Monday, 4 January 2016

Global Markets Tumble

On the first trading day of 2016, global financial markets have tumbled.  The Chinese stock markets, which rose by more than 100% at the start of last lear, before falling more than 30%, fell another 8% yesterday alone, before being closed early to prevent further losses.  In fact, the only reason last year's fall was stopped was intervention in the market by the Chinese authorities.  Those falls sparked falls on other Asian markets, and European market opened with falls of around 2.5%.  In some ways its a question of life mirroring art once again.

As I wrote towards the end of last year, the election of a left-wing, anti-austerity government in Spain, featured in my new novel, 2017, as part of a process of similar governments being elected across Europe.  In the book, massively inflated stock markets crash at the start of January 2017, amidst rising tension in the Middle East.  The only difference here is its the start of 2016, rather than 2017.

The fact is that, financial and property markets are grotesquely overpriced, and the only wonder is that they have not already crashed by much more than this current drop.  The only reason they have not, is massive and unprecedented levels of intervention, and manipulation by states, to prevent it, so as to protect the fictitious wealth of private, money-lending capitalists, who leech off the productive-economy, and who fuel such panics and financial crises, through their gambling and speculation.

The open manipulation of the markets by the Chinese state authorities, is only a more transparent and honest effort at protecting the interests of those financial gamblers and speculators than is the same manipulation that has been undertaken to the same purpose and effect by governments and central banks in the West over the last twenty-five years, or so.

The biggest threat to those financial markets, though you would not know it from all of the financial pundits, and media, is that the pace of economic growth increases.  Those same representatives have this morning been quick to try to explain the falls in financial markets, by the continued slow down in the Chinese economy.  In past weeks, they have explained the fall in global oil prices, and other primary product prices, in similar terms.  Yet, the fact is that global oil demand has continued to rise, not fall.  It rose by around 2.5%.  Demand for other primary products has also generally continued to rise, or at least not fall significantly.  It is not falling demand, or under-consumption that explains falling global prices for primary products ranging from milk to oil, and copper to iron ore, but overproduction.

As demand boomed with the onset of the new long wave boom in 1999, demand for all these things rocketed, and prices for them soared, sending profits from their production soaring too.  Eventually, that led to a massive splurge of investment.  It led to the fracking boom in the United States, to billions of dollars being invested in huge industrial farms in Angola and other parts of Africa, and to a massive investment in new mines in Central Asia, Africa and Latin America.  It is the huge expansion of production of these primary products that resulted from it that has increased supply, and driven down global prices, often, for many of the higher cost producers, below their current costs of production.

But, the apologists for capitalism have never been able to reconcile themselves with the idea that capitalism suffers crises due to such overproduction.  The fall in market prices of commodities has to be explained by inadequate demand and underconsumption, and similarly the fall in financial markets has to be explained, by weak economic activity.  But, historically, it is strong economic activity that causes financial markets to perform badly, and vice versa.  Strong economic activity raises the demand for capital, relative to its supply, which causes interest rates to rise.  But, the prices of revenue bearing assets such as shares, bonds, and land are determined by a capitalisation of the revenue they produce.  So, when interest rates rise, that capitalised price falls.  That causes falling prices of stocks, bonds and property.  It is why the apologists of this money-lending capital pray for weak economic activity, so as to keep interest rates low, and these asset prices, which are the basis of their fictitious wealth, inflated.

But, yields on these financial assets are now so low, at near zero, that even a tiny absolute rise, represents a huge percentage rise, which means an equally huge drop in the capitalised prices of the assets.  A rise in interest rates from 0.25%, to 0.50%, for example, means a 100% rise in the rate!

A look around the globe, shows, however, that, for example, in Saudi Arabia, an economy that, until the last year or so, pumped huge amounts of money-capital into global financial markets, as speculation in shares and bonds, is now forced to borrow money from those markets to finance its spending, as oil prices have fallen.

China, which also pumped masses of money-capital into those financial markets, is seeing its, once apparently endless, supplies of labour-power dry up, causing wages to rise, and the rate of surplus value fall.  In order to develop its own domestic market, which requires a fall in the savings rate by its workers, it is being force to follow the pattern in other developed economies, of creating an extensive welfare state.  To open up, further supplies of exploitable labour-power, it needs to spend billions of dollars on communications and infrastructure to open up its central and western regions.

In Europe, anti-austerity governments are being elected.  But, in any case, in order to compete with new rising economies, the EU needs itself to spend billions on renewing its own infrastructure. That comes at a time when the biggest productivity gains from all of the new labour-saving inventions developed in the 1980's, and their subsequent spread into a range of applications, are coming to an end.  Prior to 2008, wages had started to rise rapidly, and that trajectory is being resumed, which again squeezes profits, at a time when firms will need to invest in more productive-capital, so as to meet the demand for more wage goods, as wages rise.  A similar situation exists in the US.  It is a scenario I set out more than a year ago, in my first book - Marx and Engels Theories of Crisis, Understanding The Coming Storm.

It means the demand for capital is rising, at a time when the supply of capital is growing at a slower pace, causing interest rates to rise. The consequence is inevitably that instability will increase in financial markets, and stock, bond and property markets will fall.

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