Sunday, 6 August 2017

Bank of England Decision – It Will End In Tears

On Thursday, the Bank of England's Monetary Policy Committee voted 6-2 not to increase official interest rates from their 0.25% level, that was introduced as an “emergency measure” following the Brexit vote in June 2016. The Bank of England argued, last year, that one reason that the economy had not suffered, more than it had, following the Brexit vote, was down to its decision to cut rates from 0.5% to 0.25%. However, the fact is that the economy was never going to start suffering the dire consequences that were predicted, simply on the back of the referendum vote. Only when Brexit actually happens will the real damage to the economy begin. In the last year, the economy continued to grow, and there is now as near full employment as there is ever likely to be. So, why continue with what was supposed to be an “emergency measure” for a Brexit effect that never actually materialised anyway? The truth is that the low interest rate policy and QE never was intended to spur the economy. It was only ever intended to keep asset prices inflated.

On Thursday, on Newsnight, Ann Pettifor complained about the fact that the economy is again weakening, but two members of the MPC had voted to raise rates. A similar line has been taken by other Keynesians, like former MPC member David “Danny” Blanchflower. It misses the point, that actually, one reason for the lack of a strong economic recovery, is not that interest rates, at 0.25%, are too high, but that they are actually way too low, and that economic recovery will only come when central banks begin to convey the message that they are no longer going to underpin the paper wealth of the owners of loanable-money capital, but are going to start encouraging real investment in productive-capital.

After all, if the state really wanted to stimulate the economy, why proceed with policies of austerity? The difference between the US economy, which rejected austerity in the years after 2009, and the UK and EU which implemented austerity has been stark. All of these economies began to recover sharply in 2009, as their governments all once again rediscovered their Keynesian side. The chart shows a typical “V” shaped recovery for all up to 2010.

But, the US, which, under Obama, continued to implement fiscal stimulus, continued to grow, whereas, the UK which implemented austerity under the Liberal-Tory government in 2010, saw its own strong recovery, come to a halt, and then reverse, into recession, before spending several years flatlining. The EU, which imposed austerity on the periphery after 2010, saw a similar pattern of its recovery going into reverse, before flatlining until the last year or so. The US recovery would have been even faster had it not been for Republicans blocking some of Obama's fiscal stimulus at Congressional and state level, as well as imposing political crises over the Debt Ceiling etc., on the economy.

The only point of monetary easing, as a means of providing economic stimulus is if it is being combined with a fiscal stimulus, but as Keynes pointed out simply printing more money, or lowering official interest rates, only acts like pushing on a string, unless there is some basis for an increase in demand. In other words, there is simply a slowdown in the velocity of circulation of the currency. But, the situation is even worse than that. As Marx pointed out in relation to paper currencies, once they have been put into circulation, the state has absolutely no control over where that currency then goes. Combining monetary easing alongside a policy of austerity is insane, therefore, if the policy is really intended to provide economic stimulus. But, it wasn't. It was intended only to avoid the inevitable collapse of asset prices – shares, bonds and property – which are the main form of wealth, now, for private capitalists. Monetary easing along with austerity pushed the increased currency in the direction the state wanted it to go, into those financial assets, and policies by the state to prop up the housing market facilitated that further.

My thesis is quite simple. The role of the state, and thereby of central banks is to protect the wealth and power of the capitalist class. Ultimately, that means protecting and facilitating the growth of the dominant form of capital, which today is socialised capital, in the form of huge multinational corporations. But, at different points in the long wave cycle, this is not apparent. The capitalist class and its representatives can suffer from the delusions caused by competition, and its manifestation in various forms of fetishism, just as can every other class. In the last thirty years, the illusion has taken hold that the paper wealth represented by continual capital gains in financial assets, can continue more or less unrelated to the growth of actual capital. The state has seen its role as protecting and advancing the growth of those asset prices. It does so whilst pretending that its actual intention is to stimulate the real economy, just as the representatives of shareholders on company boards pretend they are acting in the interest of the company, when, in fact, they are only acting in the interests of shareholders (and often just themselves).

In just the same way that the short term interests of shareholders are contrary to the interests of the company itself, and the requirement for capital accumulation, so the short-term interests of the capitalist class are contrary to the interests of real capital, for such capital accumulation. Eventually, as Marx says, the latter must win out, because money-capital is subordinated to productive-capital, which is the source of new value and surplus value, from which the payment of interest is derived. In acting to ensure that asset prices are inflated, and reflated whenever they crash, the state has created incentives for available loanable capital to go into speculation, and thereby to be diverted away from real capital accumulation, and money (revenue) to be drained from commodity circulation, and again diverted into speculation, pushing up property, share and bond prices.

By definition, this slows capital accumulation, aggregate demand, and economic growth from what it otherwise would have been, and in doing so, creates disinflationary pressures, which when combined with other factors, such as rising productivity, can lead to actual deflationary pressures. Prices are merely the exchange value of commodities expressed in money, and if the exchange-value of commodities is being reduced, whilst the amount of currency actually in general circulation is restrained, because it is diverted into this speculation in assets, the market prices of commodities must also thereby fall, or at best rise only modestly. The lack of commodity price inflation is not due to there not being enough liquidity in total, or interest rates being too high (at 0 – 0.25%!), but is precisely because the excess liquidity is sucking large amounts of total liquidity into speculation.

The growth in the global economy since 2010 has been despite the actions of central banks and governments, not because of it. If economic growth had been stronger, the demand for money-capital would have risen, causing interest rates to rise, which would crash asset prices, which are based upon capitalised revenues. If the excess liquidity had been used simply as revenue to fund consumption, then consumer goods prices would have risen creating inflation that would have led to interest rate rises, as was happening prior to the 2008 crash. Governments and central banks have then had a direct interest in holding back such economic growth, for fear of cratering those asset prices. As growth rises anyway, and liquidity gets sucked back into general circulation, inflation will rise, and is likely to rise much faster than anyone currently believes, given that huge sea of liquidity out in the global economy. Central banks, in responding, are likely to cause that liquidity to stream out of assets, and into general circulation.

The main form of private capitalist wealth today is in the form of fictitious capital – shares, bonds, property (mortgages etc.) and their derivatives. This reflects the fact, as outlined by Marx and Engels, and further elaborated by Kautsky – for example in The Road To Power – that from the end of the 19th century, the private capitalists had become a socially redundant class, like the landlords before them. The 'functional' role of the capitalist, as an organiser of production, had been taken over by professional managers, increasingly drawn from the ranks of the working-class, as free state education, provided workers with the skills required to perform those tasks. These worker-managers, were the personification of what was now socialised capital, whether in the form of the joint stock companies, or the actual worker-owned co-operatives. As capitalist enterprises, still functioning within the context of a capitalist economy, albeit one that was increasingly managed and regulated, by the capitalist state, as the personification of this socialised capital, the professional managers still had to act as such, by attempting to maximise the production of surplus value, and the accumulation of this socialised capital. 

Doing so meant that they were in conflict with the interests of the private capitalists who were now reduced merely to the role of providers of loanable money-capital, in the form of the purchase of shares and bonds. The functional capitalists sought to accumulate real capital, even where this meant the rate of profit was reduced, whereas the share and bondholders sought the maximisation of the interest paid to them as dividends or interest on their bonds. For that reason, the private money-capitalists sought to ensure their interests were protected as against the interests of the real capital, i.e. against the interests of the firm. They appointed Boards of Directors to sit above the actual day to day managers, and they used their political power to ensure that the laws on corporate governance enabled them to have a vote proportionate to their shareholding, and thereby to exercise such control.

In the 1980's, and into the 1990's, as labour-saving technologies were introduced, productivity rose sharply, labour was shaken out, causing wages to fall, and the rate of surplus value, and profit to rise. The production of profits, and thereby realised potential money-capital rose faster than the demand for loanable money-capital, and so the rate of interest fell progressively. Because the prices of revenue producing assets are based upon the capitalised value of their respective revenue, falling interest rates pushed up the prices of shares, bonds, and property.

When in 1987, a financial crisis struck that was worse than the 1929 Wall Street Crash, and sent stock market prices down by 25%, it was followed by panic. The erstwhile supporter of Ayn Rand, and of sound money based upon gold, Alan Greenspan, now ensconced as Chairman of the US Federal Reserve, abandoned his former sound money beliefs, and stepped in to support the stock market, by cutting the Federal Reserve's official interest rates. So began what came to be known as The Greenspan Put, whereby every time the stock market, property market etc. seemed like it might falter, the Federal Reserve stepped in to cut rates, and send it back up again. It became a one way bet for speculators.

With vast amounts of liquidity swirling around the global economy, not just from all of these masses of realised profits, but also from vast amounts of interest received by the owners of financial assets, and rents received by landlords, including the billions in petrodollars possessed by the Gulf States, and North Sea oil states like Norway, even allowing for the actual increases in real investment that took place from around 1999 onwards, as the new long wave boom got underway, the amount of available money-capital continued to exceed the demand for it, and with states and central banks guaranteeing that stock and bond and property markets would only ever go up, that excess liquidity went into speculation in these financial assets.

The Dow Jones rose by 1300% between 1980 and 2000; other stock markets had similar rises, way in excess of GDP growth during the period; in 1988-1990 UK house prices doubled, before crashing back to their original level in 1990, as interest rates rose at the same time that the UK economy slowed; by 1997 it was back to its 1990 level, and then more than doubled again in the years up to 2007. In 1999, Greenspan and the Federal Reserve pumped additional liquidity into the system, just in case there was a problem with the Millennium Bug. There wasn't but all of the additional liquidity went into yet more speculation into the stocks of choice of the time, technology, which soared, and then in March 2000, crashed by 75%! Once again, Greenspan was on hand to pump more liquidity into the system to stop asset prices crashing further.

The real interest of the owners of this fictitious capital, in the long-term, is to obtain revenue from the ownership of that asset. A landlord desires rent, the owner of money-capital desires interest. So long as the prices of these assets remains fairly stable, that is the decisive factor. If profits increase, so that the payment of interest increases, and rents increase, the rate of interest and rate of rent may not change much, but the amount of interest and amount of rent increases, simply on the back of larger amounts of capital being accumulated. Similarly, the price of land/property, and price of bonds/shares may not change much. It is the revenue from each asset that rises.

However, the opposite is also true, if the price of shares, bonds, land/property rises quickly, the yield on those assets falls, and that may be the case even if the actual amount of interest or rent rises. The rampant speculation in these assets from the 1980's onwards, drove their prices ever higher, underpinned by central banks, and by other actions by the state, for example the Help To Buy, and other policies adopted by the British government. The extent to which speculation drove the asset prices higher, even compared with increasing revenues is shown by the fact that in the 1970's, about 10% of company profits went to pay dividends to shareholders, whereas today that figure is around 70%, and a similar picture exists in the US and elsewhere, yet yields on all these assets have continued to fall.

In other words, as these asset prices soared, thereby driving down yields, those representatives of the owners of fictitious capital, sitting on Company Boards, and in the C-Suites, siphoned off profits increasingly to pay out higher dividends, and other forms of capital transfers to shareholders, and away from investment in real productive-capital, i.e. expanding production, building new factories, taking on additional workers and so on. Moreover, as the yields, on these assets got driven ever closer to zero and beyond – look at German 2 Year Bunds with a Yield of -0.60%, or even debt ridden Italy, whose 2 Year Bonds are at - 0.22% – the main concern of the owners of these assets shifted away from the potential for yield, and towards the potential for capital gains, i.e. an increase in the price of the asset.

The classic example has been property, where, it has now become commonplace in London, for example, for foreign speculators to buy up and finance property developments that then remain empty, because the owners are not interested in obtaining a potential rent – often set so ridiculously high that no one could afford them – but only in the potential for the price of the property to rise by 20% p.a. It was recently shown, for example, that within a short distance of Grenfell Tower, there were more than 1200 luxury properties owned by foreign speculators that have been left empty. With yields sent to near zero – you are lucky if you can get more than 0.1% on ordinary savings deposits now – and consequently, annuities paying out dismal amounts for pensions, large numbers with any cash were driven to place their savings into these forms of speculative asset.

But, across the globe, central banks have been forced to start tightening monetary policy, albeit grudgingly. Most developed economies are close to what is effectively full employment. So far, it has not resulted in rapidly rising wages, but one interesting explanation for that was given by an analyst on CNBC recently. It was that baby boomer workers are falling out of the labour force, and being replaced, by millennials. The latter start on much lower wages than the boomer workers they have replaced. However, the analyst said, look at the annual rise in wages of these replacement workers, and it is rising by around 4%. There has also been a lot of slack in the labour market, because boomer generation workers who have retired early, can come back into the workforce if wages are high enough, particularly if they only have to work part-time to supplement pensions etc. In both the US and UK, there has been a lot of low productivity, casual and fake self-employment, which means workers temporarily absorbed that way, start to take up permanent jobs.

On reason for low wages often given, but which is false, is low levels of productivity. It is low wages that cause low productivity, not vice versa. As Marx pointed out, at one point in the 19th century when women workers wages were particularly low, capitalists used women to pull canal barges rather than horses, because it was more profitable! Ricardo also pointed out that wages have to be high enough to encourage capital to introduce productivity raising machines etc. It is always when wages rise, due to a shortage of labour, which then squeezes profits, creating the greater potential for crises of overproduction, that capital starts to innovate and develop new labour-saving technologies. That sparks a new round of intensive accumulation, as was seen in the late 1970's, and early 1980's. As Marx puts it,

“Improvements, inventions, greater economy in the means of production, etc. are introduced not at times when prices rise above their average level, but when they fall below it, i.e., when profit falls below its normal rate.”

(Theories of Surplus Value,II, Chapter 8, p 26 – 7)

What we are seeing is that the underlying strength of the long wave boom phase is asserting itself despite the attempts of the state and central banks to hold it back, via measures of austerity, and of draining money-capital into unproductive speculation. Vast new areas for capital to be invested in exist in space technology, renewable energy technology, the switch from petrol/diesel engines to electrically powered cars, and self driving vehicles, huge potential in health sciences, biotechnology, gene technology, and cyber technology exists, all of which offer huge profits, and the development of vast markets. In fact, the holding back of that growth after 2008, is likely to see the current long wave cycle extended, beyond its normal conjuncture of 2025 to somewhere between 2030-2035, before a new crisis phase begins.

But, the fact that yields on assets are now at such low levels, which means that the ability to raise asset prices by money printing etc. has run its course, and the fact that global growth is rising again, with labour shortages starting to appear, means that the ability to divert money-capital into speculation rather than real capital investment has also run its course. Rising employment and wages also means that liquidity no longer diverted into speculation, will also be sucked into commodity circulation, leading to rising inflation, which will provoke rises in market rates of interest.

The attempts to extend the astronomical inflation of asset prices, at the expense of real capital accumulation, of which the Bank of England's decision last week, is just the latest example, will end in tears, as the financial bust will be much larger than it otherwise would have been had it simply been allowed to play itself out in 2008/9.

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