If a capitalist needs to borrow £1,000, at a rate of interest of 6%, so as to buy £800 of materials and £200 of labour-power, then, if the amount of money put into circulation doubles, this may nominally double the reserves of money-capital available to be loaned, but the prices of materials will double, and wages will double, so that now the capitalist needs to borrow £2,000 of money-capital to set in motion the same amount of materials and labour-power.
But, what has been seen, in the last thirty years, is that, as yields fell, and the potential for capital gains on financial assets rose, a large part of the demand for money-capital was for its use purely for financial speculation. If a company issues a bond with a value of £1,000, the bond represents a demand for money-capital, and the purchaser of the bond provides a supply of money-capital. If additional bonds are issued, at the same pace that the supply of money-capital rises, the rate of interest on these bonds will remain the same, or to put it another way, the price of the bonds will remain the same.
However, if no additional bonds are issued, but the supply of loanable money-capital rises, it will result in this money-capital pushing up the price of the bonds, as the owners of the money-capital compete with each other for the available bonds. As the prices of the bonds rises, so the yield on them falls. The same thing happens with shares.
Money printing fuels this process, in conditions where there is a built in tendency to engage in this kind of speculation, rather than to lend money-capital to fund the accumulation of real capital. But, the representatives of the scrooges dominate the boards of companies, and instead of issuing additional shares, so as to fund expansion of production, they have been using company profits to buy back shares, which further inflated their prices, and the paper wealth of shareholders.
One obvious course of action, after the 2008 financial crisis, would have been for governments to increase their own borrowing, by issuing large numbers of bonds over long durations. That would have caused bond prices to fall, discouraging the financial speculation, whilst providing governments with large amounts of, historically, very cheap funding, which could be used to rejuvenate infrastructure, put people to work, and thereby create the conditions of rising demand that encourages productive investment.
That policy of Keynesian intervention was adopted by British capital long before Keynes himself codified it in his General Theory. In the 18th century, the British state borrowed extensively, running up a public debt way in excess of that, which exists today. It rose to around 250% of GDP, but provided the funding for the creation of the kind of infrastructure that British capital entering the Industrial Revolution required. It soaked up large reservoirs of money-capital, providing revenues for the owners of that money-capital, and was according to Marx, a principal factor of primary capital accumulation.
“The public debt becomes one of the most powerful levers of primitive accumulation. As with the stroke of an enchanter’s wand, it endows barren money with the power of breeding and thus turns it into capital, without the necessity of its exposing itself to the troubles and risks inseparable from its employment in industry or even in usury. The state creditors actually give nothing away, for the sum lent is transformed into public bonds, easily negotiable, which go on functioning in their hands just as so much hard cash would. But further, apart from the class of lazy annuitants thus created, and from the improvised wealth of the financiers, middlemen between the government and the nation – as also apart from the tax-farmers, merchants, private manufacturers, to whom a good part of every national loan renders the service of a capital fallen from heaven – the national debt has given rise to joint-stock companies, to dealings in negotiable effects of all kinds, and to agiotage, in a word to stock-exchange gambling and the modern bankocracy.”
(Capital Volume I, Chapter 31)
In the post-war period, the same policy of fiscal expansion to fuel capital accumulation was adopted on a more global scale. Developed economies created welfare states; in large parts of Europe, old under-capitalised staple industries were nationalised, rationalised and recapitalised; the measures that individual corporations had begun to adopt from the 19th century, of long-term corporate planning, were extended, and increasingly adopted by the state itself, and even introduced at a supra-state level, with the creation of the EU, and international para-state bodies such as the IMF, World Bank, GATT/WTO and so on; and the Marshall Plan implemented a large scale Keynesian fiscal expansion, based upon the rejuvenation of infrastructure across Europe. It was a reflection of the objective needs of a now dominant socialised capital, transformed into the dominant ideas of society.
But, governments in most major economies, in the last thirty years, have been dominated by conservatives who share the same outlook as the money-lending capitalists. They seek to simultaneously achieve two mutually contradictory objectives. On the one hand, they want to maximise the yield from the money-capital they lend; on the other hand, as the fictitious capital they own is their visible manifestation of wealth, they seek to maintain the value of that fictitious wealth, and where possible to see it inflate rapidly. The two objectives are contradictory, because as the value of the fictitious capital is inflated, so the yield on it shrinks.
Rather than engaging in a policy of fiscal expansion, which could have provided much needed infrastructure to facilitate the growth of real capital, and which, by undermining the basis of speculative capital gains, would have encouraged the investment of money-capital into the accumulation of real capital, they did the opposite. They introduced policies of austerity that undermined the existing infrastructure, lowered productivity, undermined aggregate demand, and thereby also discouraged productive investment. At the same time, they encouraged further financial speculation via the introduction of QE, and by other policies that encouraged speculation, such as the Tory government's policies in relation to Help To Buy, and so on that acted to inflate property demand, whilst undermining the potential for increasing housing supply. Similar policies to cut short the collapse of property and land prices were adopted in the US, Ireland, Spain etc.
QE did not cause an inflation of commodity prices, but it did cause an inflation of financial asset prices. As Marx put it,
“It would be still more absurd to presume that capital would yield interest on the basis of capitalist production without performing any productive function, i.e., without creating surplus-value, of which interest is just a part; that the capitalist mode of production would run its course without capitalist production. If an untowardly large section of capitalists were to convert their capital into money-capital, the result would be a frightful depreciation of money-capital and a frightful fall in the rate of interest; many would at once face the impossibility of living on their interest, and would hence be compelled to reconvert into industrial capitalists.” (Capital III, Chapter 23, p 378)
As the prices of shares, bonds and property rose higher and higher, so more money-capital was required to buy any given quantity of bonds, shares, or property. That is an increasing amount of money-capital that was not being made available for other requirements, and which thereby raised interest rates in those other areas.
But, there were further consequences of that, as I have set out elsewhere. By pushing up the prices of bonds and shares to astronomical levels, the contributions made by workers and their employers into pension funds bought fewer and fewer bonds and shares. That meant that the capital within the fund grew more slowly, and so its ability to produce increased revenues to cover current and future pension commitments declined. That was exacerbated as the yields on bonds and shares declined. What made that even worse was that, to compensate for the declining revenues, pension commitments were financed out of capital rather than revenue, thereby destroying the capital base itself.
Suppose a pension fund contains £1 million of bonds, which produce a yield of 5%, or £50,000 a year. If the fund only has to pay out £50,000 a year for pensions, it can do this from the revenue year after year, without the £1 million of capital ever being diminished. As result of the inflation of asset prices, the nominal value of the bonds in the fund rises, say, to £2 million, even though it only contains the same number of bonds. However, the yield by the same token falls to 2.5%, as these bonds continue to pay out the same £50,000 per year in interest. But, over time, the fund's pension commitments rise, as additional pensions have to be paid and so on. During the 1990's, in particular, many employers saw the rise in stock and bond markets as an opportunity to suspend their contributions to pension schemes, despite the fact that the yields on financial assets were declining, and despite the fact that rising asset prices meant that the existing contributions were buying fewer and fewer shares and bonds.
The basis of this was that, as the nominal value of the assets in the fund rose, it was possible to cover pension commitments, by selling some of the bonds within the fund. In other words, to fund current commitments from capital rather than revenue. If we take the example, above, suppose the fund needed to pay out £100,000 a year in pensions. It only has £50,000 of revenue. So, it sells £50,000 of bonds from the fund. That seems fine, because the fund has experienced a 100% capital gain. However, having sold 5% of the bonds, that means the fund has a smaller capital base, and, therefore, has reduced the potential for creating revenue.
If the fund continued on this basis, it would find itself having to finance an increasing proportion of its commitments from capital sales rather than from revenue, because as the capital base is reduced, the revenue is reduced along with it. After six or seven years, it would have reduced the capital in the fund by half, having sold half of the bonds it owned, so that instead of producing £50,000 of revenue in interest, it would only be generating £25,000. That is what has happened with pension funds, which is why they have such huge black holes, in their ability to meet current and future commitments.
It has been masked, to an extent, because workers have continued to make contributions to their pension funds. But, that turns those funds into effectively a Ponzi Scheme, whereby the pension payments to previous contributors to the scheme are being funded not from scheme earnings, but from the contributions of current scheme members.
The past inflation of those financial asset prices can now only be covered by a huge funding of those pension black holes out of the profits of those companies, or by the state picking up the tab, which it can only do by increasing the amount of tax taken out of surplus value.
A similar story applies to property. Financial speculation drove up property prices, encouraged by government policy that fuelled housing demand whilst constraining housing supply. An indication of that is the fact that although we are continually told that high property prices are a result of a lack of supply, the fact is that there are 50% more homes per head of population today, in the UK, than there was in the 1970's, when property prices were much lower! Moreover, there are more than 1 million empty homes in the UK that could be meeting supply, along with planning permission to build around half a million additional homes that is not being activated.
The real problem is that speculative demand for property has been continually driven higher by sections of the population that have available money to engage in such speculation, whilst other sections of the population, who do not have such wealth or income, are simultaneously frozen out of the property market by the sky-high speculative prices. That process was enabled to continue by effectively removing the need for buyers to provide reasonable deposits, and by the provision of large amounts of cheap bank credit that financed the speculation. Nearly all of the lending by finance houses is accounted for by lending for such property speculation in one form or another, with next to nothing going to finance industrial investment.
British banks have loans outstanding worth about 160% of UK GDP. But 35% of these loans went to other financial institutions, 42.7% went to households for mortgages and another 10.1% went to commercial real estate and construction. Manufacturing received just 1.4% of the total! UK banking’s main activity is just leveraging up existing property assets.
Whether taken in terms of house purchase or rental, the cost of shelter for workers has risen massively, but as with the cost of pension provision, that has not been reflected in workers' wages. Sooner or later, that disparity has to be redressed. It would require a huge rise in wages, and thereby a huge squeeze on the production of surplus value, and/or it will require a huge and prolonged collapse in the price of property, shares, and bonds.
Historically, house prices have been around three times average earnings, but, today, that figure is more like ten times. In London, the figure is higher than that. It is why the proportion of homes that are owner-occupied has started to fall dramatically, as workers can no longer afford to buy a house. For wages to rise to return the ratio to the long-term average, would require that wages more or less treble, which is not going to happen. But, the consequence has been a rise in private renting, which has pushed up rents.
Again, the rise in rents has not been compensated in wages, which is why there has been a huge rise in Housing Benefit payments, which amount to a transfer of more than £9 billion from taxpayers to landlords. Yet, even as rents have risen sharply, rental yields, like the yield on shares and bonds, have fallen, because property prices have risen even faster than rents. Landlords have either to pay out ever higher prices to obtain additional property to rent, or else the value of the property they own now, represents a substantial amount of tied up capital, the return on which is declining.
It has only been the potential for perennial capital gains on property that has prevented it being liquidated. As the recent 38% collapse in commercial property prices showed, however, that can change at a moment's notice, and property, unlike bonds or shares, is illiquid. It cannot be sold quickly, and so the collapse in its price is always more sudden and dramatic than with more liquid assets.
The ghost, having started by showing them an interview with Bill Gross from 2009, in which he advised “Buy what the Fed is buying, but buy it first”, concluded by showing them a current interview with Gross, and the the new bond king, Jeff Gundlach. Both concluded that the prices of bonds and shares were unsustainable, leading them both now to advise, “Sell everything.”
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