Wednesday, 31 August 2016

A Crisis Carol - Stave 2 - The Ghost Of Crisis Past - Part 1

Stave 2 – The Ghost of Crisis Past

A vision haunts the scrooges. It is the ghost of crisis past.  It takes them back to 2007. All seemed marvellous with the world. Trade had been rising since the late 1990's, and the pace had quickened even more after 2002. For the first time since 1967, not one single economy in the world was in recession. Everything was going so well that inflation had become a concern, and official interest rates were raised to halt it.

But, no sooner were those rates raised than the dark clouds gathered, and the conditions became ominous. From 1987 onwards, Monetarism had appeared to be the solution for all the woes of the scrooges. With workers defeated, demoralised and materially weakened, as large swathes of mature industries had relocated to Asia, where vast reservoirs of the cheap, unskilled labour required for this mature production existed, and as a new wave of labour-saving technologies created a growing relative surplus population, in the developed economies, it became possible to raise the rate of profit, by raising prices faster than wages, and thereby raising the rate of surplus value.

The means to do that was by increasing the money supply, which was effected by increasing the availability of bank credit, and, in particular, private household credit, and for mortgages. Wages were stagnant or falling, but consumption was expanded via this explosion of private household debt.

This seemed like Nirvanha for the scrooges. They do not like to see wages rise, because that causes profits to fall, and if profits fall, there is less of them to pay as interest (whether bond interest or dividends). If dividends fall, then the capitalised value of shares fall, and the same applies to bond prices.  Given that the wealth of the scrooges is nearly all in these forms of fictitious capital, that is one of the last things they want to see.  On the other hand, the scrooges also know that businesses can only realise profits if they can sell what they have produced, and as workers form the largest mass of consumers, stagnant or falling wages are not conducive to consumption.

The explosion of private household debt meant that profits could be realised even as wages fell. But, the scrooges are not fussy about who they lend money to, provided they can draw interest, and have confidence of a return of their capital. So, as this debt bubble expanded to ever larger proportions, it was music to the ears of the scrooges, for another reason.

Some of the scrooges lend directly to consumers. They can be seen on the high streets in increasing numbers. Some take the open form of payday lenders, charging 4000% p.a. in interest; others take the form of pawnbrokers; others a disguised form, as providers of various consumer durables that are provided on the basis of assorted payment schemes, all of which are founded on usurious levels of interest; others take the hidden form of the loan shark who dwells in the shadows, and often have their own Bill Sykes to ensure repayment by one means or another. 

But, most of the lending to private households is done via banks and financial institutions, which in this way act as the collective representative of the scrooges, just as in other ways they act as the collective representatives of the scrooges' victims, the borrowers.

The scrooges, the owners of loanable money-capital, use it to lend to a variety of companies, including banks and finance houses. The lending to the latter takes the form of buying bank shares, bank bonds, as well as straightforward deposits of money in bank accounts. The money-capital that the scrooges lend to the banks and finance houses in these various forms thereby make up a sizeable chunk of the bank capital. For a bank or financial institution, this money-capital acts in the same way that raw material works for productive-capital, or commodity-capital works for a commercial capital. In other words, it is the basis of its profits.

Its important to understand this in relation to the banks and finance houses, because it is easy to misunderstand the difference between interest and profit, given that one means by which the banks and finance houses obtain their earnings is by charging interest. The difference essentially comes down to this. A money-capitalist earns interest because they own money-capital, and lend it out. The interest is the price of the use value of the capital they lend (i.e. the use value of being able to produce the average rate of profit). A bank or financial institution makes a profit by undertaking a function for which they get paid. One function the bank undertakes is to bring together large amounts of other people's money-capital, available to be loaned, and to then provide it as loans to all those who want to borrow.

The bank can then make a profit on the difference between what it pays to those who want to lend this capital, and what it charges those who want to borrow it. In this way, its not much different to a merchant capital that buys commodities from producers at one price, and sells those commodities to consumers at a higher price. And, that as Marx describes is what, money-dealing capital, actually is, a form of merchant capital, that makes the average rate of profit, on the capital it advances, as with any other capital. This average rate of profit, as Marx describes is quite different to the average rate of interest, and determined by quite different laws.

For the scrooges, then, they could rake in large amounts of interest, during the 1990's, and early 2000's, because company profits rose across the globe. Wages were stagnant, productivity was rising sharply, unit costs were falling sharply, sales were up, fuelled by private household credit. Out of these profits, the scrooges were paid large amounts of interest as dividends, and coupon receipts on bonds. But, the explosion of private household debt used to fund this consumption, as wages were stagnant, meant that the scrooges also made large amounts of interest, as dividends on their bank shares, as the banks and finance houses fuelled the growth of private household debt. 

Its not surprising then that the scrooges used some of this large amount of interest to buy more shares and bonds, so as to increase their future revenue even more. And, in some parts of the world, for example, oil producing countries, governments that drew in large amounts of rent from oil revenues, as well as dividends on the shares they owned, had huge surpluses of money-capital to lend, which they threw into global capital markets to buy shares and bonds, and which also found its way, via the banks and finance houses, into financing the expansion of household debt.

But, the growth of the demand for shares and bonds, during this period, in order to obtain this interest, far exceeded the issuing of new shares and bonds, required to finance an expansion of productive investment. The consequence was an inevitable rise in the price of shares and bonds. In the 1980's, Thatcher in Britain and Reagan in the US, had launched into the Monetarist experiment, and deregulated financial markets. Alongside an expansion of credit went an encouragement for individuals to gamble and speculate. The privatisation programme, in Britain, seemed to offer people money for nothing, as every nationalised industry, floated on the Stock Exchange, at a low valuation, saw 30-50% rises in its share price within days.

The extent to which people engaged in this in total financial ignorance was demonstrated when share prices dropped sharply and yet people signed up to buy privatised BP shares, at issue, at a much higher price than they could buy existing BP shares on the open market!

Along with this speculation, and encouragement of borrowing, went the privatisation of council houses, as people were again encouraged to believe in money for nothing, and the idea that house prices could just rise based on thin air. But, of course, its no wonder that people were led into that delusion.

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