Friday, 26 August 2016

A Crisis Carol - Stave 1 – Monetarism's Ghost

Stave 1 - Monetarism's Ghost

Monetarism was dead to begin with. There is no doubt whatever about that. The register of its burial was signed. Monetarism was as dead as a doornail, this must be distinctly understood. (Apologies to Charles Dickens).

The scrooges know that Monetarism is dead, but its ghost has visited them and warned them to mend their ways. The scrooges – the owners of loanable money-capital – make their money from interest. Like Ebenezer Scrooge, they do not make money by engaging in any productive or even commercial activity, but rather from lending money to those who do engage in such activity.

Those who do engage in productive or commercial activity hopefully make a profit from that activity, and, out of that profit, they pay interest to the scrooges, who loaned them money-capital, so as to undertake their business. The interest takes a number of forms. If the money has been borrowed as a bank loan, it takes the form of bank interest; if it was borrowed by issuing a bond, or debenture, it takes the form of a fixed coupon payment; if it was borrowed by issuing shares, it takes the form of dividends paid to shareholders.

Whichever of these forms it takes, this interest is a deduction from the profits made by the productive or commercial capitalists (industrial capital). And, like Ebenezer Scrooge, if the scrooge's extract too much in interest, they kill off the source of their own income, because businesses can only pay interest if they first make profits. To pay more in interest, businesses need to make bigger profits, but, to make bigger profits, they need to invest in additional capital, which they can only do if they make bigger profits.

This is the nightmare that the scrooges face, and it is why they are very frightened. As Marx pointed out 150 years ago, at least as regards the medium to large capitals, the capitalists had ceased playing a part in relation to such business activity. The businesses were no longer owned as private property, but had become socialised capital. The firm itself is a legal corporate entity, which owns the capital. The firms now borrow money-capital, in order to undertake their activities, and pay interest in the aforementioned forms on this borrowed money-capital.

Today, the bulk of private wealth exists in the form of this fictitious capital, of shares, bonds, and other paper assets, as well as landed property. As the Tories, and apologists and romantics for a bygone age of capitalism, never cease to remind us, the vast majority of businesses are small, privately owned concerns. They are made up of a few million self-employed people – many of whom scrape a living from such activity, because they have given up hope of obtaining permanent, full-time employment – people who run small stores, back street garages and workshops, through to the small enterprises that may employ a few dozen people. They are people who run their own Old Curiosity Shops.

But, all put together, this privately owned productive wealth is miniscule when compared either with the trillions of dollars worth of privately owned paper wealth, or the trillions of dollars of socialised productive wealth. Moreover, nearly all of these small privately owned capitals are ephemeral. They depend almost entirely for their existence on work and business handed to them from the huge socialised capitals. More than half the new businesses created in 2009 had ceased trading by 2014, and on average, around 75% of new businesses fail within just a few years.

It may be true, as the Tories say, that small businesses create the most new jobs, but, because these small businesses collapse so soon after being established, and so frequently, they are also responsible for the largest number of job losses. Long-term economic growth, prosperity and employment depends upon the big socialised, industrial capital, and ultimately that fact determines the policies of the state.

There is also a significant difference between these small private capitals and the large socialised capitals, when it comes to borrowing money-capital. Large companies, like Microsoft or Apple, as well as large states, like the US, can borrow money at very low rates of interest. Despite having tens of billions of dollars of cash on their balance sheet, Microsoft, in recent years, has borrowed billions more, by issuing bonds, on which it paid only 2-3% interest.

The US and UK governments can currently borrow money for ten years at an interest rate of only 1.5% and 0.6% respectively. Yet, that is far from an accurate picture of the real state of interest rates, even within the US and UK, let alone were we to examine the rates of interest being paid elsewhere in the world.

As Marx set out, a more accurate picture of the average rate of interest is given by the amounts charged for these small companies to borrow, than the yield on government bonds, and that is all the more true as QE has made government bond yields meaningless.

“For instance, if we wish to compare the English interest rate with the Indian, we should not take the interest rate of the Bank of England, but rather, e.g., that charged by lenders of small machinery to small producers in domestic industry.” (Capital III, Chapter 36, p 597) 

Many of these small, privately owned capitals have had difficulty being able to borrow at all. Some of that is understandable. Around 160,000 UK firms, about 10% of the total number of firms are zombies. They are barely able to pay the interest on their existing loans, and completely unable to repay the capital sum. They clank around like old Marley's ghost, dragging their chains of debt behind them.

That bank and other lenders have no desire to lend additional sums, to these companies, is understandable. In a healthier financial system, these firms would be allowed to go bust, so that their capital could be used more effectively elsewhere. But, the banks do not foreclose on them – just as they do not foreclose on mortgages in arrears – unless they fear an imminent loss of their money, because, as long as the firm is at least paying the interest, the bank is obtaining revenue. The banks, and from there the entire financial system, has been built up, over the last ten years, on the basis of a policy of “extend and pretend”, of kicking the can down the road.

But, there are many other small firms that are not in this condition, and yet still cannot obtain bank loans. Many are not big enough to become publicly listed companies, or to raise money in the bond market. They are forced to raise money-capital by putting up private houses as collateral, or taking out mortgages on those houses, or borrowing from friends and family. Such resources are very limited. Businesses have, therefore, had to borrow from other sources. In recent years, there has been a growth of peer to peer lending, facilitated by the internet. That means that individuals currently getting next to no interest on their savings can lend, with others, to small businesses, often in their local area.

But, the rate of interest on such loans to small businesses is frequently around 10% p.a. That is in stark contrast to the 2% a large company like Microsoft can borrow at, or the 0.6% the UK government can currently borrow at for ten years.

In order to persuade them to change their ways, the scrooges have been visited by three more ghosts, the ghosts of crisis past, present and future.

Next - The Ghost of Crisis Past

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