Wednesday, 29 October 2014

Q.E. Ends

The Federal Reserve, at its meeting today, as expected ended its programme of quantitative easing. Its statement also suggests that it may begin to raise its official interest rates in the next three or four months.  Market interest rates in the global economy have already been rising over the last few months in response to the tapering of QE.

The huge injection of liquidity over the last few years has acted to put a floor under stock and property markets.  That floor has now been removed completely.  One effect of all that money printing was to make speculation in these assets almost a one way bet.  That meant that companies could borrow cheaply and buy back shares to pump up their share values.  Shareholders could be bought off from complaining about low dividend yields, by offering them large capital gains instead, as the price earnings multiple of shares was expanded.  That option now becomes more difficult.

If companies want to see their share price rise now, they will have to bring it about not by accounting manipulation, or technical tricks such as share buy backs, but by actually growing the companies earnings.  That means they need to invest much more, in order to expand the business.  An example of that was seen yesterday with Facebook which announced it was going to be increasing its investment spending, for precisely that purpose.  Similarly, Apple has seen its profit margins on iPhones and iPads, falls steadily over the last couple of years, as new versions have been seen to offer only marginal improvements over existing models.  To grow its earnings and raise margins, Apple needs to introduce new technologies, such as the Apple Watch, iPay and so on, but again, all of these things require large scale capital investment.

The effect of such capital investment, was witnessed in the reaction to Facebook's announcement.  Its shares fell sharply, because, although its earning grew, large scale capital investment will mean that less of future profits will be available for distribution to shareholders, and it may even require the issuing of additional shares, thereby diluting the value of each existing share.

The reality, is that QE has acted to blunt such capital investment over the last few years, because it has been more profitable to use available cash for speculative activity, rather than productive investment.  It has saved the insolvent banks, and the financial oligarchy, but at the expense of the real economy.

The ending of QE makes possible the reverse, an increase in productive investment as firms have to grow their businesses, but the consequence is that stock markets, and property markets will fall.  Bonds, prices, particularly the high yielding junk bonds, into which investors have had to flee in search of yield, have been pushed to historically levels that will also now fall.  Interest rates fell for 30 years after 1982, and have reached such low levels because of the massive rise in the rate and mass of profit over that period.

We now have the rate of profit starting to fall, whilst the demand for money-capital for this productive investment is set to rise.  As Marx sets out the  interest rate is determined by this interaction between the demand and supply for money capital.  The supply is falling relative to the demand, so interest rates are rising, and will continue to rise whatever central banks do.

Today is the 85th anniversay of the 1929 stock market crash.  There is a thirteen year cycle for stock market crashes.  Another such crash was due in 2013, following the crashes of 2000, 1987, 1974, 1962.  No such crash is likely today, and by their nature crashes usually occur when no one expects them.  But, as I have set out in my book Marx and Engels' Theories of Crisis: Understanding The Coming Storm, such a crash is inevitable, and it is inevitable despite, and partly even because the real global economy remains in a period of long wave boom.

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