China's Black Monday

Even the official Chinese news agencies are calling the 8.5% drop in the Shanghai Composite Index, and similar drops on other Chinese markets “Black Monday”. As I suggested last week, even the intervention of the Chinese Central Bank, and the proposal that Chinese Pension Funds should try to prop up the stock market, by speculating a third of their funds into the market has not stopped it, and it will not stop it, because these markets, like those in the west, have been in an astronomical bubble for a long time, and that bubble is now bursting. These last acts only emphasise that the states and central banks have used up all of their ammunition to keep these fictitious assets inflated, and their actions now smack of the desperation of a drowning man.

The proposal to “allow” Chinese pension funds, which really amounts to an instruction to do so, to use a third of their funds, about $150 billion, into the stock market, for the first time, is a bit like a football team that has tried every trick in its book, and in the last minute of extra time sends the goal-keeper up to the opposition goal, while they take a corner kick. More ominously for Chinese workers, whose savings are invested in these pension funds, it is rather like the actions of the state in Cyprus, which bailed out the capitalist banks and financial institutions, in the country when they failed a couple of years ago, by raiding government workers pension funds.

In 2008, when the banks and financial institutions went bust, after 3 decades of rampant, state sponsored speculation, to blow up the prices of fictitious capital in shares, bonds and property markets, the state stepped in to bail out the private owners of that fictitious capital. The state bought up shares in the banks, rather than allowing them to go bust. Having done so, they have then imposed – in many countries outside the US, China and a few other places – austerity on to the populations of those countries to recoup the money they handed out to the owners of that fictitious capital.

The proposal to squander Chinese workers pensions on an attempt to delay the collapse of Chinese stock markets is just another last gasp in that process. And it will be a squandering of that money, because the prices of that fictitious capital will continue to collapse. It is a squandering of that money in the case of China, because using it to buy shares will create not one penny of additional wealth in China, and there are lots of different ways that it could be used productively, that would be beneficial to the Chinese economy, and to Chinese people.

But, the same has been seen in the UK, US and many parts of Europe over the last three decades, and more intensely in the last ten years or so. We have seen people encouraged to take out private pensions, which were missold to them, and whose value collapsed. The policy of QE, has not only pushed up house prices to ridiculous levels, which has put them out of the reach of a large proportion of workers, but, has in the process massively increased rents, and the costs of Housing Benefit. But, it is also the policy of QE, which has destroyed workers pensions. On the one hand, it pushed up the prices of shares and bonds, to ridiculous levels, so that workers pension contributions bought fewer of them to go into their pension pot, on the other, the same process continually reduced the yields on those bonds and shares, so that the income from the pension funds, became less and less able to meet the requirements for pension payments. That is what has caused the massive black holes in pension funds, not the fact that workers are living a few years longer.

But, in response to that, we have also then seen people encouraged to waste huge amounts of their savings buying up property at exorbitant prices, on the promise that this would instead provide them with a pension income, where their actual pensions and savings could not. In addition, they were encouraged to take their own savings and equity in their own houses, to waste money providing deposits for their children, to buy those same hugely over priced houses, and so keep the bubble inflated a while longer. Everyone who has speculated in property over the last twenty years, and particularly over the last ten years, will see their money disappear just as surely as the investors are currently seeing on the Shanghai, and other global stock markets.

What is also notable in this respect, is that global markets have been selling off now for more than a week. Last week, the Shanghai market fell again significantly, followed by the steep falls in the US, UK and Europe. Asian and European markets had already fallen significantly by their close on Friday, and before the 3% plus drops in the US, on Friday. Yet, the mainstream news channels said nothing about it, either on Friday or over the weekend. When I got up this morning, and after Shanghai had closed down 8.5%, with European markets opening with falls of around 2.5%, the BBC News Channel was still saying nothing about it, preferring instead to see the break up of One Direction as a more significant global news story!

As markets continued to crash, they eventually did mention it briefly on the Business News section, but mostly in terms of it being a crash of Chinese markets. Its almost as though the mainstream news has blacked it out, in order to allow the main owners of this fictitious capital to sell off their rapidly depreciating assets, to the less savvy punters, before the markets really crash, just as those main owners of fictitious capital were bailed out by the rest of us in 2008, just as they were bailed out by workers pension funds in Cyprus, as they are being bailed out in China from workers pension funds and so on.

The same thing applies to all of the various scams to get people, over the years, to waste their money buying up massively over priced property, before it crashes. As I wrote recently its a lot like a second massexpropriation of the peasantry, a means of dispossessing large numbers of workers who built up savings and property after WWII, of what they had gained by their hard work, by offering them unrealistic prospects of wealth from gambling. Its perhaps no coincidence that during the same period, we have had a massive expansion, promoted by the state of gambling in general.

The financial pundits are in territory they cannot understand, and keep repeating the old mantras, asking the question about what the authorities can do to end the sell-off, as though, in the end there is anything a central planner can do to stop such a sell-off, as though they can dictate the value and price of commodities, be they beans or capital, and as though even if they could stop such a sell-off, they should. In reality, as Marx pointed out long ago, a sell-off of these fictitious capital markets is actually a good thing. It would certainly be a good thing for workers, for the reasons I've set out before – it would mean the cost of providing pensions becomes slashed, and it means that the cost of housing returns to more rational levels.

In reality, the central banks have made themselves irrelevant. They have had six years since 2008 to have normalised monetary policy, and have failed to do so. They have instead kept pumping out liquidity to inflate asset markets at the expense of the real economy. Now, official interest rates are at near zero, and they have already pumped the markets so full of liquidity that they are fit to burst. In fact, as I write this, and in line with what I said on Saturday, its not just equity markets selling off, but bond markets too in a number of European countries, including the UK, even as the pundits continue to beg for the Federal Reserve not to raise official rates in September.

At the same time, the conditions which make a rise in interest rates inevitable continue to develop. The continued drop in oil prices is being attributed to a slow down in demand, caused by a slowdown in the Chinese economy. But the reality is that the demand for oil continues to rise, not fall. In fact, lower oil prices has caused the demand for oil, globally to rise more strongly than it was. The falling oil prices, as with the prices of other raw materials is not due to lower demand, but due to a continued strong increase in supply, as new methods of oil extraction, such as fracking, has massively increased the amount of oil coming on to the market, and has significantly reduced the cost of production of that oil. In other words, as I've been forecasting for some time, it mounts to the normal overproduction of primary products that occurs at this stage of the long wave cycle.

But,as I set out a while ago, that means that the owners of huge amounts of rent arising from this production, now see that rent disappear, and they become borrowers, rather than lenders into the capital markets, which pushes up interest rates.

We are in for a period where this fictitious capital gets massively writtendown, and that process is likely to continue for a prolonged period, just as the process of blowing up these bubbles occurred over 30-40 years, so sharp sell-offs, followed by small recoveries, will be part of a long term downward trend.