Tuesday, 13 October 2015

The VW/Saudi Proxy

Events over the last few weeks at VW, and in Saudi Arabia, illustrate points I have been making for the last couple of years in relation to the change in the long wave conjuncture, from the Spring to Summer phase.

At the end of last year, I set out the way that the collapse in oil prices had two obvious effects. Firstly, because oil is a significant element of constant capital, and thereby comprises a large part of the cost of production, any large fall in its price, would reduce that cost, and thereby result in a large rise in the rate of profit.  In the same way, because oil, and oil related products (everything from petrol and plastics to toothpaste) forms a huge element of consumption, the reduction in the value of oil, thereby reduces the price of wage goods, and so the value of labour-power.  The consequence of this is to increase the rate of surplus value, and thereby the rate of profit.

Firstly, therefore, the fall in oil prices, brings about a sharp rise in the mass and rate of profit, as well as a release of capital.  It thereby makes possible an increase in the accumulation of capital, particularly in all those spheres where oil comprises a large element of the cost of production, as well as in those spheres producing wage goods, which are likely to see some rise in demand as a result of a rise in workers real wages.  Although, this will be offset by a fall in investment spending in the oil industry, and associated production, this can only ever be small in relation to the beneficial effect on all other capital.

Despite the fact that the global economy has been subdued as the result of being in a downward phase of the three year cycle from Q3 2014, to Q3 2015, and despite the fact that the effect on investment in the oil and related industries is fairly immediate (although despite rapidly falling prices, oil output has continued to rise, which signifies that a further sharp fall is required before the unprofitable producers are finally shaken out, and a new process of concentration and centralisation occurs) whilst the effect of capital release, and rising rates of profit in other areas, and increases in consumption, take some time to feed through, some sign of that has been seen in the US, where new car sales have risen sharply.

One reason that consumption takes time to rise, is that the savings that workers enjoy from lower prices of petrol, and other oil derived products, come to them only piecemeal.  As a worker, you might enjoy around a $2,000 a year windfall, as a result of lower oil prices, but it only comes to you as $40 a week.  But, for an oil producer, the fall in revenue will be pretty noticeable straight away. Consumers might save up some of their savings, before splashing out on a new car, or larger purchase.  In addition, consumers across the globe are weighed down by huge, unprecedented levels of private debt, run up since the 1980's.  An immediate effect of any savings for consumers, may well be to pay down some of this private debt, rather than to immediately use the savings for additional consumption.

In short, however, the overall economic effect of this fall in the oil price is beneficial.  Even paying down the private debt, simply means that consumers will have a larger part of their incomes available in future to cover purchases, rather that to cover debt and interest.

By contrast, the consequence of falling oil prices, and the same is true for the falls seen in recent years, in the prices of copper, and other materials, has a depressing effect on financial markets.  As Marx sets out.  The rate of interest is the result of a struggle between two camps of capital, on the one hand productive-capital, which needs to borrow money-capital to cover the purchase of means of production and labour-power, and money-lending capital, which centralises the ownership of that money-capital in the banks and stock exchanges.

The available supply of this money-capital depends upon the stock of it already in existence - which is why Marx and Engels set out that older more mature societies tend to have more of it, and so lower interest rates, and because many of the former productive-capitalists retire from activity to live off the lending of their money-capital - and the flow of additional potential money-capital that results from the receipt of revenues by exploiters - profits, interest and rent.

The demand for this money-capital, depends upon the extent to which productive-capital needs it to expand.  On the one hand, a rise in the rate of profit, might encourage firms to want to expand, and thereby borrow more money to do so.  On the other hand, a consequent rise in the mass of profit, which this brings about may mean the firm has more internal resources from that profit to use for expansion, without the need to go to the money market for additional funds.  The struggles between these two camps of capital, demand on the one side, supply on the other, determines the rate of interest.

High oil and other primary product prices, created surplus profits, which took the form of rents for the producers of these products.  A characteristic feature of revenues, is that they are used for consumption rather than production.  But, what is not actually consumed in the form of commodities, can be consumed in the form of speculation, the purchase of fictitious capital - shares, bonds, property.  In other words, all of these revenues poured into global financial markets - the so called Petro-Dollar Market is a visible expression of that - as a supply of loanable money-capital.  It thereby acted to push down global interest rates.  The large rise in global rates of profit since the late 1980's had also had the same effect in reducing global interest rates over that period.

One expression of this, was the massive flow of these money funds into global stock and bond markets, also facilitated by the so called Big Bang, undertaken by Thatcher in the late 1980's in Britain, and by Reagan in the US at around the same time.  Low interest rates were the other side of the coin to these astronomical prices for fictitious capital, as ever larger bubbles in stock, bond and property have been blown up.

But, in recent weeks, Saudi Arabia, which was the source of vast amounts of these petro-dollars into global money markets, has stopped being a lender on a vast scale, and become a borrower.  Although, Saudi Arabia, produces oil at a cost of around $5 per barrel, and makes profits at any price above that - which is one reason it has recently offered to sell oil to Asian markets at a discounted price, even lower than current market prices, so as to increase its market share - it needs oil at around $100 a barrel, in order to provide the mass of revenues required to cover its large level of state spending.

That state spending has increased recently with the proxy war it is conducting against Iran in Yemen, and in Syria and Iraq, where it along with other feudal gulf states finances, trains, and equips the jihadists of ISIS, and other clerical-fascists.  Saudi Arabia, also requires high levels of state spending to provide for its own population, as a means of pacifying them, in the absence of any real growth of industry in the economy, and an abysmal record on human rights, and lack of even bourgeois democratic freedoms.

In recent weeks, therefore, rather than pumping money into the money markets to buy bonds, Saudia Arabia has been selling some of the US and other bonds, it owns to raise cash, and also issuing its own bonds to the same end.  It has not been alone.  All of the other gulf states as well as countries like Norway, have been following a similar course.  In other words, the situation is reversing, so that after 30 years, of falling interest rates, and soaring prices of fictitious capital, we now have interest rates rising.

The example, of Volkswagen demonstrates this process from a different angle.  One consequence of these soaring prices for fictitious capital, is that it creates a vicious circle.  The more the prices of bonds, shares, property rise, the more they are demanded, because speculation offers the lure of much higher prices for any of these assets in the near future.  Buyers of these over-priced assets become disinterested in the fact that they provide them with very little income, and a sharply falling yield, because they are more concerned with making these rapid, large capital gains.  That would normally stop, when those bubbles burst, and the speculators lost their shirts from the gamble.  Ultimately, that must happen, but for the last thirty years, every time such a bubble has burst, or started to burst, central banks have intervened to print money tokens, and use them to reflate those asset prices, so that the belief takes hold that these markets can only ever go up.

The consequence of this is that there is no reason for the owners of this potential money-capital to loan it for productive purposes, which take long periods to produce profits, in uncertain conditions. The owners of money-capital would much larger lend money to people to buy over priced houses, in the belief that those over priced houses will always become even more over priced, because should they start to fall, the central bank will make even more money available, whilst the government will find ways of giving that money away, so as to inflate house prices even further.  The owners of potential money-capital would rather use it to buy existing bonds, or shares for the same reason.

Because none of this lending leads to any productive-activity - lending money for someone to buy an existing house is not the same as lending money to a builder to build a house, just as buying existing bonds and shares does nothing to buy another factory, machine, or to employ a single additional worker - the lending only pushes more liquidity into a demand for bonds, shares, property and so pushes up the prices of all these things, becoming a self-fulfilling prophecy.  It is why the policy of Q.E. has done nothing to stimulate economic activity, but has simply created asset price bubbles, whilst actually if anything causing a deflation of consumer prices, and increase in consumer debt.

But, for precisely that reason, it creates an incentive as Andy Haldane wrote recently for capital to eat itself.  As money-capital goes into speculation rather than productive investment, the potential for the mass of profits to grow is necessarily restricted.  As the mass of profits is restricted, the potential to pay dividends as interest on the loaned money-capital, is reduced.  The consequence is that as the amount of dividend remains the same, but the price of shares rises, the yield - the relation of the dividend to the share price - declines.  In order to sustain yields, a bigger portion of the profit must be devoted to paying out dividends, and a smaller part retained by companies for expansion.  So, companies grow more slowly than they would have done, which means their profits grow more slowly than they would have done, which means their ability to pay dividends declines, and so the vicious circle intensifies.

This is made worse, as haldane makes clear by existing corporate governance regulations.  As Marx, made clear in Capital Volume III,  shareholders are not the owners of joint stock companies.  Such companies represent socialised capital.  That is the company's productive-capital is owned collectively by the company itself as a legal corporate body.  The shareholders are merely lenders of money-capital to the company, in return for which they are sold shares by the company.  The shareholders, are only what the name suggests, the owners of shares, not the company's capital.  They are creditors of the company, not its owners, no different in that sense to a bank that makes a loan to the company, or a buyer of the company's bonds.  As such, the ownership of shares in economic terms, gives the owner of the share only a right to receive an average rate of interest on the money they have loaned.

As I've pointed out before, this is made clear in English Law, which distinguishes clearly between the ownership of shares, and the ownership of the firm's productive-capital.

"A company is an entity distinct alike from its shareholders and its directors.” (Shaw & Sons (Salford) Ltd v Shaw [1935] 2 KB 113 by Greer LJ. 

 Its also an issue discussed recently in Moneyweek.

The nature of a joint stock company as such socialised capital is shown by the fact that a company could become its own only shareholder, simply by buying back all of the outstanding shares from its own profits.  As Haldane and Clinton have suggested, from a purely bourgeois social-democratic viewpoint, this indicates the need for a thorough reform of corporate governance rules, to prevent shareholders having their current disproportionate influence on company decision making.  Such decisions, should be the preserve of the associated producers - the workers and managers - within the company - not of shareholders and other such creditors.

In fact, with interest rates being so low, large companies, in particular, have been doing this.  They have issued bonds, or used their own profits to buy back shares, rather than use the proceeds to invest in additional productive-capital.  They have not been buying back shares to rid themselves of shareholders, however.  On the contrary, they have been doing this, because by doing so they thereby increase the price of the outstanding shares, inflating further the fictitious wealth of the shareholders, as well as the share options of the top executives who are the ones who make such decisions.  At the same time, the reduction in the number of outstanding shares, acts to inflate the earnings per share, and dividend yield on each remaining share, which thereby gives a wholly distorted picture of the extent to which stock markets are over valued.

This is where the events at VW come in as a proxy of the other side of the story.  As companies have used a disproportionate amount of their profits to hand back to shareholders in one form or another - a higher proportion as dividends, direct returns of money, the buyback of shares and so on - so a smaller proportion has gone into productive investment.  Yet, the laws of capitalist production, set objective limits upon how far that can continue.  In the end, each capital must compete for its right to exist in the marketplace, and in the end, its ability to do so depends upon undertaking actual investment in productive-capital, to be able to produce more efficiently, more cheaply, to produce new types of products able to claim a share of the market and so on.

In the US, both US and Japanese car producers have spent considerable sums investing in the production of both electric only and hybrid powered cars, as a means of complying with the more stringent emissions requirements.  In Europe, less stringent requirements, and a history, particularly in mainland Europe, of developing diesel engines, as a more efficient form of motive power, mitigated against that.  To have largely discounted all of the investment that had been put into the production of diesel powered cars, and to have had to catch up, by spending large amounts to invest in the productive-capital required to develop electric and hybrid powered cars, would have required a large investment of money-capital, and a large cut in the amount paid out to shareholders as dividends.  VW, and almost certainly most other European car manufacturers, decided instead to invest simply in technology that would enable their diesel engines to cheat on the emissions tests.

Thats is, in fact, symptomatic of the avoidance of necessary expenditures in a whole range of areas, which will have to be made, and will probably end up being more costly, simply in order to make up lost ground.  Britain is on the verge of suffering power outages, because of a lack of productive investment in power generation, and distribution; large parts of Europe are decades behind economies like Singapore, and even some emerging African economies, in terms of broadband and communications technology infrastructure.  Britain, is wasting money on HS2, which will be out of date by the time its completed, and is already 19th. century technology bring provided for 21st century requirements.  Yet, the much smaller investment required in broadband is being held back by the government.  Its meagre proposals do not even cover the whole country, and is only for the provision of 100 mbps speeds, whilst Singapore already has coverage of nearly all of the country at a speed of 1 gbps, and they are looking to raise it further!

The US, needs to spend huge amounts of productive capital, in replacing its crumbling infrastructure on rails, roads, bridges, and telecommunications.

In short, at the same time as the conjuncture is seeing a relative diminution in the availability of loanable money-capital, the objective laws of capitalist production, are creating the requirement for a sharp rise in the demand for such money-capital to fund this productive investment.  The consequence must be a sharp rise in interest, and corresponding collapse in the prices of fictitious capital.

No comments: