Thursday, 17 September 2015

Federal Reserve Meeting Leaves Official Rates Unchanged

The US Federal Reserve, at the end of its two day meeting, today left official interest rates unchanged.  As I wrote recently, the act is largely symbolic. Central bankers cannot dictate market rates of interest, which rather, are set by the interaction of demand and supply for capital. At best, all a central bank can do is to influence the price of some financial assets, for example, by buying government bonds, and in so doing, affect the yields on those assets. But, the cost of doing so is to cause other interest rates, and probably inflation to rise. Its amazing how those central bankers believe that “People's Q.E.” will cause inflation, but the Q.E. they undertook to bail out the banks could only have beneficial effects!  However, what this decision means is two things.  Firstly, the Federal Reserve is now massively behind the curve, and will have to hike rates sharply, when it is forced to move.  Secondly, it shows the extent to which they are scared that any such move will cause a bursting of massively inflated bubbles in shares, bonds and property.

In reality, market rates of interest across the globe are rising, and have been rising for some time. That is most apparent in emerging markets, whose currencies have been falling sharply against the dollar, causing inflation and interest rates to then rise sharply. But, as I also pointed out some time ago, this process is a bit like the process of “volley-firing” that Marx described. At some point, when these emerging market currencies have fallen, and their interest rates risen, compared to the US, UK, EU and so on, they begin to look attractive homes for hot money. At that point, money-capital flows out of the US and so on, and into these emerging markets, hoping not only to obtain much higher yields on its investment, but also to obtain sizeable capital gains, as their currencies begin to rise, and the prices of their bonds etc. also rise sharply. The the process becomes one, where the US, UK and EU faces falling currencies, rising inflation, and rising market rates of interest.

In this context, the UK is in a particularly precarious position. The UK already has a high level of both public and private debt, but worse, it has a large and growing trade deficit, as the Tories economic policy has been one of encouraging growth via consumption, but more of that consumption being satisfied by imports rather than domestic production. There are only two ways of paying for a trade deficit. One is to borrow, from foreigners, to cover the gap, which means that at some point in the future that borrowing must be repaid with interest. The other is to convert a part of the country's capital, into revenue, and to ship this capital abroad to pay for the consumption. Its like a peasant producer that has to destroy some of their means of production, in the form of livestock, in order to meet a shortfall in their consumption needs.  Britain, like the US has been paying for the difference by borrowing, but the ability to do so may be coming to an end.

Last year the deficit was nearly £35 billion, and in July of this year the deficit for the month was nearly £3.4 billion. That was partly due to a continued rise in imports, but also to a 9.5% drop in exports. That means that Britain is approaching the point whereby foreigners will begin to doubt whether the UK will be able to export enough in future to earn the revenue required to repay its borrowing. In a world where former sources of loanable money-capital, such as the Gulf States, China, Russia and so on, are themselves going into the money market to borrow, to finance their own state spending, as oil revenues have crashed, the UK will face sharply rising interest rates, in the not too distant future. That comes on top of a tightening labour market, which is pushing up wages in several areas.

A similar thing can be seen in the US, except there the growth seems more balanced than the UK, where it is still based upon consumption driven by asset price bubbles, particularly in housing, which are also likely to burst violently. Annualised GDP for the US in the last quarter was 3.7%. The annual rate of growth has been between 2.5% to 3% for the last year. That is also reflected in the continual fall in the rate of unemployment.

As I have set out before, these changes have significant effects. Firstly, the drop in unemployment, both in the US and UK, is being reflected in higher wages, though as yet only in certain spheres. The rise in wages, puts more revenue in workers pockets, to be spent on consumption, and this is also being magnified by the fall in oil prices, which takes money, as rent, out of the hands of oil producers. As workers in the US, UK, and EU, and elsewhere, use these higher wages, and savings from falling oil prices, to consume more, this raises demand for wage goods. The producers of wage goods, thereby have an incentive to increase investment in this production. That, in turn, raises the demand for labour-power, in those industries, and the sectors supplying them even further, which causes a shift of capital towards wage goods production. But, the increase in demand for labour-power, resulting from this increased investment in productive capacity, causes wages to rise further.

At the same time, the rise in wages causes a greater proportion of the new value created by labour to go to labour, and a smaller proportion to surplus value (paid out as revenue in profits, rent and interest). This in fact, is the other side of the reallocation of capital towards wage goods production.

But, this same process, means that profits are squeezed. On the one hand, more laid-out capital is tied up as variable capital, and less is realised as profits. Productive-capital finds itself in need of investing more to satisfy the increased demand for wage goods, and potential to make profits from it, whilst its realised profits that could have been used to finance that additional investment are reduced. In other words, the demand for capital rises, whilst the supply of capital falls relatively. The consequence is that interest rates, which are the price of capital, rise.

The idea that central banks can provide this capital by simply printing money, or fixing official interest rates by diktat is false. Capital can only be created, by mobilising means of production and labour-power to engage in production for the purpose of expanding value, i.e. by engaging in production that creates more value than was consumed in the production process. Central banks most certainly cannot do that.

Money, can be used to buy both means of production and labour-power for this purpose, and this money then takes the form of money-capital. But, it is only actual money, the equivalent form of value, which can perform that function. Simply printing money tokens, whether in the form of notes and coins, or electronically created bank money, does not do that. Simply creating more of these money tokens, merely reduces the value of the token.

If the demand for capital is £100 billion, and the supply of capital is £100 billion, at an interest rate of 6%, the rate of interest cannot be reduced, say to 4%, by the central bank, printing an additional £100 billion of money tokens. If it does so, the value of each token, simply falls in half. The demand for capital is a demand to buy buildings, machines, materials and labour-power, at their current prices, to engage in production.  If the central bank creates an additional £100 billion of money tokens, to supply for lending, all this does is to devalue each token, so that the money prices, of all of these buildings, machines, materials and wages doubles. In that case, the demand for capital simply adjusts upwards to £200 billion, so that the interest rate remains at 6%.

Marx describes this in Theories of Surplus Value, by quoting David Hume, and Joseph Massie.

"Hume attacks Locke, Massie attacks both Petty and Locke, both of whom still held the view that the level of interest depends on the quantity of money, and that in fact the real object of the loan is money (not capital).

Massie laid down more categorically than did Hume, that interest is merely a part of profit. Hume is mainly concerned to show that the value of money makes no difference to the rate of interest, since, given the proportion between interest and money-capital—6 per cent for example, that is, £6, rises or falls in value at the same time as the value of the £100 (and. therefore, of one pound sterling) rises or falls, but the proportion 6 is not affected by this.”

In the end, like most politics, what is seen on the surface, with events such as the Federal Reserve announcement, is mere pantomime, whilst the real decisions, and determinations go on elsewhere unseen.

The same changes in conditions that have led to the rise of Syriza in Greece, Podemos in Spain, Corbyn in the UK, Sanders in the US, are the same changes in conditions that are leading to the rise in wages globally, and rises in interest rates, as profits start to get squeezed. This is not an end to the long wave boom, but merely a conjunctural shift from its Spring to Summer phase, as has been seen so many times in the past. It means also a shift in the structure of capital towards the production of wage goods. Nowhere is that to be seen more clearly than in China, which needs to quickly bring about a structural shift in its economy towards meeting the needs of its domestic consumer market, and away from ever more investment in means of production.

It means, as I set out in my first book, that the laws of capital will mean that where huge sums have been used as revenue to finance speculation that has driven up financial asset prices, a greater proportion of realised profits will now have to be devoted to productive investment. It means that the financial bubbles in share, bond and property markets blown up to astronomical levels over the last 30 years, will burst with dramatic consequences much more marked than in 2008. That is why the owners of fictitious capital, and their representatives have been so terrified about rising interest rates. But, the laws of capital will roll on regardless of their panic.

In fact, as Marx points out, such a financial crash, despite the potential short term damage it may inflict, will only have a beneficial effect for capital itself.

“As regards the fall in the purely nominal capital, State bonds, shares etc.—in so far as it does not lead to the bankruptcy of the state or of the share company, or to the complete stoppage of reproduction through undermining the credit of the industrial capitalists who hold such securities—it amounts only to the transfer of wealth from one hand to another and will, on the whole, act favourably upon reproduction, since the parvenus into whose hands these stocks or shares fall cheaply, are mostly more enterprising than their former owners.” (TOSV2 p 496)

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