Monday, 21 March 2016

Capital III, Chapter 29 - Part 8

The process of the depreciation of the paper arises from the tightness in the money market, i.e. the demand for money-capital exceeds the supply, pushing interest rates higher. (Note: that this does not require that interest rates are already high, only that demand begins to exceed supply at current rates, pushing those rates higher.  In fact, the lower rates are, the larger the proportion any rate increase is, and so the greater its effect on capitalisation.  The imbalance may be due to the demand rising, or the supply falling, or a combination of the two.)  This occurs for the reason Marx describes here that those in need of money-capital, sell their existing bonds and other securities, to obtain it. The reason for the high level of demand may be because of some panic or crisis. For example, back in 2008, I noticed an unexpected and sizeable drop in the futures price of oil. I came to the conclusion that the reason for this was that banks and other financial institutions were dumping their holdings of these futures contracts, which had been very lucrative, out of desperation to obtain money-capital. I warned that if I was correct it would mean a looming financial crisis of cataclysmic proportions. Within just a few weeks, that proved correct, as the 2008 financial crisis erupted for exactly those reasons.

This long-term chart shows that, in real terms, share prices
rose from around 1930-60, when the rate of profit was
rising, and the rate of interest was declining.  They fell between
1960-85, when the rate of profit was falling, and the rate of
interest was rising.  They have risen again between 1985 and
2015 when the rate of profit was rising, and the rate of interest
has been falling.
But, the demand for money-capital may simply reflect booming economic conditions and inadequate money-capital being produced or invested in productive-capital. This can arise in the Summer phase of the long wave, where an increased demand for money-capital arises as the general annual rate of profit begins to fall. Relatively less money-capital is supplied, as the mass of profit does not grow so quickly. Less productive-capital can be financed from companies' internal resources, and less money is deposited in money markets.  This effect over the long-wave cycle can be seen in the long-term movement of share prices in real terms.

Its not just that companies sell the bonds and other financial assets they hold, to raise money-capital; they also issue additional bonds for that purpose, so that this additional supply of bonds reduces bond prices and causes yields to rise. But, it also causes companies to seek additional funds by issuing new shares, and again this increased supply of shares reduces share prices, and thereby increases yields.

Its under these conditions, particularly after a period of speculative activity, on financial markets, such as that seen in the last 30 years, that this change of conditions results not just in a fall in prices, but a bursting of financial bubbles, and financial crises that significantly destroy fictitious capital values.

As Marx says elsewhere, these kinds of financial collapse are generally beneficial for capital.

“As regards the fall in the purely nominal capital, State bonds, shares etc.—in so far as it does not lead to the bankruptcy of the state or of the share company, or to the complete stoppage of reproduction through undermining the credit of the industrial capitalists who hold such securities—it amounts only to the transfer of wealth from one hand to another and will, on the whole, act favourably upon reproduction, since the parvenus into whose hands these stocks or shares fall cheaply, are mostly more enterprising than their former owners.” (TOSV2 p 496) 

And as Marx puts it here,

“To the extent that the depreciation or increase in value of this paper is independent of the movement of value of the actual capital that it represents, the wealth of the nation is just as great before as after its depreciation or increase in value. 

"The public stocks and canal and railway shares had already by the 23rd of October, 1847, been depreciated in the aggregate to the amount of £114,752,225." (Morris, Governor of the Bank of England, testimony in the Report on Commercial Distress, 1847-48 [No. 3800].) 

Unless this depreciation reflected an actual stoppage of production and of traffic on canals and railways, or a suspension of already initiated enterprises, or squandering capital in positively worthless ventures, the nation did not grow one cent poorer by the bursting of this soap bubble of nominal money-capital.” (p 468)

The same is true when property bubbles burst. The houses themselves are the same houses they were before, they provide exactly the same utility, in terms of shelter, they did previously. The only difference after the bursting of such a bubble is that people can afford to buy them, whereas previously they could not.

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