Thursday, 31 March 2016

Capital III, Chapter 30 - Part 6

All of this is fine so long as the reproduction process continues without any hitches. But, the reproduction process inevitably does encounter hitches, for all the reasons previously outlined, by which commodity-production and exchange involves a series of contradictions, stemming from the separation of production and consumption.  (See my book setting these out in more detail - Marx and Engels Theories of Crisis)

These contradictions necessarily manifest themselves in a breakdown of the circuit of capital in one of its three stages. Even if commodities are sold, they may be sold later than is required to ensure that payment is available to cover debts, or commodities may be sold at prices below what is required to reproduce the capital consumed in their production. 

“As soon as a stoppage takes place, as a result of delayed returns, glutted markets, or fallen prices, a superabundance of industrial capital becomes available, but in a form in which it cannot perform its functions. Huge quantities of commodity-capital, but unsaleable. Huge quantities of fixed capital, but largely idle due to stagnant reproduction. Credit is contracted 1) because this capital is idle, i.e., blocked in one of its phases of reproduction because it cannot complete its metamorphosis; 2) because confidence in the continuity of the reproduction process has been shaken; 3) because the demand for this commercial credit diminishes.” (p 483)

Credit contracts because each business that already has too much stock, does not require to buy more. But, that does not apply to their requirement for money-capital. To stay in business they still need money to pay bills for rent, heating and lighting, wages and so on, as well as to cover any outstanding bills to suppliers. They need money to cover the fact that they do not have money coming in from their own sales, their commodity-capital is not being metamorphosed into potential money-capital. In this way, the demand for credit moves in the opposite direction away from commercial credit, to the need for bank credit.

“During the crisis itself, since everyone has products to sell, cannot sell them, and yet must sell them in order to meet payments, it is not the mass of idle and investment-seeking capital, but rather the mass of capital impeded in its reproduction process, that is greatest just when the shortage of credit is most acute (and therefore the rate of discount highest for banker’s credit).” (p 483)

In other words, firms do not want to buy on credit, because they are already overstocked, but firms also do not want to sell on credit, because they need cash. The need for cash leads them to seek to discount more bills at the bank, because what they actually require here is not money-capital, but money, liquidity.  But for the lender of money-capital, they are not concerned whether the borrower needs it as money-capital, or simply as liquidity.  For them it is money-capital, upon which they seek the market rate of interest.  This increased demand for money-capital, at a time when its supply is constrained, pushes interest rates higher.

The crisis is not a consequence of credit, rather the contraction of credit is a consequence of the crisis, of the fact that industrial capital has been overproduced.

“Factories are closed, raw materials accumulate, finished products flood the market as commodities. Nothing is more erroneous, therefore, than to blame a scarcity of productive capital for such a condition. It is precisely at such times that there is a superabundance of productive capital, partly in relation to the normal, but temporarily reduced scale of reproduction, and partly in relation to the paralysed consumption.” (p 483)

Its not that there is lots of money-capital available waiting to be loaned out, but that there is lots of physical capital that cannot be employed, or cannot be realised. In fact, the available money-capital is in demand to keep businesses afloat.

Wednesday, 30 March 2016

Capital III, Chapter 30 - Part 5

Considering just this commercial credit, separate from bank credit, its expansion is a manifestation of the expansion of industrial capital itself. This must be the case, because although the credit is measured by its monetary value, what is actually being loaned is commodity-capital. When firm A supplies firm B with 1,000 kilos of cotton, with a value of £100, but invoices them for payment in 30 days, they have provided them with £100 of credit, for 30 days, but what they have actually loaned them is 1,000 kilos of cotton.

The 1,000 kilos of cotton comprise a part of the commodity-capital of firm A. To the extent that this £100 of credit provided to firm B, is a new additional credit, it is only a reflection, therefore, of the fact that firm A's commodity-capital had expanded by £100, or 1,000 kilos of cotton, which is a reflection of the fact that its own productive capital had expanded, to produce this additional cotton.

“Loan capital and industrial capital are identical here. The loaned capital is commodity-capital which is intended either for ultimate individual consumption or for the replacement of the constant elements of productive capital. What appears here as loan capital is always capital existing in some definite phase of the reproduction process, but which by means of purchase and sale passes from one person to another, while its equivalent is not paid by the buyer until some later stipulated time.” (p 481)

Credit functions in two stages here. In the first stage, a commodity goes through a series of transformations, in order to reach its final form. Cotton is transported to a spinner who produces yarn, which is sold to a weaver, who then provides a tailor with woven cloth, so that the tailor can produce the suit, as the final commodity.

All along this chain, credit facilitates the process, as the cotton supplier supplies the spinner, and obtains payment at some later date, whilst the spinner does the same in relation to the weaver and so on. But, once the commodity has assumed its final form, as a suit, credit then takes part in the second stage, which is the transfer of the suit from one hand to another, until it reaches the final consumer. For example, the tailor may sell the suit to a wholesaler, who sells it to an exporter, who ships it from China to Britain, where it is bought by an importer, who sells it to a retail chain, who eventually sell it to a consumer. At each of these stages, the suit, which comprises part of the commodity-capital of each of these firms, is sold using credit.

“It follows, then, that it is never idle capital which is loaned here, but capital which must change its form in the hands of its owner; it exists in a form that for him is merely commodity-capital, i.e., capital which must be retransformed, and, to begin with, at least converted into money. It is, therefore, the metamorphosis of commodities that is here promoted by credit; not merely C — M, but also M — C and the actual production process. A large quantity of credit within the reproductive circuit (banker’s credit excepted) does not signify a large quantity of idle capital, which is being offered for loan and is seeking profitable investment. It means rather a large employment of capital in the reproduction process.” (p 482)

Credit facilitates the expansion of production beyond the bounds of what consumption would otherwise have imposed upon it. If the supplier of cotton could only supply it provided the spinner had money up front to pay them, and if the spinner could only have that money if the weaver had money to pay them for the yarn etc., the cotton may never get supplied in the first place, and this capital would never be produced.

But, the credit enables the production to occur irrespective of any limitation of consumption. As a result, of the production occurring, spurred on by the credit, workers are put to work harvesting cotton etc. As a result, these workers have incomes to spend, which means that consumption increases. As consumption increases, so an increased flow of capital returns, which prompts additional accumulation, and further increases in production, facilitated by a further extension of credit.

“The maximum of credit is here identical with the fullest employment of industrial capital, that is, the utmost exertion of its reproductive power without regard to the limits of consumption. These limits of consumption are extended by the exertions of the reproduction process itself. On the one hand, this increases the consumption of revenue on the part of labourers and capitalists, on the other hand, it is identical with an exertion of productive consumption.” (p 482)

Tuesday, 29 March 2016

Capital III, Chapter 30 - Part 4

Each capital will need to retain a reserve fund of money-capital, so as to be able to meet its own obligations, therefore, should one of these payments owed to it fail, totally or partially. Failure to retain such a reserve leaves a firm vulnerable to a cash flow crisis, and many firms, particularly in times of buoyant trade, go out of business, not because they are making losses, but because they have not provided themselves with sufficient liquidity to pay their bills on time, should any problem arise in being paid themselves.

Marx comments that despite all of this credit issued between companies, it does not do away with the need for cash. He cites the need for cash to pay wages and taxes etc. But, today even that requirement is diminished. Both wages and taxes are paid by electronic transfer into the recipient's bank account, and when it is considered that, in turn, electronic transfers are made for regular payments, such as direct debits, to cover things such as utility bills, gym membership, and so on, it can be seen to what extent, even in this respect, the need for cash has been reduced.

For example, if I work for the local council, to which the local gym owes business rates, or rent, it pays these each month by electronic transfer. At the same time, the Council pays my wages from the funds transferred to it, whilst out of my wages I pay a gym fee. To the extent all these transfers cancel each other out, no money is required.  In reality here, the commodity I sell to the Council, my labour-power, is bought, not with money, but with the commodity, the gym sells to me, leisure facilities, with the Council here standing in the same role as the landlords, in the Tableau Economique.

There, as Marx explains, in Theories of Surplus Value, the landlords begin the year with £2000 of money, received the previous year in rent from farmers, but this money, Marx sets out was really just a money form, of the landlords legal claim to a physical proportion of the farmer's output, which in previous times would have comprised the rent in kind.  When the landlords buy £1,000 of manufactured goods from industry (the sterile class) they do so, in reality, not with money, but with the £1,000 of commodities produced by farmers, to which they had claim.  Similarly, industry buys £1,000 of food from farmers, to provide the wages of its workers.  It pays for this with money, but when farmers then buy £1,000 of manufactured goods from industry, this money flows back to industry.  In reality, therefore, the farmers have bought these manufactured goods, not with money, but with the £1,000 of food they previously sold to industry.  This exchange could just as easily have been effected by industry, handing an IOU, or some other similar piece of paper to the farmers, which would be redeemed when they sold manufactured goods to farmers.  This was, indeed the basis of commercial credit.

The extent to which these electronic transfers reduces the need for money was shown by the effect on De La Rue, who print bank notes for the Bank of England, and saw the demand for such work fall significantly.  Bills of exchange were replaced by bank cheques, and have today been replaced by electronic transfers.  Companies simply settle their accounts by such direct electronic transfers, but individuals too conduct most of their transactions electronically, at least in the highly banked economies.  A problem with payment by cheque was that the size of purchase was limited, because cheques could be written for which funds did not exist in the payers bank account, which is why cheques had to be covered with a bank card, which provided a guarantee for the payee up to £100. But, the development of technology, and the Internet means this problem does not exist, now, because a payment by bank card, can first verify that sufficient funds exist in the payer's bank account, before completing the transaction.

However, the fact that all of these payments can be made by electronic transfers from one account to another, rather than by cash does not change the need for a money balance to be held in each account, because all of these counterbalancing payments will not be made at the same time or in a convenient sequence, so that one provides the funds to pay another etc.  

If my £1,000 wages are paid into the bank, on the 20th of each month, but I have a bill for £100 to pay on the 25th, of each month, then I still need to make sure I have a balance of at least £100 in the account on the 25th.

“We have seen in the discussion of the reproduction process (Vol II, Part III) that the producers of constant capital exchange, in part, constant capital among themselves. As a result, the bills of exchange can, more or less, balance each other out.” (p 480)

This was the point made in Capital II, that if we have two departments of the economy, the total value of the production is comprised of c + v + s. However, it is only v + s, which takes part in the total social exchange. The constant capital consumed in Department I, is exchanged within the department by its producers, and thereby cancels each other out.

This kind of cancelling out can occur wherever businesses in different industries engage in mutual exchanges. For example, a coal mine may sell coal to a steel maker, but the steel maker may also sell steel for supports to the col mine. However, there are lots of instances where this is not the case, and where therefore, settlement must be made by a money payment.

“For example, the claim of the spinner on the weaver is not settled by the claim of the coal-dealer on the machine-builder. The spinner never has any counter-claims on the machine-builder, in his business, because his product, yarn, never enters as an element in the machine-builder’s reproduction process. Such claims must, therefore, be settled by money.” (p 480)

The limit of commercial credit is the extent of the reserves of capitalists to cover these inevitable disruptions in its flow, and the extent of any of these disruptions in the flow. The longer the duration of the credit, the greater the potential for disruption, and so the greater the need for a larger reserve to cover that possibility.

“And, furthermore, the returns are so much less secure, the more the original transaction was conditioned upon speculation on the rise or fall of commodity-prices. But it is evident that with the development of the productive power of labour, and thus of production on a large scale: 1) the markets expand and become more distant from the place of production; 2) credits must, therefore, be prolonged; 3) the speculative element must thus more and more dominate the transactions. Production on a large scale and for distant markets throws the total product into the hands of commerce; but it is impossible that the capital of a nation should double itself in such a manner that commerce should itself be able to buy up the entire national product with its own capital and to sell it again. Credit is, therefore, indispensable here; credit, whose volume grows with the growing volume of value of production and whose time duration grows with the increasing distance of the markets. A mutual interaction takes place here. The development of the production process extends the credit, and credit leads to an extension of industrial and commercial operations.” (p 481)

Monday, 28 March 2016

Capital III, Chapter 30 - Part 3

Because the fluctuations in the value of shares can be affected by a whole range of factors – changes in interest rates, changes in market conditions, changes in investor sentiment – as well as the potential of future profits and dividends, trading in them becomes more simply a matter of gambling. Moreover, as part of this process, the ownership of the shares themselves becomes concentrated in fewer hands.

“In order to quickly settle this question, let us point out that one could also mean by the accumulation of money-capital the accumulation of wealth in the hands of bankers (money-lenders by profession), acting as middlemen between private money-capitalists on the one hand, and the state, communities, and reproducing borrowers on the other. For the entire vast extension of the credit system, and all credit in general, is exploited by them as their private capital. These fellows always possess capital and incomes in money-form or in direct claims on money. The accumulation of the wealth of this class may take place completely differently than actual accumulation, but it proves at any rate that this class pockets a good deal of the real accumulation.” (p 478)

All of these things, such as shares, bonds and other securities, are means of loaning money-capital. They are effectively a certificate saying that the money has been loaned. But, these certificates are not the loan capital itself. It has passed out of the hands of the lender and into the hands of the borrower, who may or may not use it to purchase real capital, but who will be charged interest on it as if they had anyway.

For a capitalist, who owns one of the securities, it cannot act for him as money-capital. He cannot use it to buy materials or labour-power, etc. If he wants to buy any of these things, what he actually needs is money. Consequently, if he needs money, and cannot get it any other way, he may use such securities as collateral to obtain a loan from a bank, or alternatively may sell them to obtain the money value they represent.

It is this loanable capital, the capital loaned out to businesses that Marx is now interested in, and its accumulation. The starting point is the commercial credit that firms provide to each other. In other words, when a business supplies goods and services to another firm, it invoices the buyer for this amount, with the terms for payment, which normally stipulate that the invoice should be paid within 30 days, 60 days, or 90 days etc. In effect, the buyer is being provided with credit to the value of the invoice, for the time in which they have to pay.

These payments, in Marx’s time, were often made by bills of exchange. These bills, which entitled the owner to collect the amount stipulated, could also be endorsed and used to pay debts run up by the owner. Or, if the owner needed cash, they could take the bill to the bank and have it discounted, i.e. obtain its value in cash, less an amount charged by the bank as interest, which was a more or less amount depending on how long the bank itself would have to wait to collect on the bill.

“To the extent that these bills of exchange circulate among the merchants themselves as means of payment again, by endorsement from one to another — without, however, the mediation of discounting — it is merely a transfer of the claim from A to B and does not change the picture in the least. It merely replaces one person by another. And even in this case, the liquidation can take place without the intervention of money.” (p 479)

Marx's analysis of the process of social reproduction,
based on the Tableau Economique, demonstrates that
these exchanges show that every commodity is money.
  In most cases, commodities are bought by commodities
by this process of exchange, and money only acts as
 means of circulation, being advanced only to flow back.
Money only acts to buy commodities, where they are
not bought by commodities, i.e. where it acts as means
of payment.  But, any piece of paper, such as a bill of
 exchange can fulfill that function of facilitating
 circulation.  It is only money fetishism that creates
the delusion that money has a more specific role.
In other words, if there is A, B and C, and B buys £10 of goods from A, whilst C buys £10 of goods from B, and A buys £10 of goods from C, they each draw up bills of exchange, which in total cancel each other out. So, no money is required. Only if the bills did not cancel each other, would money be required, and then only for the balance. What this relies on is that there is a return flow of capital. If at some point, in the chain, described above, the goods thrown on to the market are not sold, the capital consumed in their production does not flow back, and so the capital that should then have flowed back to cover previous payments cannot be made, so that a failure of payments takes place along the chain.

In fact, even if the goods are sold, a disruption may still occur.

“If the corn speculator has a bill of exchange drawn upon his agent, the agent can pay the money if the corn has been sold in the interim at the expected price. These payments, therefore, depend on the fluidity of reproduction, that is, the production and consumption processes. But since the credits are mutual, the solvency of one depends upon the solvency of another; for in drawing his bill of exchange, one may have counted either on the return flow of the capital in his own business or on the return flow of the capital in a third party’s business whose bill of exchange is due in the meantime.” (p 479-80)

Sunday, 27 March 2016

Capital III, Chapter 30 - Part 2

If I am a capitalist and have £1,000, which I use to buy a machine, it can easily be seen that I have a capital of £1,000. If I come to sell the machine that comprises this capital, I can obtain its value. But, if I am a money-capitalist, and buy a share in a company, providing it with £1,000 of money-capital, which it uses to buy a machine, it appears that two capitals of £1,000 have been created. On the one hand, the firm has a capital in the shape of the machine worth £1,000, which it could sell. On the other hand, I have a share certificate with a value of £1,000, which I could equally sell. It appears that £2,000 of capital exists, where previously only £1,000 existed, even though, in reality, there still only exists the real capital of £1,000 in the shape of the machine.

The share certificates exist only as duplicates of the real capital, an imaginary claim upon it, because the shareholder or bondholder, who loans money-capital to the state, or joint stock company, can never actually take possession of the individual assets, whose purchase they finance.

“They come to nominally represent non-existent capital. For the real capital exists side by side with them and does not change hands as a result of the transfer of these duplicates from one person to another. They assume the form of interest-bearing capital, not only because they guarantee a certain income, but also because, through their sale, their repayment as capital-values can be obtained.” (p 477)

To the extent that additional shares are issued to raise money-capital, that is invested in real capital, in the building of factories, railways and so on, the expansion of the share capital reflects the expansion of the real capital. 

“But as duplicates which are themselves objects of transactions as commodities, and thus able to circulate as capital-values, they are illusory, and their value may fall or rise quite independently of the movement of value of the real capital for which they are titles. Their value, that is, their quotation on the Stock Exchange, necessarily has a tendency to rise with a fall in the rate of interest — in so far as this fall, independent of the characteristic movements of money-capital, is due merely to the tendency for the rate of profit to fall; therefore, this imaginary wealth expands, if for this reason alone, in the course of capitalist production in accordance with the expressed value for each of its aliquot parts of specific original nominal value.” (p 477-8)

In fact, although Marx's point that share prices tend to rise when interest rates fall is correct, his other point about a fall in the interest rate, due “... merely to the tendency for the rate of profit to fall” does not at all seem to follow. As Marx has already described, the rate of interest can rise or fall, whether the rate of profit itself is rising or falling. If the rate of profit is rising, this will cause a rise in the demand for money-capital, but it will also cause a rise in the supply of money-capital. Similarly, if the rate of profit is falling, the supply of money-capital will also be falling, which may cause the rate of interest to rise not fall. But, in any case it would be a strange situation where the rate of profit was falling, and the value of shares was rising, because the share price generally acts as a discounting mechanism of future earnings, i.e. profits.

Its far more likely that if the rate of profit is falling, that share prices would fall, and money would move out of equities, and into bonds, as the safer asset, where yield would have also become relatively higher, which would then cause the price of bonds to rise and their yield to fall. In other words, Marx has the causal relation back to front here.

Marx gives an example of how the expansion of share capital can be an expression of the expansion of actual capital.

“A portion of the accumulated loanable money-capital is indeed merely an expression of industrial capital. For instance, when England, in 1857, had invested 180 million in American railways and other enterprises, this investment was transacted almost completely by the export of English commodities for which the Americans did not have to make payment in return. The English exporter drew bills of exchange for these commodities on America, which the English stock subscribers bought up and which were sent to America for purchasing the stock subscriptions.” (Note 7, p 478)

Saturday, 26 March 2016

Capital III, Chapter 30 - Part 1

Money-Capital and Real Capital. I

Marx then turns to a series of questions that are of interest today with the blowing up of repeated asset price bubbles.

First, to what extent is the accumulation of money-capital an indication of an accumulation of real capital, and to what extent is a plethora of money-capital a manifestation of overproduction.

“Does this plethora, or excessive supply of money-capital, coincide with the existence of stagnating masses of money (bullion, gold coin and bank-notes), so that this superabundance of actual money is the expression and external form of that plethora of loan capital?” (p 476)


“To what extent does a scarcity of money, i.e., a shortage of loan capital, express a shortage of real capital (commodity-capital and productive capital)? To what extent does it coincide, on the other hand, with a shortage of money as such, a shortage of the medium of circulation?” (p 476)

On the basis of the analysis so far, we know that money, as the universal equivalent form of value, represents a certain quantity of labour-time, and its owner, thereby, has a claim on an equal amount of labour-time. The owner of money-capital, i.e. money that has been loaned out, has a claim not just on an equivalent amount of labour, as represented by the loan, but also to an amount of labour equal in value to the interest on the loan.

Yet, there is nothing specific to the money used as money-capital as opposed to that which existed simply as money, which creates this larger quantity of labour-time over which it exerts a claim. If I have £10, and use it to buy food, I obtain food with a value of £10, which represents a given quantity of labour-time. There is no expansion of value. If I loan this £10 to B, who gives me an I.O.U., that promises to pay me back £11, at the end of the week, then, if B spends the £10 on food, there has likewise been no expansion of value. Absent any other factors, at the end of the week, B could give me the food, they bought, and nothing else, thereby defaulting on their promise to pay the £1 interest. I would simply have £10 of food, rather than £10 in money.

But, equally, B may have eaten the food. In that case, I am left with a rather worthless piece of paper that promised to pay me £11. Only if B has some form of employment can they repay me, so that they must expend £11 of labour-time, and with the proceeds repay the debt, so that, in effect, I had a claim on £11 worth of their labour-time.

However, in no way has this £10 loan created any additional value. Only if B had themselves used the loan as capital, i.e. to buy means of production and labour-power, so as to produce surplus value, would it have resulted in an expansion of value. But, then it is the real capital that self-expanded not the money-capital. The money-capital can only expand and obtain interest because the real capital expanded.

So, where money-capital is loaned for the national debt, for example, the interest paid on this loan does not arise because the money-capital somehow expands, or even because it is loaned to acquire real capital, which expands. It arises only because money-capital is able to command interest. In this case, the interest is paid, not out of any expansion of capital, but can only be paid continually out of the performance of new labour.

“By means of these facts, whereby even an accumulation of debts may appear as an accumulation of capital, the height of distortion taking place in the credit system becomes apparent. These promissory notes, which are issued for the originally loaned capital long since spent, these paper duplicates of consumed capital, serve for their owners as capital to the extent that they are saleable commodities and may, therefore, be reconverted into capital.” (p 476-7)

Back To Chapter 29

Forward To Part 2

Northern Soul Classics - You Ought To Be In Heaven - The Impressions

Pure class.  Perfect Impressions.

Friday, 25 March 2016

Friday Night Disco - Needle In A Haystack - The Velvelettes

Just about to set off for Moorville Hall soul night.  Meantime I'll leave you with this classic from the Velvellettes.

US GDP and The Rate of Profit

A lot of heat and column inches has been generated, particularly in recent years over the question of the rate of profit.  I have pointed out in the past that a lot of the debate has been rather pointless, because the data that was being used for the various claims was itself inadequate from the perspective of determining a Marxist rate of profit.  That was so for several reasons.

Firstly, the figures for the value of output are those for GDP.  But, Marx explains at length, in Capital III, and in Theories of Surplus Value, that this figure for GDP, is, in fact, only a figure for the value of society's consumption fund, which is equal to the value of national income/expenditure.  National Income is the figure for the sum of all revenues - wages, profit, interest and rent - which in turn is equal to the new value created by labour during the year, which is equal to v + s, variable capital, plus surplus value.  But, the total value of output, i.e. gross national output as opposed to gross national income/expenditure is equal not to v + s, but to c + v +s.  That is not just to this new value produced during the year, equal to incomes and expenditure, but also to the constant capital consumed in the production of constant capital, and which must be replaced, on a like for like basis, out of current production, and which, therefore, forms no part whatsoever of the value of consumption, because it is entirely an exchange of capital with capital, and not with revenue.

The delusion that gross national output is the same as gross national product/income/expenditure flows from what Marx calls Adam Smith's absurd concept that the value of a commodity, and so of society's commodity-product, can be resolved purely into incomes.  That concept lies at the basis of all orthodox bourgeois economic theory.  One of the first things that economic students are taught is that the value of output is equal to the revenues obtained as wages, profits, rent and interest.  That idea is also the basis of the marginal theory of value.  Yet, as Marx observes, this notion is clearly absurd.

If we take a shop that sells bread, the shop owner buys the bread from a baker, for say £100.  The shop owner sells the bread for say £120.  But, its quite clear that this £120 cannot form the income of the shop owner, all of which they spend to fund their consumption.  If they did, they would not have the £100 required to buy bread from the baker tomorrow, to sell in their shop, and so would go out of business.  The income of the shop owner is only £20.  The value of the bread they sell, quite clearly does not resolve itself purely into their income of £20, because the largest part of it, consists not of any such income, but of the constant capital of the shop owner, in the shape of the bread, which they must repeatedly set aside from the proceeds of their sale, so as to be able to reproduce it in kind.

Adam Smith, tried to get round this by claiming that the constant capital, here the bread, itself resolved itself purely into these revenues, but, as Marx shows, this is equally absurd, and simply shifts us from pillar to post, because each of these elements of the constant capital, what would be termed the "intermediate production", are themselves comprised not just of revenues, i.e. newly created value, but also of constant capital.

If we worked our way back from the shop owner, through the baker, to the miller, and beyond to the farmer who produces the grain, which is turned into flour, which is then turned into bread, we find that, for example, the farmer produces 100 tons of grain, with a value of £100.  But, again, the farmer cannot sell all of this grain, and obtain this £100 of value.  Of this 100 tons of grain, the farmer may require 50 tons, as seed, so that they can produce grain next year.  The value of the farmer's output is £100, comprised of £50 of constant capital (seed), and £50 of new value created by the farmer's labour.  But, the farmer can only sell £50 of this output, replacing the £50 of constant capital, on a like for like basis, directly from output, an exchange of capital with capital.

It is only the £50 of new value the farmer creates, which forms their income, and which they can consume.  Similarly, the farmer sells £50 of grain to the miller, who adds an amount of new value to it, by their labour, say £25, so that the flour they sell to the baker has a value of £75.  But, it is only the £25 of new value they create, which forms their income, and which they can consume, because they must use the other £50, to once more buy grain from the farmer.  In the same way, the baker adds £25 of new value to the flour, by their labour, in turning it into bread.  But, for the same reason, it is only this £25 of new value that they can consume as revenue.  Finally, the shop owner buys the bread for £100, and sells it for £120, taking £20 of income, and it is only this £20, which they can consume.

Of the total consumption fund of £120, represented by the bread, and which is the equivalent of GDP, therefore, the shopkeeper consumes £20, the baker £25, the miller £25, and the farmer £50, but the total value of output here is not £120, equal to this consumption fund, made up of the total of all the added value of this intermediate production, but is equal to £170, because an additional £50 of grain was produced, which never went into circulation, and never formed either an income for anyone, or formed part of consumption.  It simply went to reproduce itself out of current production.

By taking the value of output as GDP, which is only the value of the consumption fund, of the new value created by labour during the year, a false picture is thereby given of the actual value of output, and consequently of changes within it.  By using these figures, therefore, as the basis for determining the value of profits, and comparing this to the other elements of GDP, what is thereby being calculated is not a figure for a Marxian rate of profit, but only of a Marxian rate of surplus value, a comparison of the amount of surplus value produced (and allocated as profit, rent and interest) relative to variable capital.

The second reason that the calculation of the rate of profit, based on this data, is wrong, is that it does not take into consideration changes in the rate of turnover of capital, and consequently in the annual rate of profit.  Even were it to provide an estimate of the rate of profit rather than just the rate of surplus value, it would only be an estimate of the rate of profit based on the laid out capital rather than the advanced capital.  In other words it would be an estimate of the profit margin, p/k, not the annual rate of profit, which is the basis of the average or general rate of profit.  As it is, it is not ven an estimate of the annual rate of surplus value.

On top of that is the problem of taking data collated on the basis of bourgeois categories, and trying to fit them into Marxian categories.  The best and most reliable data provided is that produced by the US Bureau of Economic Affairs, but the further problem with trying to calculate a Marxian rate of profit, using this data, has also been highlighted.

A recent analysis, by CNBC, showed the BEA's data to be seriously flawed.  The CNBC analysis showed that the US GDP figures, for each quarter, had a margin of error of 1.3% points.  That is a huge potential discrepancy.  In other words, if the GDP growth figure came in, for any particular quarter, as being 2%, the actual figure could be as much as 3.3%, or as little as 0.7%!  Growth could be almost doubled on the one hand, or more than halved on the other.

That is on top of the usual short-term revisions of the data, which occur in the months following the initial release.  For example, the initial figure for US fourth quarter GDP was announced as 1%, but has now been revised up to 1.4%, itself a 40% increase on the original estimate of growth for the quarter.  If the data provided by the most reliable sources in the globe is out by these kinds of amounts, and the real situation is only discernible several years after the event, how unreliable is the data provided for other economies, and how pointless, therefore, the attempts to determine Marxian rates of profit based upon them, even besides the other problems with that data, as described above.

As CNBC's Steve Liesman pointed out, the Federal Reserve, when there is a conflict of data between what jobs numbers are implying, and what the GDP data suggests, always take the jobs data, because the number of actual new jobs created, and increase in employment is more objectively and accurately determined.  On that basis, for several years now,  the US has been producing more than twice as many jobs, each month, than are required to achieve full employment.  That seems inconsistent with the published data on GDP growth, and this new research by CNBC probably explains why.  In that case, we will probably see, in later years, that the US economy has been growing much more strongly than the published data suggests, and that it may already have started to become overheated.  In that case, the Federal Reserve may be already behind the curve, and will find itself having to raise official interest rates, sharply, to curb a problem of inflation.

Capital III, Chapter 29 - Part 12

However, it is not just the deposits, put out to circulation, as loans, that are doubled in this way. Marx and Engels set out how this is also the case with the reserves, because, as today, the majority of these reserves are themselves placed by the banks on deposit with the central bank. So, for example, when in June 2014, the ECB decided to introduce a negative deposit rate, this was a charge on the various European banks that make such deposits with it. The intention was to encourage these banks to reduce these deposits – effectively, like all deposits, loans to the ECB – and instead to loan the money to commercial clients.

Engels sets out the reserves of fifteen of the largest London banks in 1892, which amounted to almost £28 million. He writes,

“Of this total reserve of almost 28 million, at least 25 million are deposited in the Bank of England, and at most 3 million are in cash in the safes of the 15 banks themselves. But the cash reserve of the banking department of the Bank of England amounted to less than 16 million during that same month of November 1892!” (Note 4, p 474)

The reserves of the banks, therefore, became merged with the reserves of the Bank of England. This is significant when, as happened in 1847 and 1857, there is a gold drain, which sparks a financial panic and credit crunch, because it then not only drains the reserves of the Bank of England, but also the commercial banks, whose reserves have become merged with it.

“However, this reserve fund also has a double existence. The reserve fund of the banking department is equal to the surplus of notes which the Bank is authorised to issue over and above the notes in circulation. The legal maximum of the note issue is £14 million (for which no bullion reserve is required; it is the approximate amount owed by the state to the Bank) plus the amount of the Bank's supply of precious metal. If the supply of precious metal in the Bank amounts to £14 million, the Bank can thus issue £28 million in notes, and if £20 million of these are in circulation, the reserve fund of the banking department is £8 million. These £8 million's worth of notes are then legally the banker's capital at the disposal of the Bank, and at the same time the reserve fund for its deposits. Now, if a drain of gold takes place, whereby the supply of precious metal in the Bank is reduced by £6 million — requiring the destruction of an equivalent number of notes — the reserve of the banking department would fall from £8 million to £2 million. On the one hand, the Bank would raise its rate of interest considerably; on the other hand, the banks having deposits with it, and the other depositors, would observe a large decrease in the reserve fund covering their own credits in the Bank. In 1857, the four largest stock banks of London threatened to call in their deposits, and thereby bankrupt the banking department, unless the Bank of England would secure a "government letter" suspending the Bank Act of 1844. In this way the banking department could fail, as in 1847, while any number of millions (e.g., 8 million in 1847) are held in its issue department to guarantee the convertibility of the circulating notes.” (p 473-4)

As in 1847, the Bank Act was suspended, and this enabled the bank to issue as many bank notes as was required to end the panic, without them being backed by gold. Engels describes it as,

“... thus, to create an arbitrary quantity of fictitious paper money-capital, and to use it for the purpose of making loans to banks, exchange brokers, and through them to commerce.” (Note 5, p 474)

In other words, this was the same process as was required to resolve the financial crisis of 2008. Engels' description here of this money-printing as the creation of “fictitious money-capital” is significant because it distinguishes it from actual money-capital. As described previously, contrary to the belief of the proponents of QE, money printing cannot create money-capital, but only money tokens. Because it cannot produce money-capital, it cannot thereby reduce interest rates. It may act to reduce specific interest rates as a result of the funds being used to buy specific securities, but only at the cost of causing other interest rates to rise, and, in the longer term, inflation.

Thursday, 24 March 2016

Brexit and The Break-up of Britain

One important aspect of the EU Referendum, for British workers, is what effect a vote to leave would have for their unity not just with workers across Europe, but also within the existing British state. One threat to that unity, posed by the potential for a Scottish breakaway was avoided in the Scottish Referendum, but a vote to leave the EU, would re-open that danger. But, it would also open similar dangers in relation to Wales and Northern Ireland. In fact, the dangers in relation to Northern Ireland for the working-class are severe.

At the time of the Scottish Referendum, in a discussion elsewhere, I pondered the question of whether there were any conditions under which Marxists might advocate a separate Scotland. I suggested that one possible situation might be if Britain were to leave the EU, but Scotland, as part of gaining independence, were to remain within the EU. The Marxist argument against separation, particularly the separation of small states is that it divides the working-class, as a global class, by establishing artificial borders between them. More than one hundred years ago, Lenin argued that it was only possible to support the creation of new bourgeois states in the most extreme cases, for that very reason.

“The Social-Democrats will always combat every attempt to influence national self-determination from without by violence or by any injustice. However, our unreserved recognition of the struggle for freedom of self-determination does not in any way commit us to supporting every demand for national self-determination. As the party of the proletariat, the Social-Democratic Party considers it to be its positive and principal task to further the self-determination of the proletariat in each nationality rather than that of peoples or nations. We must always and unreservedly work for the very closest unity of the proletariat of all nationalities, and it is only in isolated and exceptional cases that we can advance and actively support demands conducive to the establishment of a new class state or to the substitution of a looser federal unity, etc., for the complete political unity of a state.” 

On balance, I concluded that, given that Britain is already a unified state, whereas the EU is only a proto-state, a state that not only is not unitary, but is not even a federation, then Scottish workers should vote to remain in the former, even if the latter was itself to leave the EU. If the EU were to become a federal, or unitary state, then that situation would change. However, we have to deal with the situation as it exists now, and not how it might exist at some point in the future. That argument applies equally to Wales.

The situation in Northern Ireland is different. The potential there is not just for Northern Ireland to remain a part of a unified British state, outside the EU, or else to be a part of an EU proto state, but is also to be part of a unitary Irish State, within the EU. That question is complicated further by the possibility of incorporating the Northern Ireland statelet within the Irish State on the basis of a federal system, to provide guarantees to minorities within specific areas.

In terms, of dealing with the existing situation, Marxists might argue against Scottish or Welsh separation from a unified British State, and yet it is clear that, if Britain, as a whole, were to vote to leave the EU, that might well be at odds with the wishes of the people of Scotland. A decision to leave will almost certainly provoke demands for a new Scottish independence referendum. Whilst Marxists would still argue for Scotland to remain within the UK, if Scotland were to vote to leave, then Marxists would uphold their right to self-determination. In the less likely event that Wales were to vote to leave the UK, the same principle would apply. Under those conditions a vote to leave the EU, would undoubtedly lead, at the very least, to a constitutional crisis, within the UK, and potentially to the break-up of Britain itself.

On the other hand, what the current situation does highlight, and open the potential for addressing, is the issue of the status of the Isle of Man, Channel Islands and so on, which, on the one hand, benefit from protection by the British State, and yet act both as tax havens for the rich, as well as operating as self-governing dominions. The current discussions should open the potential for a wider discussion in relation to the completion of the British bourgeois revolution, in these respects, and in relation to the remnants of feudalism represented by the Monarchy, House of Lords and so on. 

The question, in relation to Northern Ireland, is more severe in its consequences for the working-class. For a long period, from the end of the 1960's, until the signing of the Good Friday Agreement of 1998, the conflict in Northern Ireland wrought terrible damage, not just as a result of violence on the people of Northern Ireland and Britain, but also by creating deep divisions within the working-class. It divided workers in Northern Ireland along sectarian lines, and divided workers in Northern Ireland from those in the rest of Britain, as a result of hostility created by acts of terrorism on the mainland, undertaken by Republicans, much as is happening now in relation to acts of terrorism by jihadists. Just as today, it facilitated the actions of the British state in limiting basic bourgeois freedoms, and restricting civil liberties. In fact, the jihadists are rank amateurs and incompetents, in comparison to the success of the Republicans, during that period, and any return of such conditions would almost certainly result in a much harsher restriction of those rights.

A main consideration in ending the conflict in Northern Ireland, and reaching a settlement, was the fact of the expansion of the EU, as a broader transnational proto-state, in which the concerns of minorities could be subsumed. That was further facilitated by the economic benefits that began to flow from the EU, across the border between the Irish Republic and Northern Ireland, especially as the Irish economy grew rapidly as part of the development of the EU. Within the context of the EU, the existing borders became almost irrelevant, as the experience of Sinn Fein demonstrates. It stands candidates in elections in Northern Ireland and the Irish Republic, it has MP's elected to Westminster and Dublin, as well as to the European Parliament.  There is no reason that the working-class in Britain and Ireland could not be fused together more closely in a similar way, by the operation of a single Labour Party, trades unions and co-operatives across those borders.. 

A decision of Britain to leave the EU would be likely to undermine the basis of the resolution of the Northern Ireland conflict, not only because some of the treaties and agreements that have been reached are based upon the membership of both the UK and Ireland of the EU. The concern of the Brexiteers with immigration is an obvious example of the way such divisions would open up. With Ireland in the EU, and Schengen, EU migrants seeking entry to Britain, could simply move to Ireland, and then cross into the UK through Northern Ireland. Very soon it would become necessary to establish border controls between the Irish Republic and Northern Ireland. That would be just symbolic of all of the other restrictions that would go up between the two parts of Ireland.

The rational solution for such a situation would be the incorporation of Northern Ireland into the Irish Republic, but the Protestant majority in the North would continue to oppose such a solution. The hope of the catholic minority, in the North, that the issue of the border would slowly dissolve, within the context of wider EU membership, would be dashed, once more reigniting divisions between the two communities, especially as the catholic minority no longer saw protection for their interests from EU institutions, and instead saw themselves, once more, confronted by a nationalist, conservative British state, historically tied to the protestant majority. It is likely, under such conditions, that the current arrangements would collapse quickly, that communal divisions would open up, once more, and that the men of violence would again dominate the politics of the region, with its consequent effects on the politics of the UK and Ireland.

Over the last few years, there has been growing centrifugal tendencies within Europe. A major cause of those tendencies has been the conservative responses to the financial crisis of 2008, which sought to protect the owners of fictitious capital at the expense of real capital, via the imposition of measures of austerity which depressed economic activity and capital formation, along with measures of monetary stimulus which inflated fictitious asset prices, and sucked potential money-capital out of general circulation, once again depressing capital formation, and economic activity. 

Those policies led workers, across Europe, to look for simple solutions to the problems those policies imposed upon them. As in the past, it facilitated the work of populist demagogues to offer up easy solutions by scapegoating one group or another, and suggesting that if only control rested more locally all problems could be resolved. But, in fact, the opposite was the case. The problems did not result from control being exercised by “others”, but from the very policies of austerity that were being employed by conservative politicians everywhere. 

Only to the extent that those policies impacted more severely on particular countries, such as Greece, was it true, because it was those conservative politicians that had current control over EU policy making. But, the reality was that Greece would have to have imposed even greater austerity, and would have seen an even greater diminution of the living standards of its people outside the EU. The solution to those problems is not greater division and separation, but quite the opposite, it is greater unity and integration, within a larger, unified EU state that is capable of adopting the kind of measures of fiscal stimulus that are required to promote economic growth and capital formation. Rather than further fragmentation and division, what workers across Europe actually need, at the moment is a United States of Europe, as the basis framework within which the European working-class can struggle for a workers' Europe, and ultimately a Socialist United States of Europe.

Capital III, Chapter 29 - Part 11

In a precursor to the development of the wide range of derivatives that exist today, Marx refers to the way credit and interest-bearing capital leads to a situation where capital seems to double and treble itself. For example, today a mortgage is issued against the security of a house. The loan acts as interest-bearing capital. But, the mortgage itself is then packaged into a bundle and sold as a mortgage backed security. The MBS then appears to be the interest bearing capital, and the mortgage not the house is then the security.

Marx details the beginnings of what today are mutual funds, unit trusts, and investment trusts, in which a large number of small amounts can be amalgamated into a large fund, which can then be invested across a range of shares to avoid large losses from any one share.

Marx quotes Adam Smith, who describes how, just as the same piece of money can be used to perform several purchases, so it can be used to make several loans. If A lends £1,000 to W, who uses it to buy £1,000 of commodities from B, B may then use this £1,000 received to lend to X, who then buys £1,000 of goods from C, who then lends this £1,000 to Y.

The same £1,000 has sufficed to make three loans totalling £3,000, as well as to enable £3,000 of commodities to be bought. Yet, assuming the basis of the loans was sound, they could all be repaid. Although, it may not seem it, this is different than had A simply lent £1,000 to B, who then lends it to C. In that case, the same capital would simply have transferred hands. But, in fact, three separate capitals have been lent in the previous example, using the same £1,000. That is as a result of these separate capitals circulating three separate commodity-capitals.

“The number of capitals which it actually represents depends on the number of times that it functions as the value-form of various commodity-capitals.” (p 472)

Marx then quotes from “The Currency Theory Reviewed”, to demonstrate how this can lead to a given amount of deposits being expanded into a much greater quantity, what today is called the credit multiplier.

“"It is unquestionably true that the £1,000 which you deposit at A today may be reissued tomorrow, and form a deposit at B. The day after that, reissued from B, it may form a deposit at C... and so on to infinitude; and that the same £1,000 in money may, thus, by a succession of transfers, multiply itself into a sum of deposits absolutely indefinite. It is possible, therefore, that nine-tenths of all the deposits in the United Kingdom may have no existence beyond their record in the books of the bankers who are respectively accountable for them.... Thus in Scotland, for instance, currency has never exceeded £3 million, the deposits in the banks are estimated at £27 million. Unless a run on the banks be made, the same £1,000 would, if sent back upon its travels, cancel with the same facility a sum equally indefinite. As the same £1,000, with which you cancel your debt to a tradesman today, may cancel his debt to the merchant tomorrow, the merchant's debt to the bank the day following, and so on without end; so the same £1,000 may pass from hand to hand, and bank to bank, and cancel any conceivable sum of deposits." (The Currency Theory Reviewed, pp. 62-63.)” (p 472)

Back To Part 10

Forward To Part 12

Wednesday, 23 March 2016

The Fifth Largest Economy?

Brexiteers repeatedly argue that a Britain outside the EU would prosper because Britain, after all, is the world's fifth largest economy. But, in fact, not only is this argument spurious, but it also shows what is wrong with their underlying world view. We will set aside the fact that a hundred years ago, Britain was the world's largest economy, and still ruled the world, and the fact that even sixty years ago, it was still the world's second largest economy behind the US, which had taken over its first place spot. We can set aside the fact that not too many years ago Britain was still the third or fourth largest economy. In other words, we can set aide the fact that Britain's standing in the world rankings has been rapidly declining over the last one hundred years, and was one reason it needed to become part of a larger economic bloc in the first place.

Instead, let's look beneath the fact of this fifth place, and examine what it means in reality. As the saying goes, “In the world of the blind, the one eyed man is king.” In other words, what exactly does being fifth largest economy mean in a global economy that comprises more than 200 different countries. We might have, for example, a distribution that was something like A $ 2 trillion, B $1.5 trillion, C $1 trillion, D $0.99 trillion, E $400 billion, F $300, G-Z $ 50 billion.

In that case, economy E, is the fifth largest economy, but it is only a fifth the size of the largest economy, and half the size of the fourth largest economy. Its actual standing appears quite different when viewed in this way, and when the vast number of economies are seen as being more or less in a different league. A football team might be 20th, out of a league of 100 clubs, but its 20th position doesn't change the fact that it is at the bottom of its division, and about to get relegated!

The world's largest economy, the United States has a GDP of $18 trillion. China, which is the second largest economy, has a GDP of $11.4 trillion. Third place is held by Japan, with a GDP of $4.1 trillion. In fourth place is Germany with a GDP of $3.4 trillion. Britain's GDP is $2.9 trillion, whilst France is close behind with $2.4 trillion. (All figures for 2015, based on the CIA World Factbook).

In other words the UK may be the fifth largest economy, but it is only a seventh (14%), of the size of the US economy. It is only a fifth the size of the Chinese economy, and getting smaller in proportion by the minute. It is only three-quarters the size of the Japanese economy, which has itself been going backwards for the last 25 years. What is more, behind France comes a list of economies, which are moving in the opposite direction to the UK. Where the UK has been in decline for more than a hundred years, when its top spot began to be challenged by Germany, the US, France, Japan and so on, economies like Brazil, India and so on, which occupy the positions below France, have been growing, and moving up the rankings quickly. Britain, may be the fifth largest economy today, but on the basis of its relative decline over the last century and the relative rise of these other economies, it will only be a matter of at most a decade, before Britain sinks to being only the tenth largest economy, and possibly even just the fifteenth largest economy behind places like South Korea and Mexico.

But, what is more, looking at the ranking of the UK economy, on the basis of the relative sizes of different national economies is itself misleading, precisely because the global economy has long since gone past the stage of such national economies, and instead been divided into competing regional economic blocs. In fact, a look at the world ranking of economies provided by Wikipedia, shows the world's largest economy being not the US, but the EU, with a GDP of $18.5 trillion, or about 25%, of global GDP.

An independent UK economy with its GDP of just $2.9 trillion, would then appear as a rather insignificant minnow squeezed between the EU economy of $18.5 trillion, and the US economy of $18 trillion. It would be rather like the little corner shop, squeezed between a giant Tesco at one end of the road, and a giant Sainsbury's at the other, and all the time, it would be seeing its position deteriorate, as other large supermarkets opened around it, and other independent traders grouped together in larger associations. In fact, it was precisely for that reason, that the EU was formed so that the individually small economies of Western Europe, could create a much larger single market so as to compete with the rise of the naturally, and geographically much larger single market of the United States.

But, even the giant US economy no longer stands alone, in this new global economy divided into large economic blocs. It has joined with Canada and Mexico to form NAFTA, with a combined GDP of around $20 trillion. It is a market of around 470 million people, compared to the market of around 500 million people in the EU, and 1.4 billion in China. By contrast, the UK has a domestic market of just 60 million people.

And that message, that the days of the individual national economy are long dead, has not been lost on all of those in the newly rising economies. In South America, Mercosur has been established. It has a domestic market of around 290 million people, and a GDP of around $ 4 trillion. In South-East Asia, ASEAN has a domestic market of 625 million people, and a GDP of $ 2.8 trillion.

Some of the world's fastest growing economies today are in developing sub-Saharan Africa. Ethiopia, for example, grew in 2014/15 by more than 10%, and it has grown by around that amount for the last decade, other than for 2008, when it grew at 8.8%, and 2011, when it grew at 8.7%. Along with it have arisen a number of African economic blocs. The Organisation of African Unity aims at establishing something akin to the EU, across Africa by 2030, which is probably an ambitious target, but it indicates the direction of travel for global economies, and it is a direction of travel that the Brexiteers are moving in the opposite way from.

So, the Brexiteers talk about the UK as the world's fifth largest economy is entirely misleading because it fails to take into consideration the actual relative strength of the UK economy not only compared with its main competitors, and with the direction of travel of these different economies, but more importantly, it fails to recognise that a UK economy standing on its own, would not be competing with these other various economies as individual national economies, but as economies which are themselves integrated into larger economic blocs.

Capital III, Chapter 29 - Part 10

A portion of the money supply must be held as a reserve fund as described earlier, because of the need to balance payments etc. The size of the reserve varies in line with the needs of circulation. Aside from this reserve, bank deposits are always in circulation in one form or another. Either they are circulating so as to circulate capital or else to circulate revenue.

The circulation of capital involves a transfer of capital, in so far as it is an exchange between capitals. For example, a productive capitalist transfers money-capital to a supplier of raw materials, and receives these raw materials as productive-capital. However, when a capitalist buys labour-power, this is not a transfer of capital, at least directly. The capitalist takes a portion of their money-capital, and buys labour-power with it, but what is transferred to the worker as wages is not capital, but revenue.

The money the worker receives is not money-capital, but only money. It is not destined to be used by the worker as capital, as self expanding value, but only as revenue to buy commodities of equal value, for their consumption. Nor does the labour-power, sold by the worker to the capitalist constitute a transfer of capital. It is not capital for the worker; it is not for him self-expanding value, but only a commodity, sold at its value. It only becomes capital in the hands of the capitalist.

Only to the extent that the capitalist uses a portion of their money-capital to pay wages, to the worker, who then buys commodities, which form the commodity-capital of some other capital, is there an exchange of capital, in the same way as if the capitalist had used his money-capital to buy those commodities themselves, and then used them to pay the worker.

The money, in the hands of the capitalist, used to buy commodities, for their own consumption, acts not to circulate capital, but acts as revenue only to circulate commodities. The money they pay in taxes, or rents, or interest when used by their recipients, also acts only as revenue to circulate commodities.

Finally, the money that circulates to buy shares, bonds and property, and other speculative assets, also does not act to circulate capital, but only acts as revenue to circulate commodities, the commodities here being those bits of paper that confer title.

“The deposits themselves play a double role. On the one hand, as we have just mentioned, they are loaned out as interest-bearing capital and are, therefore, not in the safes of the banks, but figure merely on their books as credits of the depositors. On the other hand, they function merely as such book entries, in so far as the mutual claims of the depositors are balanced by cheques on their deposits and can be written off against each other. In this connection, it is immaterial whether these deposits are entrusted to the same banker, who can thus balance the various accounts against each other, or whether this is done in different banks, which mutually exchange cheques and pay only the balances to one another.” (p 469-70)

Tuesday, 22 March 2016

Will Financial Markets Crash Tomorrow?

There have been numerous suggestions from financial analysts that financial markets have become very expensive, and that March was likely to see a peak in valuations. Some have been more specific, about when that peak might arrive, and as I reported a while ago, one contributor to CNBC even predicted that the peak would come at 2.00 p.m. tomorrow. So, are markets likely to crash tomorrow afternoon? Probably not.

There is no doubt that global financial and property markets are grotesquely inflated. They have been repeatedly blown up over the last thirty years. But, the fact that these markets are in a bubble does not mean that the bubble is going to burst tomorrow. After all, they have been in a bubble for a long-time, and it hasn't burst yet. As Keynes said, financial markets can remain irrational for much longer than the average speculator can remain solvent. In 1996, Federal Reserve Chairman, Alan Greenspan, commented that he thought financial markets were suffering from “irrational exuberance”, yet they did not crash for another four years, in March 2000. Part of the reason for the irrational exuberance, and the reason that irrationality continued until then was, of course, the very policies that Greenspan was pursuing, what became known as the “Greenspan Put”, as he cut official interest rates, and relaxed monetary policy, every time the stock market dipped.

When markets crashed in March 2000, the Sunday Times, ran stories arguing that it would take twenty years for them to recover. In fact, already by 2008 the Dow Jones 30, and the S&P 500 had recovered its previous 2000 levels. Whilst the NASDAQ, which had been the worst hit index in 2000, falling by 75%, did not achieve that, even it had broken its 2000 highs, by last year. Similarly, having soared after 1997, there were numerous predictions that the UK housing market was in a bubble that was set to burst, from around 2003. Yet, that bubble continued to inflate until the financial crisis of 2008 led to it falling by 20% overnight, before that fall was halted by Gordon Brown and the Bank of England's intervention. So, there is nothing about the fact that financial and property markets being in such bubbles that means that the bursting of those bubbles can be predicted with any degree of confidence. All that can be said is that bubbles always burst.

And today, we have bubbles everywhere you look, of proportions greater than at any previous time in history. There are clear signs that markets want to fall. Over the last three years there have been a number of large falls in markets, but each time the corrections have been relatively short, and have been more or less recovered in following rallies. There was the so called “taper tantrum” when the Federal Reserve announced that it was going to start reducing the amount of QE it did, then when they announced the likelihood of starting the process of raising official interest rates, there was another sell off in the middle of last year, resulting in the rate hike being deferred until December. Then there was another sharp sell off in January, leading to the Fed issuing calming words over the path of further hikes, and deferring any March hike. 

There is no reason to believe that the period ahead will not follow that pattern of similar such periods in history, and that we are in for a gradual rise in the average rate of interest, and for a thirty year period during which financial and property markets fall in real terms. Such periods are never characterised by a simple smooth decline, but by sharp declines as bubbles are burst, followed by periods of recovery and stability, followed by further declines. At some point in the not too distant future, a crash will occur, but its unlikely to be tomorrow.

The reason for that has to do with human behaviour. Think about people going to a nightclub. They pay out a chunk of change to go to some nightclub that they have been told is very popular. When they first arrive, there are not many people in, they begin to wonder whether they have made a mistake, as there is little atmosphere. Gradually, it fills up, and they feel more confident in their decision, as things start to get into the full swing. But, then it starts to get rather overcrowded. There is no room to dance on the dance floor; no one dare move from their seat for fear of losing it; it takes ages to get served at the bar; everyone squeezes against everyone else, and the atmosphere becomes hot and sticky. What is worse, everyone begins to think that its so overcrowded that it has become dangerous.

Yet, no one, having paid to enter, wants to be the first to leave, because that would mean losing out on what they had paid for, and also that it would mean that those who remained would benefit from the less cramped conditions, after others had left. The consequence is that it becomes more and more overcrowded, until a fire breaks out, and everyone rushes for the doors, at the same time, resulting in chaos, people dying from being trampled and crushed and so on.

Of course, had there been perfect knowledge so that someone would have said in advance that a fire would break out at 11.00 pm., the chaos would have been averted, because everyone would have ensured that they were out of the building before it happened. But, unless its an act of arson, no one does have such knowledge of when a fire will break out. Similarly, as the market traders say “No one rings a bell when the top of the market has been reached.” So, people continue to pile into the market, and only rush for the exits when its too late, when the peak has been reached, and the crash is underway. In fact, its usually the professional traders, and the big money-lending capitalists who get in, when its not overcrowded, and when prices are cheap, and when the ordinary retail speculator is staying away from the market, having got their fingers burned in the last market crash. Its only when prices have been rising for a long period, that the ordinary retail speculator decides they want some of the action, and begins to put more money into their Equity or Bond ISA, or decides to become a Buy To Let, property speculator, i.e. at just the time they should be staying away.

But, its for just that reason that a market crash tomorrow is unlikely. Everyone knows that these markets are grossly overpriced, and there have been lots of warnings that the markets are going to crash – similar warnings were issued by the FT and others at the end of 1999/start of 2000, but no one wanted to listen – which means that lots of money is likely already to have been taken out, just in case, just as people would leave early if they knew a fire was going to break out.

Of course, that doesn't change the fact that all of these stock, bond, property and other markets are grossly inflated, and that these bubbles will burst. One of my friends was telling me recently about the high prices for vinyl records. Its just another aspect of the extent of these bubbles, as speculative money has continually looked for the next thing that might provide large, quick capital gains, whether its, gold, silver, wine, art, bitcoin, or whatever. When the bubbles burst, they will all burst together.

So, a crash tomorrow is unlikely, but that doesn't mean it will not happen next week, or the week after that, when no one expects it, just like people get crushed in an overcrowded nightclub, when a fire breaks out unexpectedly. But, unlike 2008, when I forecast the financial crash was about to break out, I see no imminent catalyst for it, and such a catalyst is almost always necessary to spark the crash. There is undoubtedly some severe stress in global junk bond markets, where yields have risen sharply over the last few months, and where the cost of insuring against default has risen sharply. That is particularly the case in the energy sector, which accounts for about a third of the US junk bond market. The sharp fall in oil prices means many of the smaller energy companies that have raised money-capital by borrowing in the junk bond market, are in danger of collapse, and of defaulting on their bonds, with a consequent effect in the wider bond and financial markets. But, so far none of those companies appears to have defaulted to the extent of provoking a crisis, and the more recent rise in oil prices has relieved some of that pressure, whilst creating other pressures.

Another catalyst could be a renewed series of corrections and collapses in Chinese financial markets, which spreads into global markets. Other sparks could be Brexit, but in addition, there is a growing awareness amongst global policy makers that monetary policy cannot provide any solutions to global growth. Even central bankers are now openly stating that governments have to begin a process of fiscal stimulus, particularly in relation to infrastructure spending. They do not yet seem to have forced themselves to recognise that QE has actually been damaging to economic growth, rather than beneficial.

As it begins to sink in that financial markets are on a long downward trajectory, and that the days of guaranteed, large-scale capital gains are at an end, so the fact that near zero yields are the cost of those previous capital gains will begin to sink in, and the owners of that money-capital will begin to look for alternative uses for it. As Marx put it, 

“If an untowardly large section of capitalists were to convert their capital into money-capital, the result would be a frightful depreciation of money-capital and a frightful fall in the rate of interest; many would at once face the impossibility of living on their interest, and would hence be compelled to reconvert into industrial capitalists.” (Capital III, Chapter 23)

In other words, say the rate of profit is 10%, a money-capitalist may then be prepared to lend money-capital to a productive-capitalist at 3%, which they obtain either as interest on a bank loan, coupon on a commercial bond, or in the form of dividends on shares. That leaves 7%, as profit of enterprise for the productive-capital. If, however, more and more capitalists become speculators, ploughing their money into the purchase of corporate bonds, or shares, the prices of these bonds and shares rises, so that yields on them falls. These speculators may be prepared to accept near zero yields on these bonds or shares, if they think they are making large capital gains. If that no longer appears the case, and indeed it becomes more likely to make capital losses, they are unlikely to continue to accept near zero yields on the money-capital.

Instead, they will look around and see the potential for making 7-10% profit on their capital, if they employ it directly themselves as productive-capital, and will thereby turn themselves once more into industrialists, using their money to buy buildings, machines, materials and labour-power, rather than buying bonds and shares. That in itself will cause the prices of bonds and shares to fall, and interest rates to rise.

Capital III, Chapter 29 - Part 9

The various pieces of paper that constitute this fictitious capital then amount to nothing more than claims on future revenue, none of which is capital, or to the sense it is, in respect of company shares, is governed by different rules than those governing the growth of the actual capital itself.

Government bonds are a claim on a part of the state's future tax revenue; corporate bonds on the future revenue of companies; shares on the future profits of the company; mortgages on the revenue from the rent of property or the income of the property buyer. But, none of these things underlying these bits of paper constitute capital, contrary to the belief of Thomas Picketty. The state's tax revenue, is revenue not capital. It does not arise from a self-expansion of capital in the hands of the state. The interest on a corporate bond is paid out of its revenue, whether it makes profits or not. Dividends may or may not be paid on shares, but they do not arise simply from the nature of money-capital to bear interest, but only to the extent that the productive-capital produces profits. A house is not capital for an owner occupier. Its value does not self-expand, no matter how much property bubbles create that delusion.

That is obvious when the seller comes to buy another house, and finds that the money realised from the sale of one goes no further – and for a more valuable house will even go less far – than before the prices were inflated. For houses that are mortgaged and rented, although it may seem that the rent represents a self-expansion of the capital, its clear that this is no more so than with money-capital.

The capital value of the house does not self-expand. The owner of the house obtains rent from the tenant for giving them the use-value of the money-capital value of the house for a given period of time, plus the wear and tear of the property. Out of this rent the property buyer pays interest on the money-capital borrowed for its purchase.

“In all countries based on capitalist production, there exists in this form an enormous quantity of so-called interest-bearing capital, or moneyed capital. And by accumulation of money-capital nothing more, in the main, is connoted than an accumulation of these claims on production, an accumulation of the market-price, the illusory capital-value of these claims.” (p 468)

Even in Marx's day, the quantity of bank capital that was fictitious was then sizeable. Rather than comprising actual value, in the form of gold, or even Bank of England notes, backed by gold, it comprised bank notes which in themselves had no value, but to an even greater extent comprised a range of securities, such as those described above.

But, in more recent times, although banks may not hold bills of exchange, which they discount, as they did in Marx's day, the extent to which they rely on deposits from savers has declined even further. Instead, the banks obtain the funds they require for lending purposes, by themselves going into the money markets to borrow. It was when short term lending between banks seized up in 2007 that banks like Northern Rock, that had become dependent on such funding, found themselves in difficulty, which ultimately resulted in the financial crisis of 2008.