As
a result of pursuing a policy of fiscal stimulus, the US has
succeeded in raising its level of growth, thereby reducing its
expenditure on welfare and increasing its tax revenues. It would
have achieved higher and more sustained growth sooner, had it not
been for the actions of Tea Party Republicans, in limiting the fiscal
stimulus, and creating fear through, the Debt Ceiling, Budget and
Sequester political crises. It would have achieved higher levels of
growth, also, if it had not been weighed down by the introduction of
austerity measures in the UK and peripheral Europe, which undermined
global growth. Even so, the fiscal stimulus in the US, enabled it to
reduce its budget deficit by higher levels of growth.
But,
it is still a deficit not a surplus, and so US debt continues to
rise. That is still better than the UK. The policy of austerity
means that growth has been less than it should have been, and debt
has continued to rise. In the Eurozone, the same policy of austerity
has had worse effects. The UK, in the last year, had some growth, as
a result of a temporary sugar rush, induced by ephemeral factors such
as PPI compensation payments, Help To Buy, and a further increase in
consumer debt. But, the economies in Greece, Portugal, Italy and
Spain have sunk further. Because of the amount of trade that occurs
between countries within the EU, austerity measures, in the UK and
periphery, have acted to lower growth in the rest. The Eurozone as a
whole looks likely to go back into recession, and to pull Germany
down with it.
For
countries burdened with debt, the last thing they need is deflation,
but the policy of the ECB of saying it will do whatever is required,
but actually only ever doing the minimum it believes it can get away
with, has caused the Euro to rise sharply against the dollar, and
thereby to lead to such deflation. The liquidity injections it has
undertaken via LTRO, have simply stuffed the banks balance sheets
with cash, rather than increasing the currency circulation. In fact,
bank lending from European banks to businesses has fallen, as those
banks have used the cash to buy sovereign bonds, that they see,
possibly wrongly, as being ultimately guaranteed by the ECB itself.
Throughout
history, the means by which the state has dealt with large debts is
via inflation, a devaluation of the currency. In a capitalist
economy, the basic way it works is this. The state borrows £1,000;
it devalues the currency by 10%, by printing more money; there is an
inflation of prices by 10%; by the same token the amount it takes in
in taxes on wages, profits etc. rises by 10% in nominal terms; with
this 10% higher quantity of taxes it thereby pays back the original
£1,000 whose nominal value remains the same, but whose real value
has fallen by 10%.
But,
the opposite applies where there is deflation. The debt of the state
in nominal terms remains the same, but, if prices and wages are
falling, the amount of taxes also falls. The value of the debt
continues to rise in real terms. It becomes harder for the state to
repay the debt. But, for the same reason, it also becomes harder for
all borrowers, to repay their debts.
As
I pointed out a while ago – Volley Firing – the fall in the yield
on bonds in the US, UK and Eurozone is an anomaly in an environment
of rising global interest rates. Inflation and interest rates in
emerging markets have been rising. Money flowed out of those markets
into the US, UK and Europe. The banks of peripheral Europe were
boosted by the ECB's promise to backstop them, and its action to
provide European banks with cheap liquidity, via the LTRO, so that
they would buy those bonds.
But,
ultimately, the markets must test the ECB's promise to do whatever is
necessary. In fact, when Mario Draghi failed to commit decisively to
QE recently, the markets already reacted. As interest rates rise in
emerging economies, and their currencies begin to find a stable
level, money inevitably flows back towards them. The first place it
flows out of is those bonds that pay low yields, and are issued by
countries with high levels of debt. Not surprisingly then, in the
last week or so, the yield on Greek bonds rose from around 5% to over
9%, the yield on Portuguese bonds also rose sharply.
The
basis of a new Eurozone debt crisis is easily seen. When the banks
went bust in 2008, they were bailed out by the state. The state
itself then covered its expenditure, in bailing out the banks, by
borrowing. But, who did the state borrow from? The banks. Where
did the banks get the money from? The state, via the central bank,
which printed the money.
In
the case of Ireland, Portugal, Greece and Cyprus the state could not
be bailed out by domestic banks that had gone bust, but had to be
bailed out by international banks, the ECB and the IMF. But, much
like the situation that Marx describes in relation to volley-firing,
when it came to the requirement to meet a balance of payments
deficit, all that is ultimately at issue here is the order in which
payments fall due. The US was able to stem the problem in its
banking system by effectively nationalising it and recapitalising it.
It funded much of that by printing money. In so doing, it only
exacerbated the problem, because, in place of real capital forming
the basis of this recapitalisation, it was merely an extension of the
fictitious capital, and thereby of the debt that was the basis of the
problem to begin with.
The
US has not resolved the problem, but only deferred it. A large
quantity of debt was written off as part of this process. Equally, a
huge part of the debt is now in the hands of the Federal Reserve
itself, as a result of bond buying under QE. But, the US banks and
financial institutions still hold vast amounts of debt. A lot of
this debt is doubly fictitious capital. The point was referred to
earlier, that Marx points out that a bond issued by the state to
cover its expenditure is not capital, either in the shape of the bond
or in the shape of the state expenditure.
But,
the same is true of say credit card debt or student debt. The bank
has a certificate to say that person A owes them $100,000, but this
certificate is not capital. It has no means of self-expanding.
However, the interest due on this loan can only be paid in one of two
ways; either A must employ the $100,000 productively and pay the
interest out of the profits, or else they must pay the interest out
of their wages. In other words, their wages must fall below the
value of their labour-power.
Because,
credit card debt, student debt and other forms of consumer debt,
including mortgages are not used as productive-capital, they
represent fictitious capital, in the double sense. Yet, it is this
fictitious capital that has grown most. The growth of private
household debt, for example, has far exceeded government debt.
Although US banks wrote off large amounts of mortgage debt, with
state help, they still hold large amounts of such debt. They hold
around $1 trillion of student debt and a similar amount of credit
card debt. In addition, although QE has resulted in a large quantity
of government bonds being sold, by the banks, to the Federal Reserve,
they still hold a large amount of such bonds, and more importantly
they also hold vast amounts of fictitious capital in the form of
shares and corporate bonds. For all the reasons set out earlier,
about the inflation of these asset prices, this flatters the capital
position of even US banks to a huge extent. But, the US banks are in
a much healthier position than the European banks.
Marx
describes the way the development of capitalism leads to a situation
whereby capital is seen as being only money-capital. He quotes
extensively from the testimony given by Bank of England governors,
such as Lord Overstone to that effect. Overstone not only believed
that only money-capital was capital, but also that only the providers
of money-capital were capitalists. He believed that the
productive-capitalists were only entrepreneurs, effectively simply a
form of worker, and profits nothing more than a form of wage. It is
the basis upon which rests the division, familiar in orthodox
economics, of Capital – Interest, Entrepreneurship – Profit,
Labour – Wages, Land – Rent. Following on from this, Marx
demonstrates, the notion is developed that the payment of interest
flows from the inherent ability of capital to expand.
From
this, Overstone developed the idea that the rate of interest rises or
falls as a function of the demand for commodities, because he argues,
money-capital is only demanded for the purpose of buying these
commodities to increase production. The same false notion exists
today amongst bourgeois economists, that the rate of interest
increases when economic activity rises, and falls when economic
activity declines. It is behind the mindless market sentiment, which
views bad economic news as good news, because it is likely to lead to
lower interest rates, more lax monetary policy, and thereby higher
stock and bond prices.
But,
Marx points out that the higher demand for commodities only
determines the rise in the market price of those commodities, not the
market price of money-capital – the interest rate. He points out
that in times of rapid economic growth, an increased demand for such
commodities can go along with a relative or even absolute decline in
the demand for money-capital, because during such periods,
capitalists, in their dealings with each other, replace cash payment
with commercial credit.
If
A buys £100 of goods from B, they require £100 of money-capital to
do so. If B simultaneously buys £100 of goods from C, they also
require £100. If simultaneously C buys £100 of goods from A, they
too need £100. In all, £300 in money-capital must be advanced,
which they must either advance from their own funds, or else borrow
in the money market. However, when times are good and producers feel
confident, they will, Marx says, conduct such business via commercial
credit. A buys the £100 of goods from B, and raises a bill of
exchange, which promises to pay for them at some future date. B does
the same when they buy from C, and so does C when they buy from A.
But, at the due payment date, all of these bills of exchange can be
set against each other, where it is found they cancel out, so no
actual money is required, and no demand for money-capital arises in
the money-market. Even if in total they do not cancel out, the only
demand for money-capital is that sufficient to cover the balance.
Moreover,
as Marx points out, Overstone only considers the increased demand for
money-capital, and does not consider its increased supply, which
often arises under such conditions. In a period of increased
economic activity, usually at the start of such a period of growth,
the increased mass of profit is realised as an increased mass of
potential money-capital. This increase in the supply of
money-capital may well be greater than the increased demand for
money-capital, used to finance new investment in fixed capital. As a
result, the rate of interest falls rather than rises. Similarly,
Marx points out that in a period of crisis, the demand for
money-capital rises sharply, not because it is required to finance
new investments, but simply by firms that need it to stay afloat. In
fact, Marx sets out, its at these points that the rate of interest
reaches its highest levels.
But,
the rate of interest reaches its next highest, or normal level at
that point where although there is still prosperity and rapid growth,
the rate of profit itself is beginning to fall. Its that position I
believe we are in now, the Summer phase of the Long Wave cycle.
No comments:
Post a Comment