Wednesday, 14 September 2016

A Crisis Carol - Stave 4 - The Ghost of Crisis Future - Part 1

The scrooges were then visited by a third ghost – the ghost of crisis future.

“Look,” said the scrooges, “your two predecessors did a pretty good job of putting the frighteners on us, for a time, but, when everything is said and done, here we still are, wealthier than ever.”

“Yes,” said one of the scrooges, “we have experienced all that and so why should we worry about the future? Its all very well for Gross and Gundlach to say everything is too expensive, but people have been saying that for twenty years, from when Greenspan talked about ' irrational exuberance', but Greenspan himself, and his associates, have done everything required of them to keep that irrational exuberance even more exuberant, so it can't have been that irrational after all.”

Another of the scrooges stepped forward and wagged his finger at the ghost.

“We haven't even started dropping helicopter money from the central banks yet, which will keep our asset prices inflated.”

“Yes,” said another, “and just look at what Phillip Green showed us what to do. So far, we've just kept taking bigger and bigger chunks of profits as dividends, rather than it going into productive investment. But Big Phil showed us how to take dividends and capital transfers, much bigger than a company's profits, by also liquidating the actual capital of the business. In fact, we ripped off workers for twenty years, by that means, through our control of the workers pension funds.”

The ghost waved his hand upwards, and as they looked around, the scrooges saw that they were standing on top of the tallest building in Manhattan, looking out across building after building, in which, had they had X-ray vision, they would have seen tens of thousands of people trading worthless bits of paper, each of which they tried to sell for astronomical prices. The con-man who sold the Eiffel Tower to gullible marks had nothing on these traders.

The scrooges chests swelled, as they looked on with pride at the amount of paper wealth that was being created by the minute out of nothing. But, the hubris did not last long, as the ghost gave a huge blow that swept them from the roof and sent them hurtling towards the ground, several hundred feet below. As they fell, panic-stricken, the ghost appeared alongside them, casually reclined, with his head propped on one side, supported by his hand.

“Why are you looking so worried,” he asked? “After all, nothing has happened yet, has it? Who knows, maybe you could keep falling forever, defying gravity, without there being a crash.”

The scrooges understood the ghosts point. They knew that sooner rather than later a day or reckoning was fast approaching. They just didn't want to be the first to chicken out, for fear of missing out on a few more gains. They closed their eyes, waiting for the crash. But, they shortly became aware that they no longer seemed to be falling. As they opened their eyes, they realised they were on top of the building again. Looking down, they saw a number of mangled bodies, lying on the street below. A cold shudder ran down their spine.

“Don't worry. You're not dead. That's not you down there. Its just some day traders who couldn't meet their margin calls,” said the ghost.

The scrooges heard a flapping noise, and a goose flew in, honking to announce its arrival, as it waddled up alongside the ghost.

“What's that,” asked the scrooges?

“Its the goose that lays the golden eggs,” said the ghost, “and you're killing it. The goose used to be well fed by the farmer, and regularly produced large golden eggs, which more than paid for the upkeep, but you've put accountants in charge of the goose, and they've been starving the goose of grain, so as to leave more from the proceeds of the eggs for you. Now, the goose is producing fewer and smaller eggs, which has meant that the accountants have been starving the goose even more of grain.”

According to the Bank of England's Andy Haldane, in the 1970's, around 10% of company profits went to pay dividends, whereas today, that figure is around 70%. The reason for that is clear from what has already been said. Although profits have risen sharply since the 1980's, and also risen sharply in relation to the cost of producing those profits (the rate of profit) as sharply rising productivity slashed the value of constant capital, and also raised the rate of surplus value, the prices of shares rose even faster.

Suppose the total social capital is made up c 1,000 + v 500 + s 500. The rate of profit is 33.3%. Suppose that the total value of shares is also £1,000, and dividends paid from the surplus value is 10% = £50. The dividend yield is then 5%. Now suppose productivity rises, reducing the value of constant capital, and variable capital. So, we have,

c 800 + v 400 + s 600.

Now, the rate of profit has risen to 50%. If 10% of profits are paid as dividends that is now £60. But, if share prices are inflated so that they are now £1,500 then the dividend yield is only 4%. In order for yields to remain at 5%, the dividend would have to rise to £75, which is then 12.5% of profits.

The reason that share prices rose, at this faster pace was described earlier. The price of revenue producing assets, such as shares, bonds or land is not just a function of the revenue they produce, but also of the average rate of interest, via the process of capitalisation. The rise in profits, from the late 1980's, explains part of the reason for rising asset prices, but the further cause is the secular decline in interest rates that began in 1982.

In order to compensate for these falling yields, the proportion of profits going as dividends had to be continually raised, just as falling rental yields, due to ever higher property prices, had to be compensated by ever rising rents. The boards of companies are dominated by the representatives of the scrooges. Their function is not to further the interests of the company, but of the scrooges who lend money to to it, i.e. the shareholders.

This is given various names. It has been called “maximising shareholder value”, and last year, Hillary Clinton called it “Quarterly Capitalism”, meaning that everything is geared to making the quarterly reports of companies look good, particularly the rises in the company's share price. All of the TV business channels are really just about that. They deal with various aspects of economic and business activity, but the bottom line is always what is happening to the financial markets. 

John Weeks described it.

“The pervasive control of the UK economy reveals itself in what passes as economic news, more correctly named “speculation news”. Since the beginning of 2016 the media’s reporting of the movement in stock markets has reached the point of obsession. Each day’s business news headlines focus on whether these market indices fall or rise. Commentators present a fall as a harbinger of disaster, with a rise provoking optimistic cheers that we escaped disaster.” 

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