Thursday, 7 January 2016

Stock Markets Slump Again

Global stock markets have slumped again; the second time in four days. The slump began again in China, with stocks dropping, once more, by over 7%. The drop would have been more than that, but circuit breakers kicked in, stopping trading only a couple of hours after the market opened. The drop, over the four days, would also have been more, had the Chinese authorities not intervened directly, on Monday, to pump vast amounts of liquidity into the system, and withdrawn their proposals to lift the ban on short-selling.

In fact, just a few days into 2016, and already a number of the predictions I made for the year, before Christmas, have begun to be realised. This fall in stock prices is not yet the crash of stock markets that is long overdue. But, what has become increasingly clear is that the reason that crash, in stock, bond and property markets, has been pushed out, is only the unprecedented levels of intervention in these markets by governments and central banks.

Ever since 2008, central banks have printed vast amounts of electronic money, which they have used to buy the sovereign bonds of their own governments. That pushed the prices of those bonds to artificially high levels, and because speculators saw that the consequence of this was that the prices of those bonds would be pushed only in an upwards direction, they also bought these bonds, both to guarantee continued capital gains – at the expense of lower yields – and to act as a safe haven, a means of ensuring that, at least, the money they had spent in buying them, was not going to be lost as a result of default, or a fall in the price of the bonds.

All of the liquidity, and search for capital gain, at the expense of yield, also meant that large corporations, with huge amounts of cash on their balance sheets, used that cash for purposes of financial engineering, rather than for productive-investment. They bought back shares, sometimes even borrowing even more money at record low interest rates, to do so, so that the prices of those shares was inflated, in the same way that central bank buying of sovereign bonds, pushed up those bond prices. The same was true of property prices. It was a process whereby the prices of all this fictitious capital was inflated at the expense of investment in real productive capacity, which is the only means of generating additional real wealth and income.

But, there are limits to which this process can continue. For one thing, the US Federal Reserve can only push up the prices of US Treasury Bonds, if there are other sellers of those bonds from whom it can buy them. At the extreme, if the Fed owns all the bonds already, it cannot buy more, to push up the price. The only way it could buy more, would be if the US Treasury issued more bonds, to borrow more money, but that would be self-defeating, because the additional supply of bonds, would act to push the price down, not up! The ECB has found a similar problem, of there not being adequate bonds available to buy.

The other consequence of this is that in other parts of the economy, this sucking of liquidity into government backed securities, has drained liquidity, which acts to cause a deflation of prices. It also means, for example, that smaller capitals, which needed to borrow money-capital have found it was not available, or only available at much higher rates of interest. The same has been true with the usurious rates of interest charged by pay day lenders.

Moreover, because this process had been driven to such an extreme, even the prospect of it being slowed down or stopped provokes a sharp reaction. When, two years ago, the Federal Reserve announced that it was going to stop Q.E. it provoked the so called “taper tantrum”, whereby bond and stock markets sold off sharply, simply because the Fed was not going to be pumping quite as much liquidity into the market. The actual process of slowing down Q.E. then had dramatic effects on the currencies, interest rates and financial markets of all of the emerging economies, because their currencies began to fall against the dollar, pushing up their import prices, and along with it inflation. It meant their own interest rates had to rise, and because the prices of revenue bearing assets are nothing more than capitalised revenue, the prices of those assets necessarily fell sharply.

That is essentially what is happening in China. In my book, Marx and Engels Theories of Crisis, I noted that one source of a new crisis was the fact that China had been overproducing for some time, in a similar manner to the overproduction of Britain, in the 19th century. China has needed to shift the balance of its economy away from a dependence on exports, and towards and expansion of the domestic market. To do that, it needed to do a number of things. It needed, to ensure that wages rose steadily, which has happened as a natural consequence of the accumulation of capital, and the eventual using up of the labour reserves of the countryside; it needed to regulate the supply of labour-power, as other developed economies have done, via the creation of a welfare state; it also needed to use that welfare state to provide national social insurance for sickness, unemployment, and old age, so as to reduce the excessive savings of Chinese workers, which go currently to cover those life events, and thereby to increase the marginal propensity to consume; it also needed to allow the value of its currency to rise, so that the cost of the vast amounts of food and raw materials it imports would be reduced, so as to reduce the prices of all those things, in the domestic market.

Wages have risen, some progress is being made on developing a welfare state, but the Chinese authorities have been trapped. As much as government's in the West, they have been caught up in the need to keep the prices of fictitious assets inflated, and that requires low interest rates. But, having failed to shift the balance of the economy sufficiently to the domestic market, the Chinese authorities could only maintain employment levels, by overproducing, as the economy continued to grow at 7-10%, whilst the global economy it was trying to sell into was growing at only 2.5-3%. In order to maintain its exports, it has wanted to reduce the value of its currency, but that pushed up import prices, an effect that has only been mitigated by falling global prices of oil, food, and other primary products.

The fact, is that China will face either higher inflation, or else a need to raise the value of its currency, and that means higher interest rates, either way. Higher interest rates mean that current financial asset and property prices are grossly inflated, and will fall sharply. Hence the current bout of selling.

The falls in Chinese markets are not the consequence of the Chinese economy slowing, as some bourgeois economists are claiming. The Chinese economy is still growing at around 7% p.a., and this is the second largest economy in the world, and largest on the basis of PPP. They are falling because those prices were grossly and artificially inflated, as a result of the policies of liquidity injections that have been carried out over previous years. It is carrying over to other financial markets for a number of reasons.

Firstly, China has for the last two decades or more been one of the sources of vast amounts of loanable money-capital, which flooded into western bond, property and stock markets. It bought up these assets for the same reason that speculators in those economies themselves bought them – an expectation of guaranteed, quick, and massive capital gains. But, China had a further reason for doing so, from its sovereign wealth funds. It meant that large amounts of liquidity were recirculated into those western economies, so that consumers in those economies could continue to borrow, and thereby consume the vast amounts of commodities being churned out of Chinese factories. If China, needs to use some of that liquidity now to bolster its own collapsing bond, stock and property markets, it may begin to withdraw it from those western financial assets. That is at a time when other previous suppliers of vast amounts of loanable-money-capital, like Saudi Arabia, are needing themselves to borrow to cover their current spending.

All of that, along with the other reasons I have cited in previous posts, means that, whatever central banks do, global interest rates are rising, and that means falling prices for a range of assets.

It is a reflection of some of the themes in my new novel 2017. It begins at the time I started writing it, in 1999. At the time, it was known to a number of people that the authorities were intervening in financial markets, to prop them up. It is only the reverse of this, that the revolutionaries, who are the main characters in the book, bring about a crash of those financial markets, by their own manipulation. Initially, that crash was to have happened in 2005, and then in 2009, according to the plot. In fact, large amounts of the plot, actually became reality, in recent years. For example, the initial plan was to have gold rise to $1,000 an ounce, which seemed a huge rise in 1999, when it stood at $250 an ounce. In fact, it rose to $2,000 an ounce!

The other reason that financial markets have been selling off is the opposite to that the pundits want to suggest. They claim it is due to economic weakness. But, historically, financial markets rise during periods of economic weakness, when interest rates tend to be low, and fall in periods of more rapid economic growth, when interest rates rise. The fact is that, despite all of the talk about structural stagnation, a long depression and so on, the global economy continues to grow, despite all of the diversion of money-capital into speculation, and away from productive investment.

In the last couple of years and more, the US economy, which is not one of the most vibrant in the world, has created around 250,000 new jobs per month. That is nearly twice the rate of job creation required to absorb the expansion of the workforce, and to cause the unemployment rate to fall. The Federal Reserve has continued to claim that the real rate of unemployment is higher than the official 5% rate, because it says there are lots of workers, who are not in employment, but who are not claiming benefits, or seeking work. That is true, and a similar thing applies to the UK, where a large number of people who are really unemployed, or grossly underemployed, do not appear in the figures, because they are technically employed, on zero hours contracts, or else have become self-employed, simply because permanent jobs were unavailable. Some people have simply given up.

But, another factor also applies, and accounts for a large part of those who are not seeking employment. It is that they have been able to retire early. In reality, therefore, they are not unemployed at all. They have effectively left the labour market. In both the US and UK, and in parts of western Europe, the so called baby boomer generation, were able to enjoy more or less stable employment for a long period. They were able to buy houses, at a time prior to the hyper inflation in property prices that started around 1980. The money they borrowed, in the 1960's, and early 1970's, to buy those houses, was quickly eroded in value, as their wages rose during the period. That is an indication of the extent to which money-capital is subordinated to productive-capital. It represented, as inflation always does, a cancelling of large parts of the debt.

Having bought their houses, a large part of their living expenses was then covered, and they were able to devote disposable income to building up savings, in a range of financial assets, again prior to the hyper inflation of those prices. Some were able to obtain company pensions and so on. Back in the mid 1990's, at the council where I worked, there were lots of people who had worked in fairly ordinary jobs, since they left school, and who had built up their full pension entitlement. With a final salary of around £20,000, that gave them an inflation linked annual pension of £10,000. Many were happy to retire at 55, on such a pension, and enjoy an additional ten years, or to work a couple of afternoons a week in B&Q, to top up that amount. The same applies to many baby boomers, in a similar situation in the US.

On Wednesday, the ADP released its figure for US jobs growth, and it was up 257,000. The new weekly unemployment claims data, released today, showed that new claims fell by 10,000 on the week, the average down 1,250 for the month, and December job cuts were the smallest for fifteen and half years. So, rising levels of employment mean that the labour reserve starts to get used up. That is the reason that wages are starting to rise. It means that more workers with more wages, leads to a rising demand for wage goods, which provides the incentive for more capital to be invested to meet that demand. In turn that means that the demand for capital rises relative to the supply, which causes interest rates to rise, which again means a fall in financial asset prices.

The other element of the predictions made at the end of last year was that the development of new types of medical product based upon the development of new technologies would continue. The news that its now possible to restore sight to some blind people, by implanting a microchip, in their eye is an indication of that kind of development.

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