Tuesday, 25 August 2015

Cognitive Dissonance

There was a perfect example of just how unable the financial analysts and journalists are to deal with the current situation, last night. The BBC's Robert Peston, discussed the crash in global markets, and invited a number of analysts to contribute. The basic story we are told, is that its all China's fault. Earlier in the evening, the FT's Gillian Tett, had given the same message, that China's Stalinists had done a great job in rapidly growing a backward economy, by central planning, but now, the economy was just too big for it to be planned in that way, and the wheels were coming off, as they found that you cannot dictate the market prices for commodities, which will be set by the interaction of supply and demand. At the end of Peston's piece, we were all consoled, however, by another analyst, who concluded, but the good news is that if you have a mortgage, this means that the Bank of England probably will not be raising interest rates, so your mortgage will not be going up!!!!

This was said with a straight face, with no sense of irony, in consideration of everything that had just been said. So, the line they are spinning is; the Chinese economy is crashing because central planners cannot determine prices, but don't worry, because OUR central planners, at the Bank of England, CAN set prices, they can determine the price of capital, for eternity, irrespective of the laws of economics!

In fact, as on many previous occasions, when the pundits, and the central bank planners at the Bank of England themselves have confidently told us that “interest rates will not be going up”, UK interest rates yesterday DID go up, and they went up again this morning, along with interest rates in most EU countries. In other words, the actual interest rates, the yields on various government bonds, continue to move up and down, dependent upon whether the lenders of money-capital provide relatively more or less of it, in relation to demand, went up, despite all of the selling of shares, which would normally send money into bonds, as a safer haven, and especially into UK government bonds, which are a safer haven than all of the “emerging market” bonds and shares, which have seen trillions of dollars flooding out of them in recent weeks.

The fact is that, whatever the Bank of England, or the Federal Reserve might want to ordain as the official price of capital, they will find, as have the Chinese central planners, that the actual price of capital, the rate of interest that borrowers have to pay, to borrow money-capital, will be set, not by the central bank, but by the willingness of owners of that money-capital to lend it, compared to the willingness, or need of borrowers to borrow it. The former will be determined by how much of this money-capital is created by the mass of realised profits increasing, or by the proportion of revenues in the form of profits, interest and rents that are thrown into the money market, to be loaned (and that means to provide new loans, to buy new shares/bonds, not to simply bid up the prices of existing property, shares and bonds). The demand for this money-capital will depend upon the extent to which firms need to borrow money-capital to buy means of production and labour-power to expand their capital, which depends upon whether they see the potential for rising demand for their output, or in a crisis, the need for money just to stay afloat.

For the reasons Marx, Hume and Massie describe, that rate of interest cannot be reduced simply by the central bank printing more currency. Only if the central bank could itself make every loan, buy every share, bond, mortgage and so on, could it do that, and the cost would then be that the value of the currency itself would be utterly destroyed. In other words, there would be hyperinflation.

The problem is also illustrated by the fact that none of these pundits seem to grasp the difference between the real economy, real capital and the fictitious capital that swirls around the financial markets. The crisis that will at some point break out in the financial markets, on a far bigger scale than that of 2008, will not be the result of weakness in the real economy. Quite the contrary. It is relative strength in the real economy that provided the spark for the 2008 crisis, as rising inflation in 2007, caused market interest rates, and then official interest rates to rise. It will again, be rising market rates of interest, as the demand for money-capital rises relative to the supply of money-capital, which will spark the next more monumental financial crisis. The instinctive response of those pundits and speculators to cheer every bit of bad economic news, is founded upon this fact.

Between 1980-2014, the Dow Jones Index rose by 5 times the rise in US GDP and the biggest rise in the Dow was during the period of slowest growth. So there is no correlation between a rising economy, and a rising stock market. Quite the opposite, in fact.

During periods such as the early 1980's, capital begins to introduce a range of new labour saving technologies, which significantly raise productivity where they are introduced. The effect of these new technologies is typically contradictory. Considered within the sphere in which they are introduced, because they displace large amounts of labour, they reduce the produced surplus value, which acts to reduce the general rate of profit, in the way Marx describes in his Law of the Tendency for the Rate of Profit to Fall. But, because of the operation of prices of production, the industries that introduce these new technologies actually experience higher than average rates of profit, until such time as additional capital moves into these spheres, to increase supply and reduce market prices.

Moreover, the consequence of this labour-saving technology, as Marx sets out, is to increase the relative surplus population. Wages fall, as unemployment rises, which leads to a rise in the rate of surplusvalue and profit. These new technologies, bring about a significant “moral depreciation” of existing fixed capital, and rising productivity reduces the costs of circulating constant capital, particularly as raw material costs tend to be low during such periods. The effect is that although economic growth may be sluggish or stagnant, the annual rate of profit begins to rise sharply. Its this which causes share prices to rise significantly.

On the one hand, rising rates of profit causes the earnings bit of the price/earnings ratio to rise, so share prices appear cheaper. On the other, the increase in the realised money-capital, from higher profits, reduces interest rates, which causes p/e multiples to widen. Following the financial crash of 1987, this was exacerbated by the actions of central banks, which printed money and promoted the buying of these bonds and shares, and thereby created the series of huge asset price bubbles that are now bursting.

In fact, now, for all the reasons I have set out before, productivity growth is slowing, wages will start to rise, profits will start to get squeezed, (even as the mass of profits rise), because the cost of producing those profits will rise, the supply of money-capital will fall relative to the demand, so interest rates will rise, and that will be reflected in a bursting of the property, share and bond bubbles. It is not a faltering global economy that is behind the current market sell-offs. Those markets are selling off, because huge financial bubbles were created within them, and they are no longer supportable. It is merely appearance being brought into alignment with reality.

The same financial pundits, for example, have explained the sharp drops in the price of oil and other primary products by claiming that again it is due to declining demand for these materials in China. That is reminiscent of the claims of Ricardo, Mill and Say that there could be no overproduction, only under consumption. Marx showed that claim was nonsense. It was not the failure of the millions of Chinese to consume the masses of textiles and opium Britain was sending them, that was the problem, but the fact that Britain had overproduced the commodities it wanted to sell to them, because it had expanded production via the use of ever more powerful machinery that was the cause of the inability to sell them.

The same applies today. The demand for oil, for example, is NOT declining, but rising. According to the IEA global oil consumption increased by around 2% last year, and is forecast to rise by 2% again this year. It is not falling consumption of oil that is causing the price to collapse, but the fact that high oil prices after the start of the new long wave boom, caused the usual increase in exploration and search for new technologies to extract more oil, and use existing supplies more effectively. The sharp fall in oil prices is caused by overproduction, for example, the fact that fracking has made the US self sufficient in oil and gas, not reduced demand from slower Chinese growth.

The same can be seen in respect of consumption of copper, and with iron ore. It is not falling demand that explains sharply lower prices, but sharply increased supply, which is always what happens at this juncture of the long wave cycle. A look at the oil market shows that even at these low prices, additional supply continues to be added. Even many of the high cost producers continue to pump oil, rather than close down, which means that, at some point, many of these producers will go bust, as the large amount of junk bonds, which financed them will go bust too, spreading a further financial panic into financial markets. Not only will those bonds go bust, but it will trigger a cascade of claims on CDS's etc., as happened with the failure of mortgage backed securities in the sub-prime crisis.

In the meantime, Saudi Arabia, which needs oil prices at around $90 a barrel to balance its budget, is prepared to keep pumping out oil, down to its cost of production of around $15 a barrel, in order to retain and extend its market share, and force out of business the US shale producers, and at those kinds of prices, many North Sea producers would go bust too. This is a classic example, of the kind of partial crisis of overproduction that Marx describes in Capital III, Chapter 15. In the meantime, Saudi has gone from a large supplier of loanable money-capital in global money markets to a borrower, a similar effect has happened with Norway and its sovereign wealth fund, and the same applies to all those economies that have benefited from huge amounts of revenue in the form of rents, which provided part of the huge mass of money-capital into money markets over the last 30 years.

Yesterday, I watched a number of pundits who said, that they were buying large scale into these falling markets. Some of them were the same ones who have said the same thing over the last few weeks, as markets continued to drop, contrary to their predictions. In all these cases, the pundits and fund managers based their faith that they were doing the right thing on the fact that they claimed that they have “been doing this job for thirty years”. But, that is the problem. They have only been doing their job for the last thirty years! They have only been doing their job during a thirty year period when overall markets have gone up. When they didn't go up, because of economic fundamentals, they went up, because of speculation, fuelled by low interest rates, and a capitalism structured around the needs of fictitious capital rather than productive-capital. When that speculation failed, and market crashes occurred, conservative governments and the representatives of that fictitious capital, in central banks, intervened to print money and buy bonds, and shares to underpin those prices, which is why with such a one way bet, the owners of money-capital were happy to gamble with it, bidding up the prices of property, shares and bonds, to totally ridiculous and unsupportable levels, that has required ever more state intervention, ever more elaborate financial engineering and manipulation of the figures to sustain.

It is why we repeatedly hear the pleas of the financial journalists, who ask, “what can the authorities do to bring the selling to an end,” as though those authorities can or should do anything to bring it to an end.

Its the same thing with those journalists as with the Blairite politicians who cannot understand the world they are now living in. They too have only been in their jobs for thirty years, and many for more like thirty months! They have only known a world where property prices, share prices and so on go up, and where the world revolves around this paper wealth, and the conservative ideas that flow from it. Theworld is changing, Corbyn, Syriza, Podemos, Bernie Sanders are merely a reflection of it. The material conditions that support conservatism fictitious capital are weakening, and the conditions that support social-democracy and big socialised, industrial capital are strengthening.

No comments: