Thursday, 27 February 2014

Capital II, Chapter 14 - Part 4

A portion of the advanced capital must always be in the form of money-capital because it can never go immediately from being received as payment to being paid out for the purchase of productive capital. Its like a lake. It always has a certain amount of water in it, but its not all the same water. Water flows into it constantly, but water also constantly flows out. Firms have to retain money-capital as bank deposits and petty cash because, although money constantly flows in, it also constantly flows out.

Moreover, because the ratio at which money flows in, and flows out, is not constant, firms have to hold money to make up the difference. They create cash flow forecasts to predict when more money will flow in than flow out, so that balances can be run down, and vice versa, so that they can be increased.

Similarly, as seen previously, where supply is not regular or reliable, or where it takes a long time to secure, because, for example, of long transit times, a large stock must be bought, which means that capital is tied up in the stock, which is only a potential productive capital.

Marx quotes another similar example.

“In London for example great auction sales of wool take place every three months, and the wool market is controlled by them. The cotton market on the other hand is on the whole restocked continuously, if not uniformly, from harvest to harvest. Such periods determine the principal dates when these raw materials are bought. Their effect is particularly great on speculative purchases necessitating advances for longer or shorter periods for these elements of production, just as the nature of the produced commodities acts on the speculative, intentional withholding of a product for a longer or shorter term in the form of potential commodity-capital.” (p 258)

Again, more developed capital markets can help smooth out such problems. Speculators can be allowed to gamble on future prices, but actual buyers of those commodities can thereby enter into contracts to purchase the amounts of these commodities they need on a month by month basis, at a price certain, rather than having to lay out a large amount of capital at one time to secure a supply at a given price.

Those producers, with sufficient capital, can withhold their commodities from the market when prices are low, in the hope of higher prices later. This is not profitable, however, where the costs of storage are high, where the commodity may deteriorate, or where, as with livestock, it has to be fed etc.

Again, although futures markets have been criticised for supposedly causing higher prices by withholding (cornering) the market for particular products, its unlikely that this is the case. If speculators buy up a particular commodity and hoard it, rather than immediately selling it at the due date, it is normally because they expect actual market prices to rise in the future. By pushing up the future price, they actually thereby encourage producers now to increase their production, so reducing the potential future shortage, and spike in prices. Moreover, if speculators sit on commodities they have bought, pushing up current spot prices, that is only likely to encourage producers themselves to unload their current production directly on to the market, to take advantage of those higher prices. Spot prices would then fall, and the speculators lose money. With stocks having been reduced, speculators might also find they then faced higher future prices to replace their current supplies. The example of what happened to the Hunt Brothers on Silver Thursday demonstrates the dangers for such speculators.

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