Monday, 7 March 2016

Keynesian Confusion

The Keynesians are in a state of confusion over how to react to the continuing slow pace of recovery of the global economy. In part that confusion stems from the inadequacy of Keynesian theory itself, and its failure to understand the differences between money and money-capital, and consequently the determinants of interest rates, for example. But, in part it is also driven by a failure to be able to arrive at the political conclusions, for policy solutions that derive from its own theory. It is a familiar failing that applies to social-democracy more generally.

In an article, on the Prime Economic Blog, Anne Pettifor writes of the decision of the US to taper its policy of QE in October 2013.

“This slow-down in trade was then exacerbated by the October, 2013 decision of the US’s Federal Reserve to end “life support” for the US finance sector and the wider economy, and to “taper” its purchase of assets (bond-buying) under its programme of Quantitative Easing. This led as expected, to a further weakening of the US economy, which in turn lowered demand for commodities from emerging markets, most notably, China.”

Anne doesn't seem to recognise that this statement alone stands in stark contrast to the one made earlier in the article, where she writes.

“Rather than relying on expenditure or investment, the British 2010-2015 Coalition government and then the 2015 Conservative government placed excessive reliance on monetary policy to revive aggregate demand for goods and services. The consequences were predictable. Loose monetary policy enriched those that owned assets – stocks and shares, bonds or property. The evidence of this grotesque enrichment is clearest in London. According to the FT (20 Feb 2016) the owners of South Kensington residential properties have seen “substantial capital appreciation – 45 % over the past five years and a remarkable 155% since 2006.” And as the Bank of England concluded back in 2012 in its paper on the Distributional Effects of Asset Purchases” (i.e. QE)

“the benefits from these wealth effects will accrue to those households holding most financial assets.”

So, on the one hand, we have a correct assessment of the pernicious effect of loose monetary policy in blowing up asset price bubbles in share, bond and property markets, which create huge distortions in the distribution of paper wealth. On the other we have a demand for a continuation of those very same policies, in order to keep interest rates at low levels so as not to choke off economic recovery!

But, a look at the foundations of this argument show that it is almost as insane as the argument put by the monetarists. 

Firstly, does anyone seriously believe that in a world where trillions of dollars of liquidity has been created, that sloshes around, from continent to continent, like brandy in a schooner, in the bar on the Titanic, that the problem is a lack of liquidity? In a world in which official interest rates are at, or near, zero, and even in some countries below zero, and where market rates of interest are at 300 year lows, that the problem is that interest rates are too high? Are we really to believe that the problem of a failure to grow more strongly, after the crash, is down to the Federal Reserve not continuing to pump even more liquidity into the system, or that US official interest rates have been raised by 0.25% points? If that really is the problem, then capitalism really is in a bad way, and on the verge of collapse!

The reality is that those low official interest rates, which enabled banks to borrow virtually for nothing from the central bank, so as to rebuild their profits, and the injection of even more trillions of dollars into the global economy, on top of the other trillions of dollars that had been sequentially injected in the years after the 1987 global market meltdown – itself following the blowing up of asset price bubbles, in the aftermath of the so called Big Bang – not only did nothing to stimulate economic activity, and global trade, but were actually counter-productive for it.

By blowing up those asset price bubbles, and providing tacit, and sometimes not so tacit, government backed guarantees for those inflated asset prices, they created a one way bet, in which owners of loanable money-capital knew that they could make not only huge and immediate capital gains by speculating in these assets, but that, in fact, there was very little real speculation involved, because whenever the price of shares, bonds, or property dropped, the central bank would step in to pump them up again, and government's would intervene with some knew scam to prop up property prices, and the buying of houses at ever more ridiculous prices. It was like going into a casino, and being able to keep all of your winnings, no matter how large, but with the comforting knowledge that at the end of the night, any losses you made, would be handed back to you by the doorman!

Why then would you use any of your capital to engage in the actually risky business of setting up a business, buying premises, machines, materials and labour-power to produce commodities, the demand for which was not only uncertain, but was constantly being undermined in Britain and Europe, by the other side of government policy – austerity – that was cancelling government projects that might have been a source of demand for your own output, laying off government workers whose wages were a source of demand for your products, and reducing incomes in general by raising taxes and lowering benefits? Even if you thought you could make quite reasonable profits from such activity, despite all of that, it would be still far more rewarding to simply use your capital to buy a property to rent, and wait for the inevitable rise in its market price, or to buy shares or bonds to a similar end. And, of course, to the extent that money-capital did go into such speculation, it necessarily did push those prices higher!

Marx, in his analysis of rent demonstrates that Ricardo was wrong in believing that additional productive-capital is only invested when capitalists see demand expanding so as to cause prices, and the rate of profit to rise. Marx demonstrates that capitalists always anticipate that the market will expand, as a result of a natural growth of population. Its not higher profits, or a higher rate of profit that is required to get them to accumulate more capital – though that may cause them to accumulate at a faster pace – but merely the potential of a larger market. Even if this larger market may have a lower rate of profit than currently exists, this will not be a barrier to additional investment, because competition means that each individual capital is forced to accumulate to ensure it does not lose market share.

But, the same thing can apply in reverse, if government policies of austerity – and the same thing applies in the US in the states and districts where Tea Party Republicans have control, and as a result of the political crises caused by them at a federal level over the Debt Ceiling and Budget – create a climate of uncertainty, and the prospect of the market being stagnant, or even declining, there is no logical reason why any individual capital will seek to accumulate additional productive-capital, even if rates of profit on existing investment are high, because it would be investment to produce a supply for which there is a diminishing demand!

Given the importance of huge corporations in the modern economy, who operate on the basis of detailed market information on future demand growth, and whose capital investment plans are mammoth affairs, accordingly spread over long periods, it is no wonder that such corporations postpone accumulation during periods of uncertainty and austerity, and instead divert that money-capital to speculation in property and financial assets, with a corresponding depressive and deflationary effect on economic activity, and hyper inflationary effect on asset prices.

The Keynesians confuse money and money-capital, leading them to believe that they can promote economic activity using fiscal stimulus, but that this can be achieved painlessly, by printing money to keep interest rates low. This represents several levels of confusion. Firstly, it confuses money with money-capital, and so believes that the rate of interest is determined by the demand and supply of money, rather than for money-capital. Secondly, it fails to understand the real nature of money, and thereby confuses the printing of money tokens for the creation of additional money.

The real reason that global interest rates have been so low, and have been falling for 30 years from the 1980's through to around 2012, is not due to money printing, or low official interest rates set by central banks, but because the supply of money-capital continually exceeded the demand for money-capital. The reason for that was that from the mid 1980's, the rate of profit was ramped up massively across the global economy, as rising productivity led to a rise in the rate of surplus value, and a huge moral depreciation of existing fixed capital, along with a release of capital, and rise in the rate of turnover of capital.

The huge increase in liquidity caused a hyper-inflation of those asset prices, which at the same time had a deleterious longer-term effect by raising the value of labour-power, by inflating the cost of shelter, and pension provision.

If the Keynesians were to keep faith with their own ideas, they would have to accept that the kind of fiscal stimulus they seek, and, within the confines of a solution within capitalism, they are right to seek, then the consequence of that would be that the demand for money-capital (because as Marx says it is such a demand from the perspective of the owners of that money-capital, however, it might be actually employed) would rise, relative to its supply, causing interest rates to rise, and as interest rates rise, so the prices of all of the fictitious capital would begin to collapse. Stock, bond and property markets would begin to collapse from their current astronomically high levels, as a financial crisis greater than 2008 unfolded. The Keynesians are unwilling to accept that conclusion of their theory, and so seek to escape it, via a continuation of those same monetary measures, which are themselves a major cause of the current situation.

The alternative is to recognise that there is a major divergence of interest between productive-capital, and this loanable money-capital, tied up in vast amounts of fictitious wealth, and a solution to the problem, within capitalism, requires political solutions that recognise, and address that division, at the expense of the latter, and benefit of the former. It requires vast amounts of debt to be written off, more or less immediately, and a willingness to see huge falls in global stock, bond and property markets, as the grotesque paper wealth of the less than 1% that owns the bulk of it is depreciated. It requires major changes to corporate governance laws, to prevent the owners of that money-capital, in the form of shares exerting an unjustified control over productive-capital, by bringing about a democratisation of company boards, at least in line with with the proposals of the 1975 Bullock Report, which itself did not go anywhere near far enough. It requires that workers be given the right of democratic control over their pension funds, so as to be able to allocate those funds to real investment in productive capacity, rather than financial speculation.

The problem is that the Keynesians, like most social-democrats, are unwilling to engage in the kind of political struggle required for even such limited ends.

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