Wednesday, 21 September 2016

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

It was again the start of 2017. In the United States, a new government found itself under pressure to make good on the promises it had made in the election. But, at the same time, as the country's infrastructure creaked under the pressure of decades of neglect, the government found itself having to spend money, so as to avoid further decline, relative to China, and other emerging, dynamic economies.

In Europe, social-democratic parties were elected, as populations had had enough of years of austerity, during which time the rich had been growing ever richer. These new governments too found themselves under pressure to meet their election promises, to end austerity, and also to repair all of the damage to infrastructure that the years of austerity had inflicted.  The policy of austerity had been the equivalent of a landlord who used the rent they received to gamble, rather than to repair the roof of the property they rented out, with their tenant suffering the consequences.

Across the globe, central bankers declared that they had done all they could with monetary policy, and it was now up to governments to start using fiscal policy, to start spending, and electorates demanded they did just that. The old conservative ideas were rejected everywhere.

As this government spending rose, and economies began to grow again rapidly, everyone said, “Why didn't we realise we could do that, given that interest rates were so low?”

But, the scrooges knew the answer. As governments began to spend money, the economy grew, and workers were employed in increasing numbers, and no longer now in precarious, temporary or zero hours jobs, but in more stable, permanent, full-time jobs. As more workers were employed, wages began to rise. As wages rose, workers began to demand more consumption goods, which meant that firms producing these goods competed with each other for the business, and had to invest more to do so, even if, at first, that investment was only in additional materials and labour-power, rather than fixed capital.

That spurred on the economy even more, so that even more workers were employed, and wages rose further, but as the wages rose, so the rate of profit fell. Firms, desperate to get the new business demanded more capital, so as to expand, but as profits were squeezed, the supply of new money-capital failed to keep up with this additional demand, and so interest rates rose.

That was what the scrooges knew all along. If the rate of interest is 10% and rises to 11%, the capitalised value of £1,000 falls from £10,000 to £9,000. The owner of a £10,000 bond makes an additional £100 a year of interest, but loses £1,000 of capital. However, if interest rates are at 5%, and rise to 6%, the owner of a £10,000 bond still makes £100 p.a. additional interest, but the capitalised value of the bond falls from £10,000 to £8,333, a fall of £1,666. The lower the existing rate of interest, the more any given rise in interest rates will cause the capitalised value of revenue producing assets to fall.

Herein again resided the Alice in Wonderland world that the scrooges had created. If we take real capital, where its value rises, if the rate of profit remains the same, then the more profit it produces. Suppose we have, c 1500 + v 500 + s 500. The rate of profit is 25%. If the capital rises to c 3000 + v 1000, then the profit rises to £1,000. The reason for this is that it is the capital that produces the profit. If the organic composition of capital remains constant, any rise in capital will cause the mass of profit to rise in the same proportion.

But, that is not the case with the fictitious capital, because it does not produce profit. It simply leaches from it. If the price of bonds and shares rise, this has no consequence for the productive-capital, or its ability to produce profits. Consequently, if the same proportion of profits are paid as interest, this interest falls as a proportion of the price of the bonds or shares.

The scrooges created a topsy-turvy world where it was not the actual production of real wealth that was most important, and then not even their ability to obtain revenue, from the paper assets they owned, but merely an endless paper chase, in which the prices of those assets were driven higher, creating the delusion of rising wealth, and where the ability to consume derived not from revenue, but from increasing capital gains on those paper assets.

But, the whole of society was dragged along by this fallacy. Pension funds came to believe they could finance future pension commitments out of these inflated asset prices; individuals came to believe that ridiculously inflated house prices made them wealthier, when in fact, they were seriously impoverishing them; governments came to believe that these same inflated assets were the basis for them raising funds, rather than the need to stimulate real capital accumulation and economic growth.

The scrooges knew it had to end, but operated under the mantra, “Please god make me chaste, but not just yet.”

As soon as interest rates began to rise, by even small amounts, the capitalised values of shares, bonds and property fell by large amounts. Because the banks' balance sheets were themselves hugely inflated by the fact that nearly all of their lending had gone to finance speculation in these financial assets, and particularly the purchase of astronomically inflated property, the collapse of those asset prices collapsed the banks' capital, as happened in 2008 and 2010, but now on a far, far bigger scale.

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