Capital III, Chapter 29 - Part 4

These two examples have been demonstrated simultaneously during the Eurozone crisis. A certain quantity of the enormous hoards of money-capital is always invested in government bonds. Mutual funds always hold a certain proportion of funds in bonds, because of various requirements not to hold all of their funds in any particular asset class. Pension funds hold a certain quantity of bonds for the same reason, but also because the income from the long dated bonds, provides the required guaranteed income stream, to be able to pay out pensions over a forty year time frame.

As a result, if money has to move from one set of bonds, it tends to flow to some other bonds, although there is always also some movement between bonds and shares. When the economies of Greece, Ireland, and Portugal looked to be on the verge of collapse, therefore, the price that buyers were prepared to offer owners of their bonds dropped sharply. Although the amount of interest that these states were paying on these existing bonds did not thereby change, the yield on these bonds rose up to 30%, and beyond, as the price of the bonds dropped.

Of course, when these countries came to issue new bonds, it is this current yield on their existing bonds, which determines how much interest they would have to offer, or what price they would be able to sell them for. That is why it became impossible for them to go to the market to sell new bonds, and why the owner of existing bonds had to accept a loss on their redemption.

At the same time, money flowed into the bonds of those states that were seen as particularly safe and creditworthy, with low rates of inflation. So, funds flowed into German Bunds. As they did so, the opposite situation arises, where the price of the bond rises, and the yield declines. In fact, as a result of high levels of fear, in the market, and a desire to simply not lose money as a result of a crash, or a default, the demand for German Bunds rose so much that they were being offered with a negative interest rate!

But, the collapse in the value of the bonds of the Eurozone periphery demonstrates that not only was the state spending financed by this borrowing, fictitious capital, but the bonds issued as its equivalent was equally fictitious.

“But in all these cases, the capital, as whose offshoot (interest) state payments are considered, is illusory, fictitious capital. Not only that the amount loaned to the state no longer exists, but it was never intended that it be expended as capital, and only by investment as capital could it have been transformed into a self-preserving value. To the original creditor A, the share of annual taxes accruing to him represents interest on his capital, just as the share of the spendthrift's fortune accruing to the usurer appears to the latter, although in both cases the loaned amount was not invested as capital. The possibility of selling the state's promissory note represents for A the potential means of regaining his principal. As for B, his capital is invested, from his individual point of view, as interest-bearing capital. So far as the transaction is concerned, B has simply taken the place of A by buying the latter's claim on the state's revenue. No matter how often this transaction is repeated, the capital of the state debt remains purely fictitious, and, as soon as the promissory notes become unsaleable, the illusion of this capital disappears.” (p 467-8)

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