as they did it resulted in the credit crunch that caused Northern Rock to collapse. But, having started injecting money into the system again, even in 2008, the main concern ahead of the financial meltdown was rising inflation as I discussed – at the time. And, in fact, even after the financial meltdown, Britain has continued to have inflation way above the 2% target set for the Bank of England. For a considerable part of that time, it has had inflation of more than double the 2% target! It is only the nature of the US economy, for example, the fact that it produces all its own food, and much of its energy requirements, which has prevented the US from suffering a similar fate. 

But, in 2008, the US Federal Funds Rate, the official interest rate, stood at 6%, compared with 0.25% today. In February 2008, the UK Bank of England Base Rate stood at 5.25%, compared with 0.5% today. When the financial meltdown struck later that year, these official interest rates could then be lowered, but at current rates, no such possibility now exists, and with money printing already on a massive scale, the central banks are essentially out of bullets, when the next financial meltdown strikes, and given that the underlying problems of 2008 have been exacerbated rather than dealt with, strike it most certainly will.

Gordon Brown, was right to be concerned about anarchy on the streets if the financial system did completely collapse. The scenario he depicted did play out, for example in Cyprus earlier this year, when its banking system collapsed. But, the summer riots of 2011, showed just how, images on the screen of such anarchy, can quickly turn into a generalisation of such action. Its no wonder the central banks are doing all in their power to keep asset price bubbles inflated.

A look at how quickly things can deteriorate is shown by Cyprus, as well as by Greece. And Greece shows, for those foolish enough on the Left to think that such a crisis might be beneficial to them, that the main beneficiaries of such situations are usually the fascists like Golden Dawn. In Cyprus workers savings were confiscated, and their pensions nationalised. Having first said they would not do it, the EU has now set into law the right to confiscate workers savings when banks go bust, alongside the capital of the banks' bond and shareholders.

At the moment, they promise not to touch workers savings below €10,000, but the experience of Cyprus shows that if a crisis like 2008 breaks out, let alone one that is worse, the deposit guarantee for saving will almost certainly be abrogated. In fact, savings such as those in Britain's National Savings and Investment system, which theoretically have a 100% guarantee, would be easy pickings for a government desperate to raise cash. At the very least, as with the introduction of capital controls in Cyprus, the Government would be likely to prevent or place limits on the withdrawal of such funds.

Being able to make decisions to protect yourself in such situations is almost impossible. You could take all your money out of the banks etc. and stuff it under your mattress, but that is practically impossible, for security reasons, and because your house insurance would go through the roof. But, in any case, in the past, in such situations, Governments have issued new currency, so any you had under the mattress would become worthless. As interest rates rocket, and people can't afford to pay their mortgages, the banks foreclose on increasingly worthless property, causing further turmoil. Holding gold is no solution if there is large scale deflation arising from a collapse of asset prices, and in any case, government's have frequently made it illegal to hold gold.



No solutions exist on an individual basis to such situations. In Spain, where people have faced eviction, communities have banded together to resist the banks. As unemployment has risen, people have returned to their families in the countryside, where at least they can grow their own food. But, if financial armageddon strikes on the scale I think is likely, and that is suggested by Gordon Brown's fears in 2008, collective solutions by workers on a far larger scale will be required.

When the banks in Ireland were collapsing, I suggested that their workers should take them over. The workers should take no responsibility for the debts of the banks run up by their capitalist owners, and the shareholders and bondholders in the banks should lose their money. They failed to exercise control over the banks' management as they undertook reckless lending over the last 30 years. Workers should demand that the state guarantee the deposits of savers in those banks. It not only failed to properly regulate those banks' activity over the last 30 years, but its policy of money printing encouraged them to make reckless loans, as part of the attempt in the US and UK, at least, to create a low-wage/high debt economy.

Workers in those banks should come together across Europe, to create a worker owned, co-operative bank, as part of a Europe wide co-operative federation, able to assist workers in taking over their firms when the capitalist owners go bust, as well as in helping workers to set up new vibrant worker owned and controlled businesses, as an alternative to the failed capitalist model. The decision of UNISON to set up Credit Unions is a step in the right direction. But, we need much more from Trades Unions in this direction, as with the decision of the biggest US union the United Steel Workers to join with the Mondragon Co-ops to spread workers co-ops across North America – United Steel Workers.

In fact, if UNISON and other unions in Britain followed this kind of model, they could offer workers in Britain, such as those facing attacks in the NHS, with a real alternative model to both the failed private capitalist and state capitalists models, as well, in the case of the NHS, as providing workers in general with a better alternative to a healthcare system that day after day is shown to be unfit for purpose. Not only has it been shown to treat our elderly people atrociously, not only does it have waiting times that are unheard of in socialised healthcare systems in Europe etc. but as Channel 4 News showed recently you are far more likely to die in an NHS hospital than in a hospital in the US or many other countries – Channel4 News.

There is no more chance that the capitalist state will provide adequately for workers than there is that private capital will do so. We have to build our own worker owned and controlled alternative.

Saturday, 21 September 2013

Lehman's Plus Five - Part 8

In fact, rather than carry through the original policy of nationalising and recapitalising the banks, states have avoided that task and instead used repeated doses of liquidity. How does that work? Banks need to be recapitalised, because over 40 years they have lent money recklessly, a large proportion of which they may not get back. The additional capital is required to cover the potential losses from those defaults. But, the amount of capital required for that is in reality huge, because the real figure requires that the collateral – property, bonds, shares – that stand behind the banks loans be properly valued. In the US, property prices fell by up to 60%, the same is true in Ireland. In Spain property prices have also fallen by around 50%. If the property on banks balance sheets was valued to reflect the likelihood that it is only worth these kinds of figure, and probably even less, then the banks would be seen to be massively insolvent. The fact, that Deutsche Bank with massive exposure to European property debt, has covered its debt via complex derivatives estimated to be equal to the entire global GDP, gives some idea of the extent to which such recapitalisation would be required.

That is probably never going to happen. But, if it were, if there were a demand for additional capital to make good the hole in the Financial system, imagine the rate of interest that would be required to encourage the phenomenal supply of money-capital to meet this demand! It is for that reason that central banks have instead simply continued to print money for the last five years. In fact, the money printing by the US Federal Reserve is greater today than it was at the height of the crisis in 2008! It is why, as over past weeks, global bond rates have continued to rise, and stock markets have panicked at the prospect of even a slow down in US money printing, and Ben Bernanke baulked at even the most modest tapering of QE – Why Ben Bernanke Baulked.

But, Bernanke has only delayed the inevitable, and possibly made it even worse. The markets had been prepared for the beginning of tapering. In the day before the Fed decision, US 10 Year Yields had even pulled back slightly from 3% to 2.8%. Now, they will have to go through all of that preparation again. The dollar fell, and gold soared, as fears of inflation were raised. Stock markets soared, but then today US markets have fallen back. Moreover, just as has happened with his UK counterpart, Mark Carney, and as happened in Japan a few months ago, the announcement designed to push yields down, hasn't worked anyway. UK rates had pulled back slightly, but are rising again to the 3% level, German Bunds are also about to go back above 2%, and the US 10 year which had fallen as low as 2.65% is back up near 2.8%, where it started yesterday.

Whatever, central bankers do, interest rates and inflation are moving higher. That will cause a crash in the bond market, followed by a crash in the property market, quickly followed by a collapse of the banks and stock markets. That will be the real resolution of the contradictions created in the financial markets over the last 40 years. It is, however, from the perspective of capital in general the necessary resolution of 40 years of contradictions that money printing has built up within the system. The actions of central banks is now and for the last 30 years has been based upon meeting the needs of money-capital, as opposed to the interests of industrial-capital. That is not surprising central bankers are themselves bankers after all! That policy has been made possible because it was in tune with the ideology of right-wing, populist governments whose membership and electoral base is within the nationally based, small capitalists, who themselves rely on that early 19th century mentality of extraction of absolute surplus value, via the creation of a low wage/high debt economy. That model has now definitively hit the buffers. Wages and conditions in developed economies cannot be screwed down to Chinese, Indian and Vietnamese levels, and when you arrive at the stage where large numbers of workers rely on Pay Day loans at 4000% rates, and when even sections of the middle class are resorting to borrowing from pawn brokers, you know that the limits of loading families with debt has gone as far as its going to go.

The debt can only be repaid out of income, and that requires the production of real wealth. The extortions of money-capital from industrial-capital are an impediment to that. As Marx put it,

"As regards the fall in the purely nominal capital, State bonds, shares etc.—in so far as it does not lead to the bankruptcy of the state or of the share company, or to the complete stoppage of reproduction through undermining the credit of the industrial capitalists who hold such securities—it amounts only to the transfer of wealth from one hand to another and will, on the whole, act favourably upon reproduction, since the parvenus into whose hands these stocks or shares fall cheaply, are mostly more enterprising than their former owners.” (TOSV2 p 496)

Northern Soul Classics - Change Your Ways - Willie Kendrick

Northern soul, groovin at the go-go and then some.  Willie Kendrick was also part of the Just Brothers line up, who brought us Sliced Tomatoes among other classics.

Friday, 20 September 2013

Lehman's Plus Five - Part 7

In 2008, in the aftermath of the financial meltdown, we were told that part of the problem was that the banks were too big too fail. Yet, after a flurry of proposals for breaking up the banks etc., what we have seen is that the banks have become even bigger. Why would anyone be surprised at that? 150 years ago, Marx explained the process, by which capital naturally becomes more concentrated, and more centralised. The smaller capitals go bust, whenever there is a crisis, and the bigger capitals swallow them up. In fact, far from breaking up the banks, as the financial meltdown unfolded, states encouraged that process of consolidation.

But, in that process what we have seen is that the remaining banks simply increased their own insolvency, because they took over the insolvent position of the banks that had gone bust, which simply aggravated their own underlying insolvency. The clearest examples of that have been in Ireland, Spain, Portugal and Greece, but the same situation applies to banks across Europe and North America. Many of the banks in China are probably also insolvent, not only because of their exposure to western financial assets and property, but also because of their loans to large numbers of Chinese businesses that are insolvent. But, the Chinese banks are owned by the state, and behind the state stands huge financial resources.

In Spain, the state reorganised the banks from above. A range of regional banks, cajas, that had made reckless property loans, were taken over by other banks, and some were grouped together in Bankia, as a state backed bad bank. But, even since it was established, the shares in Bankia have dropped by a staggering 90%! Shares in other Spanish banks have dropped significantly, but despite a 50% drop in Spanish property prices, the value of property on these banks books continues at inflated levels. Without that, the remaining banks would be seen to be insolvent. The latest estimates even out of Spain, suggest that Spanish property prices need to fall by a further 30%, others put the figure at 50%.

In Britain, the same situation can be seen with what has happened with the Co-op and with Nationwide. The Co-op Bank has effectively been bust, because of its merger with Britannia, which had made reckless property loans, along with all the other banks and building societies. Nationwide seems to be in a similar position. But, that situation can be repeated certainly across Europe and North America. The global financial system is floating on a sea of liquidity that simply hides the fact that it is insolvent.

Back in 2008, I wrote,

“The problem that could arise given the scale is that the same causes of breakdown of trust and relations between Banks, which led to the Crunch could simply be transferred to the relations between States now acting as banks. We have already seen that to some extent. It was seen over the actions of the Dutch, Belgian and Luxembourg governments over Fortis. It was seen in the scramble for advantage when Ireland stepped in to guarantee all Bank deposits, threatening a stampede out of deposits in other EU countries. Most classically, it has been seen in the conflict between Britain and Iceland over deposits in Icelandic banks, and which was reminiscent of the 1970’s Cod War. It is certainly the case that some of these banks such as UBS of Switzerland have Balance Sheets bigger than the GDP of their host nations.” 


In many instances, states have come in to stand behind banks. Banks in the US and UK were essentially nationalised, and recapitalised. That happened in Ireland too, which then undermined the finances of the state itself. The state has also nationalised banks in Europe, like Dexia, and the problem identified of banks with bigger balance sheets than the GDP of the host country played out in Cyprus. But, as I've set out elsewhere, that particular problem is far greater in relation to Luxembourg, and it applies to many other smaller economies throughout the EU.

Thursday, 19 September 2013

Why Ben Bernanke Baulked

Let's be clear, QE has nothing to do with stimulating the economy. The purpose of QE is to protect the banks. The reason Ben Bernanke baulked from tapering is not because of concern that the economy could not take it, but that the global financial system cannot take it. Central Banks are protecting the banking system at the expense of the real economy.

The initial QE, introduced as the Financial Meltdown threatened to bring the global circulation of commodities to a grinding halt was a rational measure. The Credit Crunch threatened to turn a financial crisis into an economic crisis. It was a similar situation to that described by Marx and Engels in Capital III, in relation to the financial crises of 1847 and 1857, that were caused by the Bank Act of 1844, which prevented the necessary liquidity entering into circulation.

“By such artificial intensification of demand for money accommodation, that is, for means of payment at the decisive moment, and the simultaneous restriction of the supply the Bank Act drives the rate of interest to a hitherto unknown height during a crisis. Hence, instead of eliminating crises, the Act, on the contrary, intensifies them to a point where either the entire industrial world must go to pieces, or else the Bank Act. Both on October 25, 1847, and on November 12, 1857, the crisis reached such a point; the government then lifted the restriction for the Bank in issuing notes by suspending the Act of 1844, and this sufficed in both cases to overcome the crisis. In 1847, the assurance that bank-notes would again be issued for first-class securities sufficed to bring to light the £4 to £5 million of hoarded notes and put them back into circulation; in 1857, the issue of notes exceeding the legal amount reached almost one million, but this lasted only for a very short time.”


The reason for the Credit Crunch in 2008, was that, over 40 years of easy credit, banks and financial institutions had overseen a huge rise in personal debt. In 1960, household debt in the UK accounted for just 15% of GDP, but by 2008 that had risen to 90%! A similar explosion of debt had occurred in the US. It was not bad bank legislation that caused this credit crunch as in 1847, but simply the fact that the orgy of debt had created an unstable condition, where unless the bubble continued to be inflated, it had to burst. Ever more inventive ways had been found to continue to inflate the bubble, by bringing in every more marginal buyers of property, shares and bonds. The introduction of derivatives such as mortgage backed securities, which bundled together the mortgages of people who were likely to default with the mortgage of those who would not, so as to spread the risk by getting investors to buy the overall bundle, were supposed to be one means of achieving that end.

But, as more and more of the mortgages within them became less secure, and as rising property prices made all of the mortgages ultimately less secure – because there was a bigger risk that at some point prices might fall – the more risky the derivatives became, which prompted the development of derivatives to bundle together other derivatives, or to provide insurance against such a default. The inevitable consequence of this Ponzi Scheme was that there comes a point where someone steps off the merry-go-round. Then as happens in a credit crunch, everyone wants to hoard cash in case they can't get any themselves. No bank wants to lend to any other, because none of them know what the real financial health of the others might be. So, interbank lending rates go through the roof. Money is drained from the system, which in turn prevents the circulation of commodities bringing economic activity itself to a halt.

So, as Marx and Engels stated in relation to 1847 and 1857, introducing liquidity is a sensible action. But, the introduction of that extra liquidity in 1847 and 1857 was a short term measure lasting only a few weeks. It is now five years since Lehman Brothers collapsed, and yet the Federal Reserve is introducing more liquidity into the system today than it was at the height of the crises in 2008!!!!

It has not been the introduction of all this money printing that has been responsible for what economic recovery there has been. The reason economies rebounded in 2009 in a typical “V” shaped recovery was the injection of large amounts of fiscal, not monetary stimulus. Similarly, despite large amounts of liquidity, introduced into peripheral Eurozone economies, via the ECB, economies in Greece, Spain, and Portugal have essentially gone into a 1930's style Depression. The reason for that is that additional liquidity pumped into these economies propped up the banks, but did nothing to stimulate economic activity. The introduction of fiscal austerity, is what sent them into their long downward slump. The same has been true in Britain, though with the scale of austerity much less, the Liberal-Tory Government have not yet succeeded in reducing Britain to the same dire state as the EU periphery. But give them time.

In the US, by contrast, the continued fiscal stimulus did result in an improvement of economic activity. The reason it has slowed currently is that the Republicans have limited the fiscal plans of the Democrats, and repeated political crises over the Debt Ceiling, Sequester and Budget have caused considerable uncertainty, that hinders investment decisions by US corporations. Nevertheless, if the effect of the sequester – estimated to knock around 4% off US GDP in a full year – is taken into consideration, US growth has continued to be reasonably strong, and employment growth has continued.

On CNBC last night, as the Federal reserve decision was announced, Chief Economics Reporter, Steve Liesman, visibly hung his head in his hands. “If the economy can't take even 2.8% interest rates”, he declared, “what can it take?” It isn't that Liesman doesn't believe that the economy can take 2.8% interest rates (the yield on the US 10 Year Treasury ahead of the Fed decision) but that he was expressing his puzzlement at why the Fed seemed to believe that was the case.

But, of course, the economy can take 2.8% interest rates, and more. What can't take 2.8% rates, as recent weeks has shown, is the US property market. Having started to rise by double digit percentages over the last year – mostly as a result of speculation – the rise in Bond Yields had brought it to a shuddering halt, as it fed through into mortgage rates. The Fed can't allow US property prices, or stock prices to fall significantly, because when they do, the US banks will be seen to be bankrupt. As with their European counterparts they only appear solvent, because their balance sheets are stuffed with fictitious capital, property, bonds and shares listed at totally unrealistic values.

In the last 6 months, despite the continued large scale money printing in the US, Japan, and Britain global interest rates have continued to rise. US, UK and German bond yields have doubled in the last six months. I've set out why that is elsewhere – The Rates Of Profit, Interest and Inflation. Bernanke made clear in his statement that the Fed had also had an eye on the effect of its policy in other parts of the globe. In Britain, George Osborne is doing all in his power to keep a house price bubble inflated, and even to inflate it further. He's doing so for the same reasons, as well as for electoral purposes. Across most of Britain, despite the low interest rates, and government bribes, house prices continue to fall, as workers drowning in debt, seeing their real wages fall as money printing pushes up inflation, are in no position to bid them up. Only in parts of London, where the money of foreign billionaires, and of the small percentage of the rich who benefit from the inflating of asset price bubbles, are house prices rising, and that in itself is causing its owns set of huge contradictions in terms of a whole raft of bifurcations.

Bernanke is clearly concerned that as the money printing is slowed, it will be a signal for Bond investors to pile out of their current holdings, which will push up yields, and wider interest rates. That spells the end of the property bubble in the US, UK and parts of Europe. With it will go the banks. As I've set out before - The Great Property Market Conspiracy , its reported - by Moneyweek - that Deutsche Bank has exposure to €55 trillion of global derivatives, and its suggested that,

“ There are concerns that some banks are up to their old tricks. Instead of directly loading up on debt, they are concealing their borrowings through complicated derivative contracts.” 

That exposure of Deutsche Bank is equivalent to the entire global GDP! Most of its exposure is in relation to European property debt, but all the other European banks are in a similar position. British banks are second only to French banks in exposure to European household debt.

The reality is that the money printing is not going into the real economy. The largest corporations are already stuffed with cash, as they have built up huge cash hoards from the massive profits they have made over the last 30 years. On the other hand, the small companies are not good prospects for the banks to lend to. In Britain, around 150,000 companies have been identified as zombie companies, only able to repay the interest on their loans. Banks have little reason to lend at currently low interest rates to such companies, and risk not getting their capital back. Similarly, there are 260,000 people on interest only mortgages do not have a strategy to repay their mortgage. The average shortfall stands at a staggering £71,000, according to the FCA. 300,000 home-owners in Britain are not paying their mortgage at all and Nick Hopkinson calls forbearance “a sick joke” – mortgageintroducer.com.   This is one reason that many people are then forced to rely on the Pay Day Loan sharks.  For these people there already is a credit crunch!  In the US, the TARP programme sought to protect the banks in a similar manner and keep property prices inflated, by helping the banks avoid foreclosing.

A collapse in bond prices will crash property markets in the US, UK and Europe, and thereby expose the banks as bankrupt. So far, the outflow of funds from Bonds has been limited. Interestingly, where money has come out of Bonds, it has not gone into equities. No wonder, when the bond bubble bursts, interest rates rise, and that collapses the property market, which exposes the bankruptcy of the banks, but that will have a ripple effect across the financial system. The banks continue to be a significant component of equity markets. Higher bond yields will increase the amount investors demand as a return on their shares too. That means that price-earning ratios will need to be significantly de-rated, sending share prices overall down by a huge amount. Some indication has already been seen of that earlier in the year as stock markets fell sharply as Bond yields rose.

But, such a financial crisis, apart from its immediate impact on the real economy would be likely to have longer term benefits for the real economy, for the reasons Marx set out.

"As regards the fall in the purely nominal capital, State bonds, shares etc.—in so far as it does not lead to the bankruptcy of the state or of the share company, or to the complete stoppage of reproduction through undermining the credit of the industrial capitalists who hold such securities—it amounts only to the transfer of wealth from one hand to another and will, on the whole, act favourably upon reproduction, since the parvenus into whose hands these stocks or shares fall cheaply, are mostly more enterprising than their former owners.” (TOSV2 p 496) 

As I've set out before, a crash in property prices will make housing once more affordable for workers, whether they buy or rent. It will remove the need for huge amounts of Housing Benefit to be paid, thereby reducing the tax burden on other workers. A huge fall in the price of building land will make it once more worthwhile for builders to build houses that people can afford. A fall in the price of shares and bonds, will mean that workers pension contributions will buy far more of these financial assets, thereby significantly increasing the income into their pension pots. Both will reduce the value of labour-power increasing real wages, whilst providing the potential for an increase in relative surplus-value and the rate of profit.

In other words, as Marx sets out such a crash would be in the interests of the real economy. But, Bernanke's policy is not aimed at benefiting the real economy, it is aimed at protecting the banks and financial capitalists. Seeing the potential for even a minuscule reduction in monetary heroin to the financial system to cause that financial system to go into paroxysm, Bernanke baulked to protect the interests of the bankers over the interests of the rest of the economy.