Monday, 26 February 2018

Its Not Inflation Driving Interest Rates Higher (7/10) - Accumulation and The Rate of Interest

Accumulation and The Rate of Interest 

The rate at which capital can accumulate, is determined by the capital that must be advanced, not by the capital that is laid out during the year. In other words, it is determined by the rate of turnover of the circulating capital, comprising the materials, labour-power, and wear and tear of fixed capital, because, having been advanced, once it turns over, as the output is sold, say after a month, this capital is available again to produce the output for the following month, and so on. No additional capital is required. The higher the level of productivity, and so of the rate of turnover, the less capital must be advanced to produce a given level of output, so a given mass of profit, will thereby accumulate a larger mass of capital to be advanced, and so lead to a larger increase in the mass of profit, and output it produces. 

In a period of stagnation, therefore, the mass of profit rises, and this rise in the mass of realised profits creates the additional money-capital available to be used either directly by each firm to accumulate capital, or else is deposited by each firm in the money markets, thereby becoming available to be loaned out at interest. The consequence is that the supply of loanable money-capital increases, whilst the demand for this money-capital increases more slowly, or even declines, because output increases only sluggishly, causing the demand for additional productive-capital to rise only slowly, and in the meantime, the rise in productivity causes the rate of turnover to rise so that proportionately less capital must be advanced to produce any given level of output, whilst the technological development means that physically less fixed capital is required for any given level of output (as one new machine replaces several older machines), whilst the unit value of materials falls, as do wages

The result is that during such times, the rate of interest falls to its lowest level. This fall in the rate of interest is also the basis, during such periods, of a rise in asset prices, because the price of revenue producing assets is the capitalised value of the revenue they produce. As interest rates fall, so capitalised values rise, because a lower rate of interest means that a larger capital value is required to produce any given amount of interest. So, it's no surprise that during the stagnation phase (1987-99) of the last long wave, we saw interest rates progressively decline, and during this phase, we also witnessed a phenomenal rise in asset prices with the Dow Jones rising 2300%, (between 1980-2000), or about 7 times the growth of US GDP, and property prices going through the roof across the globe. By comparison, in the period between 1950 and 1980, the Dow Jones rose by only about half the rise in US GDP.

Moreover, during the period identified by Glyn and Sutcliffe as corresponding to the profits squeeze as wages rose, and the rate of surplus value declined, the Dow Jones, actually fell in inflation adjusted terms. This illustrates Marx's point that the movement in the price of fictitious capital is governed by completely different laws to those that determine the movements in the real economy. 

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