Sunday, 18 September 2016

A Crisis Carol - Stave 4 - The Ghost of Crisis Future - Part 3

The ghost pointed in the direction of the East, and, as the scrooges cast their gaze in that direction, a vision was presented to them. It was midnight in Times Square, on New Year's Eve, 2016. In bright illumination, the year 2017 appeared. The scrooges all felt as though someone had walked on their grave, shuddering as they remembered the events of a century earlier, of 1917, when the mortality of the capitalist system itself had been revealed.

A series of events flashed in front of the scrooges, as though watching a film being played on fast forward.

Starting in Japan, the scrooges watched as, to prevent stock markets falling, central banks started dropping helicopter money into people's bank accounts. Having seen years of falling consumer price inflation and a hyperinflation of asset prices, everyone who obtained the largesse did the rational thing, and used it to buy stocks, bonds, property and other such assets. The effect was again to pump up those asset prices to ever more ridiculous levels, and to reduce yields further and further below zero. 

Anxious not to miss out on the capital gains, everyone cut back their consumption, further and further to the bone, in order to use whatever money they had to buy these rapidly inflating financial assets. That in turn drove economies further and further into stagnation, as aggregate demand fell, and the reduction in liquidity in general circulation combined with the falling aggregate demand to exacerbate the existing consumer price deflation. Meanwhile, conservative governments reduced aggregate demand further, by introducing increasing measures of austerity to combat rising budget deficits and debt/gdp ratios, as deflation and stagnant growth made it ever harder to finance existing debt. More and more governments found themselves going through the same sequence of events that such policies had previously inflicted on Greece.

The effect was stagnant business activity and profits, whilst asset prices rose further, depressing yields even more. Banks, particularly in Europe, starting in Italy, but quickly spreading to the big German banks, that had been suffering losses, as a result of negative interest rates, suffered larger losses, and started to go bust.

The scrooges, seeing stagnant business activity and profits, but desperate to keep their asset prices inflated, sought to liquidate real capital, so as to use the money to buy fictitious capital instead. It was a huge equity release scam, implemented on a global scale. They closed down shops and factories to obtain cash, and then used the cash to speculate further in stock and bond markets, or else instructed their representatives on company boards to use the cash to buy back company shares, so as to boost the share price.

But, it was like the dying days of a star, before it goes into a supernova. It had sparked a last inflation of the asset prices, only to terminally undermine their basis. Previously, it was only a matter of profits rising more slowly, as capital accumulation was undermined. Now as capital was actually destroyed to raise cash, profits fell absolutely. As real capital was destroyed, in order to save fictitious capital, unemployment rose. Not even the policy of extend and pretend could now stop millions from defaulting on their mortgage payments, even after those that could had liquidated all of their mutual funds, ISA's, pension funds, and drained the savings and assets of their parents and grandparents to try to stay afloat.

Banks across Europe that had already been going bust found that all the property on their books was increasingly worthless, and as millions of people sold whatever mutual funds etc. they had, increasingly the value of those financial assets on bank balance sheets fell sharply too. Overnight, everyone wanted to get rid of the financial assets they had so recently clamoured for, and now just wanted hard cash so as to stay afloat, and pay for their everyday costs of living.

All of the private debt represented by the inflated value of property, bonds, and shares could not be repaid, as had happened on a much smaller scale in 2008, and with the European Debt Crisis of 2010. It was now written off forcibly, as the value of stocks, bonds, and property collapsed, with no prospect of recovering, for at least a generation.

In the past, such financial bubbles, like the South Sea Bubble, The Tulipmania, John Law's Mississippi Scheme, or the Technology Bubble were relatively limited in scope. What made this different was the fact that it was all pervasive. It was not just technology shares that had been hyper-inflated, but all shares; it was not just shares that had been inflated but other revenue producing assets, such as bonds and property. And showing that concern for capital gain had long since replaced the concern for revenue, it was not just revenue producing assets that were inflated, but any asset that might obtain a capital gain, as a result of speculation, be it gold, diamonds, art, wine, vintage cars, bitcoin, or vinyl records! The mania had left no aspect of life untouched, and now, as the prices of all these things collapsed, the life of everyone who had in any way gambled on the continuing rise in the prices of those assets, was also similarly destroyed.

The scrooges realised the game was up. They may as well have piled all the paper wealth, all the share certificates, all of the bonds, and all of the mortgages into a pile and burned them to keep warm; they may as well have opened their bottles of ludicrously expensive vintage wine and drowned their sorrows with it, whilst using the gold and diamonds for the jewellery they were intended, and listening to the vinyl records, in one last party, rather than keeping them stored in sterile containers.

The final indignity for the scrooges came when all of the factories and other real capital they had disdained, in order to inflate their paper wealth, was simply taken over by their workers, who similarly used them for the purpose they were intended of producing real wealth. The workers having started to run those businesses themselves, realised that the collapse of all of that fictitious capital did not change the usefulness of the factories, the machines and so on one bit. The workers could continue to do what they did every other day, of coming in to work, and doing the same job they always did.

They would continue to produce all of the goods and services they had been producing the day before the crash. In other words, the workers realised that, just as 250 years earlier, the landlords were found to no longer serve any useful purpose; and 150 years ago the private productive-capitalists were also found to serve no useful purpose, now the money-lending capitalists were seen to serve no useful purpose either. The vision faded to black, as the scrooges sank into oblivion...

As a light flickered, the scrooges found themselves again on top of the building alongside the ghost. The goose honked to attract their attention. As the ghost pointed to the West, the scrooges watched on as a different vision unfolded for them.

No comments: