Theories of Surplus Value, Part II, Chapter 16 - Part 8

Of course, this differentiation of the rate of profit from the annual rate of profit, and the effect on the price of production operates in the opposite direction too. In the example given, the second capital, as a result of the £75 of fixed capital represented a larger advanced capital than the laid-out capital, or cost of production, for the year, but the opposite is also true. If we take that same example, it might be that the £15 of materials, and the £10 of labour-power are advanced in the production of commodities, which are produced and sold, and the capital consumed in their production reproduced every four weeks. In that case, a total capital amounting to £25 of wear and tear, plus 13 x £15 materials, and 13 times £10 of labour-power will have been laid out. In total, the cost of production will be £25 + £195 + £130 = £350. But, the same £15 of average profit on the advanced capital of £100 is all that this capital can claim. The price of production will then be £365, and the rate of profit/profit margin will be only 4.29%. 

The consequence of this, as Marx describes, is not only that the price of production of commodities is a function of the organic composition of capital, but that it is also a function of these widely diverging rates of turnover of capital. Not only is it the case that those capitals with a higher than average organic composition have prices of production greater than their exchange-value, because their share of profit is greater than their production of surplus value, but those capitals whose rate of turnover is lower than the average also have prices of production higher than their exchange value, and obtain more profit than the surplus value they produce. 

This is the main feature of the establishment of an average annual rate of profit, and the creation thereby of prices of production which differ widely from the exchange value of commodities. It is the determining factor in the allocation of capital, because it means that capital is allocated away from the low annual rate of profit spheres into the high annual rate of profit spheres, which results in the formation of these prices of production. Its what Marx means when he says that the law of the tendency for the rate of profit to fall, where the organic composition of capital is higher (or rate of turnover is lower) is the most important law for capital.  Yet, Ricardo misses all of this, and is focussed only on the incidental movement of prices from the average rate due to fluctuations in supply and demand. 

“Having postulated the general rate of profit, he only concerns himself with the exceptional modifications in prices which are necessary for the maintenance, for the continued existence of this general rate of profit. He does not realise at all that in order to create the general rate of profit values must first be transformed into cost-prices and that therefore, when he presupposes a general rate of profit, he is no longer dealing directly with the values of commodities.” (p 434) 

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Theories of Surplus Value, Part II, Chapter 16 - Part 7

Marx describes the fundamental basis for the general or average rate of profit, which is that it is the total surplus value produced, measured against the total social capital advanced. On this basis, each separate capital is entitled to a share of the total surplus value, in the same proportion as that individual capital stands in relation to the total social capital. In short, it is entitled to receive the average rate of profit, irrespective of how much or how little surplus value that particular capital produces. 

“Each capital, therefore, in each particular branch, represents a portion of a total capital of the same organic composition, both as regards constant and variable capital, and circulating and fixed capital. As such a portion, it draws its dividends from the surplus-value created by the aggregate capital, in accordance with its size. The surplus-value thus distributed, the amount of surplus-value which falls to the share of a block of capital of given size, for example £100, during a given period of time, for example one year, constitutes the average profit or the general rate of profit, and as such it enters into the costs of production of every sphere of production.” (p 433) 

The point about “during a given period of time”, is important, because of the fact that different capitals turn over at different rates, and it is this fact, as Marx sets out in Capital II, that leads to the distinction between the rate of surplus value and annual rate of surplus value, and consequently to the distinction between the rate of profit and annual rate of profit, and thereby to the average annual or general rate of profit. 

“If this share [per 100] is 15, then the usual profit equals 15 per cent and the cost-price is £115. It can be less if, for instance, only a part of the capital advanced enters as wear and tear into the process of the creation of value. But it is always equal to the capital consumed +15 [per cent], the average profit on the capital advanced. If in one case £100 entered into the product and in another only £50, then in the first case the cost-price would be 100+15=115 and in the second case it would be 50+15=65; thus both capitals would have sold their commodities at the same cost-price, i.e., at a price which yielded the same rate of profit to both.” (p 433-4) 

In other words, the annual rate of profit is calculated on the total advanced capital. This capital includes the full value of any fixed capital, even though only a portion of the value of this fixed capital enters into the value of the output in the year. It is calculated on this full value for the simple reason that, as fixed capital, it must be present, in its entirety, for production to take place. If a capitalist spends £1 million on a factory, no production can take place without the entire factory being there for it to take place in. The fact that the factory might be expected to last for 100 years, and so only transfers £10,000 of value per year, does not change matters. The capitalist has still advanced this £1 million of capital that otherwise could have been used in some other activity, and thereby been producing profit. 

But, the difference is important in discussing the difference between the rate of profit, which is the same thing as the profit margin, which is p/k, or p/(c+v), as against the annual rate of profit, which is s x n/C, where s is the surplus value produced in one turnover period, n is the number of turnovers of the circulating capital in a year, and C is the total advanced capital for one turnover period. As Marx sets out here, the average rate of profit is 15%. The 15% is calculated on the total advanced capital, which in both cases, is taken to be £100, and so produces £15 profit. As Marx describes, if, in one case, all of the £100 of capital is laid out and consumed during the year, the cost of production, c + v, or k, is equal to £100, and adding in the £15 average annual profit gives a price of production of £115. The rate of profit, or profit margin is similarly 15%. However, in the second case, some of the advanced capital is fixed capital, which only transfers some of its value to the year's output as wear and tear. Suppose the capital is comprised £75 fixed capital, £15 materials, and £10 labour-power. If the fixed capital loses a third of its value, as wear and tear, the cost of production is then 25 (d) + £15 (c) + £10 (v) = £50. But, this capital has advanced capital in total of £100, and is still entitled to the average 15% profit, and thereby of £15. Adding this £15 of profit to the cost of production of £50 then gives a price of production of £65, and the rate of profit/profit margin is now 30%. 

How can this come about? Well, as stated above, it is clear that a capitalist who has to advance the £75 of capital as fixed capital will still expect to obtain the average 15% profit on the whole of this capital, even though it is not fully consumed during the year. If not, they will either not engage in this line of business to start with, or else they will move their capital to other spheres where they can obtain this rate of profit on their entire capital. This movement of capital between spheres, so that it produces an average rate of profit, on the total advanced capital and not just the capital consumed in the year's production, thereby raises or lowers the level of supply of commodities in each sphere, and thereby adjusts the prices of these commodities to the appropriate price of production. 

“It is evident, that the emergence, realisation, creation of the general rate of profit necessitates the transformation of values into cost-prices that are different from these values. Ricardo on the contrary assumes the identity of values and cost-prices, because he confuses the rate of profit with the rate of surplus-value. Hence he has not the faintest notion of the general change which takes place in the prices of commodities, in the course of the establishment of a general rate of profit, before there can be any talk of a general rate of profit. He accepts this rate of profit as something pre-existent which, therefore, even plays a part in his determination of value.” (p 434) 

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From Worse To Bad

A week ago, I wrote that global bond yields were set to gap higher.  Typical of the way these things happen, in the days that followed,  US Bond yields instead of rising towards 3.50% fell back.  Today they have fallen back to around 2.86%.  But let's look at why.

In the post, I wrote that, as I had suggested at the start of the year, we are either at, or approaching a number of inflexion points.  One such point here is that contrary to what has been the case over the last few years, rises in official US interest rates are now likely to act to strengthen the Dollar.  I set out the reasons for that in the post.  Now look at what has happened.  In the last few weeks the Dollar has been strengthening.  The Pound has already fallen from over $1.40 down to just over $1.32 today.  But, inevitably, the most notable effect has been on emerging market currencies, which have started to drop significantly against the Dollar, a problem for them, as many of their imports are denominated in Dollars, so a rising Dollar means imported inflation for them.

Turkey, has been one such country.  But, it has other factors.  It is sliding ever closer to dictatorship under Erdogan.  He has recently spoken about taking direct control over the Turkish central bank.  The Turkish Lira then began to fall precipitously, and Turkish bond yields spiked higher.  Eventually, as the Lira continued to drop, the Turkish central bank was forced to step in to defend it, reminiscent of Britain in 1992, and raise official interest rates.  Turkish rates have risen now to over 16%, just as the UK raised rates in 1992 to 15%.

But, Turkey is not alone,  The latest example is Italy, where the election of the right-wing nationalist coalition of Five Star and the neo-fascist Liga already spooked the markets.  Protected by being a member of the Euro, there is no Italian currency to be attacked, but as with the Eurozone Debt Crisis of 2010, that has meant the focus has centred on Italian government bonds, and now given that over the last 8 years the ECB has stuffed the mouths of commercial banks with cheap money, encouraging them to buy their country's sovereign bonds, that has also fed through in to an attack on the already shaky Italian banks who are likely to go bust, if all of the Italian bonds sitting on their balance sheets get turned into toilet paper.  What makes that situation worse, is the very fact that over the last few years, the ECB's LTRO, and then outright QE programme has meant that all of these worthless bonds have been pumped up to ridiculous levels, to the extent until this crisis, Italian bond had lower yields than UK Gilts!

The situation in Italy has highlighted the situation in Spain, once more, especially given its own political crisis surrounding the corrupt government of Rajoy.  And, that, in turn has flowed over to a sell off of Portuguese bonds.

In short, the rise in the price of US bonds, fall in their yield, is not a reflection of them being a good place to be, only that they are a relatively safe haven compared to all these absolutely awful other places.  The rise in the price of US bonds, is simply a reflection that hot money has rushed out of all these other places, causing their currencies to drop, and bond yields to surge, and into the relatively safe haven of the US.  For all the reasons previously set out, that will not last either.

Back in 2015, I wrote that the new Syriza government could not bend.  If it did, I argued, the result would not be some return to a centrist government, but a turn by the Greek people to the only other option - Golden Dawn.  In the event, Syriza did bend, and they are now facing being wiped out at the next elections.  But, in the meantime, the ECB effectively arranged for the Greek debts to be wiped out, and short term loans have been provided.  But, as Syriza themselves initially recognised, none of that resolved the underlying structural problems of the Greek economy, which requires capital not liquidity.  For now, Golden Dawn is not waiting to take over in Greece, the Greek people seem to have the good sense to have rejected them, and to recognise that life for them outside the Eurozone, let alone outside the EU, would be much worse, despite the unnecessary suffering imposed on them by the irrational programme of austerity, demanded by the EU's conservative leaders.  Instead, its across the EU that those irrational conservative polices of austerity have had their effect, in that direction.

The conservative EU leaders have wasted the eight years since 2010.  They should have recognised, particularly after the crisis in Greece, Cyprus and elsewhere that those old conservative economic policies were dead.  What Greece, and other EU countries required was not austerity, but bold fiscal expansion, to create the kind of 21st century infrastructure that would bind the EU together as a modern state, and create the networks, and foundations for balanced economic growth.  Instead, intent on the delusion of being able to reflate asset price bubbles, and thereby protect the illusory paper wealth of the richest private capitalists, they pressed ahead with austerity to restrain economic activity and investment, alongside massive money printing to further hyper inflate the prices of bonds, shares, and property - the very policy that had led to the 2008 financial crash, and the 2010 Eurozone Debt Crisis, in the first place.

The result has been Brexit, rising support for right-wing nationalists like Le Pen, Wilders, the AfD, the Austrian Freedom Party, Orban in Hungary, Law and Justice in Poland, and Five Star and the Liga in Italy.  Its time the EU leaders woke up and smelled the coffee.  Italy is not Greece, and now they have a problem.

Theories of Surplus Value, Part II, Chapter 16 - Part 6

[2.] Formation of the General Rate of Profit. (Average Profit or “Usual Profit”)

[a) The Starting-Point of the Ricardian Theory of Profit Is the Antecedent Predetermined Average Rate of Profit]

Marx begins this section with a long quote from Ricardo, which, he says, shows that he is not theoretically clear on the question of the formation of a general rate of profit. Given that Ricardo has no objective basis for determining the mass of surplus value, that is not surprising. Ricardo is essentially left assuming that there is some already existing usual rate of profit, and that competition drives capital towards it. 

Ricardo begins by noting that the market price for commodities varies from the natural or necessary price, as a result of short term imbalances of supply and demand. Ricardo says, 

“This, however, is but a temporary effect. The high profits on capital employed in producing that commodity, will naturally attract capital to that trade; and as soon as the requisite funds are supplied, and the quantity of the commodity is duly increased, its price will fall, and the profits of the trade will conform to the general level.” (p 432) 

This movement of individual prices and profits is then separate from what Ricardo sees as a general, historical downward movement in the average rate of profit, as a result of the rise in wages, previously discussed, which arises due to a growing population, and the need to provide the necessaries it requires, by moving to progressively less fertile soils. So, Ricardo says, 

“A fall in the general rate of profits is by no means incompatible with a partial rise of profits in particular employments. It is through the inequality of profits, that capital is moved from one employment to another. Whilst then general profits are falling, and gradually settling at a lower level in consequence of the rise of wages, and the increasing difficulty of supplying the increasing population with necessaries, the profits of the farmer may, for an interval of some little duration, be above the former level. An extraordinary stimulus may be also given for a certain time, to a particular branch of foreign and colonial trade (l.c., pp. 118–19).” (p 432) 

Ricardo goes on to relate how, in particular spheres, a more permanent shift in demand may occur, which causes prices and the rate of profit, in that sphere, to rise. In consequence, capital will then naturally be attracted to that sphere, increasing the supply of commodities, reducing prices and profits, until the surplus profit is eroded. He goes on, 

“In the same manner, with every increased demand for corn, it may rise so high as to afford more than the general profits to the farmer. If there be plenty of fertile land, the price of corn will again fall to its former standard, after the requisite quantity of capital has been employed in producing it, and profits will be as before; but if there be not plenty of fertile land, if, to produce this additional quantity, more than the usual quantity of capital and labour be required, corn will not fall to its former level. Its natural price will be raised, and the farmer, instead of obtaining permanently larger profits, will find himself obliged to be satisfied with the diminished rate which is the inevitable consequence of the rise of wages, produced by the rise of necessaries” (l.c., pp. 119–20).” (p 433) 

If the working-day, in each sphere, is more or less given to be the same, any variations are due to the specifics of that sphere, of the particular types of labour. Moreover, the general rate of surplus value can then be assumed to be given, because wages are, on average, the same. 

“Ricardo is preoccupied with this idea, and he confuses the general rate of surplus-value with the general rate of profit. I have shown that with the same general rate of surplus-value, the rates of profit in different branches of production must be very different, if the commodities are to be sold at their respective values.” (p 433) 

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Theories of Surplus Value, Part II, Chapter 16 - Part 5

Ricardo makes a statement that is clearly false, and illustrates his confusion, in relation to the rate of profit and rate of surplus value. He says, 

““Suppose the price of silks, velvets, furniture, and any other commodities, not required by the labourer, to rise in consequence of more labour being expended on them, would not that affect profits? Certainly not: for nothing can affect profits but a rise in wages; silks and velvets are not consumed by the labourer, and therefore cannot raise wages” (l. c., p. 118).” (p 430-1) 

But, its clear that the rate of profit, in these spheres, would fall, because the cost of the raw materials, used in their production, would have risen, even if wages did not. Moreover, if the rate of profit, in these spheres fell, capital would gradually leave them, and migrate to higher profit areas. The increased supply of commodities, in these other areas, would then reduce the prices of these commodities, and thereby reduce the rate of profit in these remaining spheres. 

“Such a nominal rise in prices does not directly affect the rate of profit, but the distribution of profit.” (p 431) 

Marx quotes Ricardo again, where he returns to the question of the rate of profit as its affected by a rise in the price of agricultural produce. A farmer, because a large part of their stock of capital consists of these commodities, (their commodity-capital), that has risen in price, would, thereby, benefit from a capital gain, resulting from the increase in the value of that capital. If corn rose from £4 to £12, Ricardo says, this would probably go along with a rise in the exchange value of the farmer's capital from £3,000 to £6,000. If profit was £180, that would be 6% on the original capital of £3,000, but the actual rate of profit, he says would be only 3%, because the current value of the capital has risen to £6,000, and £180 is only 3% on that sum. 

If a new farmer entered production, they would need £6,000 of capital, and they would only make £180, or 3%, profit on it. Others, in trades which employed these agricultural products, such as brewers, distilleries, clothiers, and linen producers, would be in a similar position that they would benefit from a capital gain (appreciation as opposed to depreciation) in the value of their stock of materials, but would also see a fall in their rate of profit, on the basis of this higher capital value. And, Marx again makes clear his own position in determining the rate of profit on the basis of the current reproduction cost of the capital, as against the proponents of the historic cost model. He writes, 

“What is important here is only something of which Ricardo is not aware, namely, that he throws overboard his identification of profit with surplus-value and [admits] that the rate of profit can be affected by a variation in the value of the constant capital independently of the value of labour. Moreover, his illustration is only partially correct. The advantage which the farmer, clothier etc. would derive from the rise in price of the stock of commodities they have on hand and on the market, would of course cease as soon as they had sold these commodities. The increased value of their capital would similarly no longer represent a gain for them, when this capital was used up and had to be replaced. They would then all find themselves in the position of the new farmer cited by Ricardo himself, who would have to advance a capital of £6,000 in order to make a profit of 3 per cent. On the other hand, the jeweller, manufacturer of hardware, money-dealer etc.—although at first they would not [receive] any compensation for their losses—would realise a rate of profit of more than 3 per cent, for only the capital laid out in wages would have risen in value whereas their constant capital remained unchanged.” (p 431-2) 

And, Marx makes a further point relevant to this, which is that what is at issue is not only the division of value of the product of labour, between wages and profit, but the division of this value between capital and revenue. If the value of the means of production rises, then, as Marx says in Capital III, these use values still have to be physically replaced on a like for like basis. The fact that their value has risen, by definition means that a greater proportion of current production, of current social labour-time, has to be devoted to their replacement. On the assumption even that the value of wage goods has not changed, therefore, the amount of current production available as surplus product falls, the amount of current social-labour-time left over as surplus labour-time falls, and so necessarily on the basis of a calculation of the rate of profit according to current reproduction costs, the rate of profit must fall. As Marx puts it, 

“One further point of importance in connection with this compensation of the falling profit by the rise in value of the capital, mentioned by Ricardo, is that for the capitalist—and generally, as far as the division of the product of annual labour is concerned—it is a question not only of the distribution of the product among the various shareholders in the revenue, but also of the division of this product into capital and revenue.” (p 432) 

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Theories of Surplus Value, Part II, Chapter 16 - Part 4

Ricardo, in his presentation, assumes that raw material prices fall, in general, and so, Marx says, this would mean a rise in the general rate of profit, and not just in one industry. The fall in the value of material raises the rate of profit, so that both more material, and more labour to process it, can be set in motion, with a consequent rise in output, and of surplus value. Its strange that Ricardo doesn't realise this, Marx says, because when the situation is reversed, so that the prices of the commodities that form the productive-capital rise, he does understand the effect. In fact, it is the effect of these rising prices that form the basis of Ricardo's theory of the falling rate of profit. 

Marx quotes Ricardo from Chapter VI of his “Principles”, “On Profits”. Ricardo assumes that worse land is brought into cultivation to meet the needs of producing necessaries. Ricardo's theory of a falling rate of profit, which also led him to fear that, ultimately, profit would disappear, and capitalism could collapse, is based on the assumption that industrial production and productivity expands faster than agricultural productivity. The consequence is that more land has to be brought into production to provide the additional supplies of food and raw material. Because Ricardo starts from an assumption that the best land is used first, he assumes that additional land brought into use must be of a lower quality. The consequence is that the price of necessaries rise, and so does differential rent. The higher price of necessaries increases the value of labour (power), and so wages. As wages rise, profit (surplus value) is reduced. Because Ricardo equates surplus value with profit, this creates an inevitable process by which the rate of profit must continually fall. 

Ricardo argues that this would also cause the prices of raw materials to rise, but Marx points out that this does not follow, and that “cotton may very well fall in price, so can silk and even wool and linen, although the price of corn may be rising.” (p 429) A farmer employing ten men would see their profit fall, because the value produced by them would be, say, £720, but now more in wages would have to be paid out of it. Marx quotes Ricardo's further argument, 

““But the rate of profits will fall still more, because the capital of the farmer … consists in a great measure of raw produce, such as his corn and hay-ricks, his unthreshed wheat and barley, his horses and cows, which would all rise in price in consequence of the rise of produce. His absolute profits would fall from £480 to £445 15s.; but if from the cause which I have just stated, his capital should rise from £3,000 to £3,200, the rate of his profits would, when corn was at £5 2s. 10d., be under 14 per cent. 

“If a manufacturer had also employed £3,000 in his business, he would be obliged in consequence of the rise of wages, to increase his capital, in order to be enabled to carry on the same business. If his commodities sold before for £720 they would continue to sell at the same price; but the wages of labour, which were before £240, would rise when corn was at £5 2s. 10d., to £274 5s. In the first case he would have a balance of £480 as profit on £ 3,000, in the second he would have a profit only of £445 15s., on an increased capital, and therefore his profits would conform to the altered rate of those of the farmer” (l.c., pp. 116–17).” (p 429-30) 

So, as Marx says, Ricardo, in his argument here, does distinguish between the amount of absolute profit, equal to the surplus value, and the rate of profit, measured against the total capital advanced. What is more, he shows that the rate of profit falls by more than just the fall in the rate of surplus value, precisely because it is measured not just against the variable capital (wages) but against also the constant capital, whose value has also risen. And, indeed, had the variable capital and the rate and mass of surplus value not changed at all, the rate of profit would have fallen, because the value of the constant capital had risen, and so the value of the total advanced capital would have risen. 

“The reverse result, i.e., a rise in the rate of profit (as distinct from a rise in surplus-value or absolute profit), would take place in the first instance cited from him, where the value of the raw produce falls. It is evident, therefore, that rises and falls in the rate of profit may also be brought about by circumstances other than the rise and fall in the absolute profit and the rise and fall in its rate, reckoned on the capital laid out in wages.” (p 430) 

Marx quotes Ricardo's comment, 

““Articles of jewellery, of iron, of plate, and of copper, would not rise, because none of the raw produce from the surface of the earth enters into their composition” (l. c., p. 117),” (p 430) 

He means here agricultural production. But, Marx adds, although the prices would not rise, the rate of profit, in this sphere, would rise above the others. That is because, in the jewellery production, etc., it is only the rise in the variable capital that causes a rise in the capital advanced, whereas in the other spheres it is a rise in the variable and the constant capital that causes a rise in the advanced capital. 

“In these passages, Ricardo himself throws overboard his whole theory of profit, which is based on the false identification of the rate of surplus-value with the rate of profit.” (p 430) 

Ricardo says, 

““In every case, agricultural, as well as manufacturing profits are lowered by a rise in the price of raw produce, if it be accompanied by a rise of wages” (l. c., pp. 113–14).” (p 430) 

However, from what he has said, its clear that even if wages did not rise, the rate of profit would fall, because of the rise in the value of raw materials, and thereby of the constant capital. 

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Theories of Surplus Value, Part II, Chapter 16 - Part 3

Marx then turns to another element of Ricardo's argument, which also illustrates the difference between Marx's approach using current reproduction costs, and the approach of those who argue for the use of historic prices. Marx quotes Ricardo from Chapter XXXII of his “Principles”. 

““The raw produce of which commodities are made, is supposed to have fallen in price, and, therefore, commodities will fall on that account. True, they will fall, but their fall will not be attended with any diminution in the money income of the producer. If he sell his commodity for less money, it is only because one of the materials from which it is made has fallen in value. If the clothier sell his cloth for £900 instead of £1,000, his income will not be less, if the wool from which it is made, has declined £100 in value” (l.c., p. 518).” (p 428) 

Marx points out that a sudden fall in, say, wool prices would affect adversely the money income of all those clothiers who had a large stock of clothes to sell, or as work in progress that used wool at its previously higher price, i.e. at its historic cost. The fall in wool prices, as Ricardo suggests, would cause the price of woollen garments to fall in price, correspondingly. Compared to the historic price paid for the wool, the clothiers would suffer a capital loss on their sale of woollen clothes at their current lower price. However, as Marx points out, in Capital III, the proportion of materials held in the form of finished product, or work in progress is small compared to the total value of materials processed during the year. The faster the rate of turnover of capital, the more so is that the case, and with modern Just In Time systems of production and stock control, that is even more the case. The capital loss suffered, is, in reality, only a paper loss, because what is more significant is the fall in the material price, for the rate of profit. 

The wool, as with any other material, or component of the constant capital, is physically replaced, “on a like for like basis”. This is the significance of Marx's analysis in Capital II, that for all existing industrial capital, the circuit is P...C` – M`.M – C...P. In other words, it begins with a quantity of productive-capital and, in the production process, a surplus value is created, which is embodied in the commodity-capital C`. When this is sold, it produces potential money-capital, M`. In effect, here, M` divides into M + m. 

In simple reproduction, m is consumed unproductively, and in expanded reproduction it is consumed productively, but thereby starts a new circuit of its own. In either case, M is the current money equivalent of the value of the previously consumed elements of the productive-capital, P, and consequently, it is metamorphosed into their physical replacement, C, prior to them once more engaging in production.

“In calculating the aggregate turnover of the advanced productive capital we therefore fix all its elements in the money-form, so that the return to that form concludes the turnover. We assume that value is always advanced in money, even in the continuous process of production, where this money-form of value is only that of money of account. Thus we can compute the average.”

(Capital II, p 187)

 So, if previously 100 kilos of wool were bought at a price of £100, and took part in production, but, in the meantime, fall in value to only £90, only this £90 would be recovered in the value of the final output. However, this £90 is now able to replace exactly, in kind, the 100 kilos of wool, at its new lower value. 

But, as Marx points out, for any capital that has £100 to spend on the purchase of wool, in other words, any new money-capital, entering into production, this lower value of wool means that instead of only being able to buy 100 kilos, it can buy 111 kilos. That is the case, for example, in relation to the m, which split from M`, when the original M continued on its circuit. M, in relation to the wool, would only have been £90, and thereby able only to reproduce the 100 kilos of consumed wool. But, let us assume that m, the surplus value, is £10. In that case, at the previous price of wool, it would have bought 10 kilos. Now, however, it buys 11.11 kilos. This is the real foundation of the rate of profit based upon the relation to the capital value, calculated on the basis of current reproduction costs, as opposed to the historic price. It provides the real basis of the self-expansion of the capital. 

As Marx puts it, 

“... it is clear that their “money income” taken in absolute terms, “will not be less” but their rate of profit will be greater than previously; for—say it was 10 per cent, i.e., £100—the same amount as before would now have to be reckoned on £900 instead of £1,000. In the first case the rate of profit was 10 per cent. In the second it is 1/9 or 11 1/9 per cent.” (p 429) 

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Northern Soul Classics - I Thought You Were Mine - The Natural Four

Friday Night Disco - The Joker On A Trip Thru The Jungle - Watts 103rd Street Rhythm Band

Trump's Triple Nobel Prize Win

Donald Trump could be the first person to ever win a triple Nobel Prize.  Trump's doppelganger, Boris Johnson, already noted that Trump was in line for a Nobel Peace Prize if instead of withdrawing from the Iran nuclear deal, he was able to enhance it, and secure a wider peace in the Middle East.  In a similar vein, Manuel Macron, proclaimed that Trump could get the Nobel prize if he brought about the denuclearisation of the Korean peninsula.  Never one to miss when someone is heaping praise and adulation upon him, Trump himself proclaimed that "people are saying I should win the Nobel Prize".

Of course, he even the Trumpish dolt Bojo was not being serious in saying that Trump should win the Nobel Peace Prize.  Politicians have realised that Trump has the mentality of a toddler, and that if you want to influence him, the way to do it is to offer him sweeties, and tell him how good he is.  Bojo realised that Britain has no influence in the world, and will have much less still after it leaves the EU, and so rather than wasting time with an actual meeting with Trump, he went over to the US to appear on Trump's favourite TV shows to heap praise on him, and offer him goodies if he were to be a good little Donald, and not pull out of the Iran deal.

The comments from Macron and others were of the same nature, with Macron even taking the piss out of Trump, by then actually shredding the whole Trumpist world view, such as it is, in his actual public comments, even as Trump was standing next to him, but doing so in language that he undoubtedly thought the ignorant Trump would not understand, or even bother to listen to having Macron's previous words of adulation still ringing in his ears. 

Of course, on Iran, the invitations of Bojo, Macron and others to remain in the deal were not enough to persuade Trump, given that he was already so committed by his previous statements, and the need to retain what remains of his base, ahead of the US mid-term elections.  Besides, Trump is also tied into a series of other commitments, with other Bonapartist leaders and regimes that require him to build, and continue the drumbeat of war against Iran.  Trump is reliant on his alliance with the Bonapartist regime of Netanyahu in Israel, and the house of Saud in Saudi Arabia.

But, Trump still had the prospect of his Nobel Peace prize for getting North Korea to get rid of its nukes.  However, as I wrote a couple of weeks ago, there was never any prospect of that happening.  Trump's empty ultimatism over the last year has simply allowed North Korea to get on with its programme of building the nukes it required, and the missiles it required to deliver them.  There was never any chance that the US was going to launch a pre-emptive strike against North Korea, other than by accident, and Kim as a far more astute politician than Trump, knew that to be the case.  Kim and the South Korean leaders both effectively played Trump with the same tools used by Bojo and Macron.  They know that Trump is a child like narcissist of extremely low intelligence, who doesn't realise when people are actually taking the piss out of him, with their ridiculous adulation, that simply reflects back on him his own infantile use of superlatives for each and every occasion.

South Korea, which was actually the driving force for a rapprochement with the North, not Trump, has good reason for trying to achieve some kind of deal.  Kim, as I pointed out, was never going to get rid of their nukes, especially having seen what happened in Iraq, Libya, and how the US had just reneged on the Iran deal.  Kim saw a meeting with Trump as the opportunity to get Us troops off the Korean peninsula perhaps in return for halting any further nuclear or missile tests (which it had completed anyway), and perhaps for reducing the size of its conventional army, which now having the protection of nukes, against US attack, it could afford to do, and would have good economic reasons for doing.

When Vice-President Pence simply reinforced that by agreeing with John Bolton that what the US actually wanted was some kind of Libyan solution in North Korea, it was fairly obvious what the North Korean reaction would be!  The whole Trump apparatus gives the appearance of a Barnum and Bailey circus, but without the actual organisation that goes behind such an operation.  It stumbles from one fiasco to another.  Trump could still be the first ever winner of a triple Nobel Prize.  If they introduce prizes for Idiocy, Incompetence and Bigotry, then Trump is a shoe-in, for all three.

It makes you wonder why the US ruling class, and more specifically its Executive Committee in the permanent state apparatus has continued to tolerate the situation.  In part, it comes down to the Bonapartist tendencies inherent in the US Presidential system.  The President has semi-dictatorial powers, especially where their political opponents are divided, and so weak.  In the US, the President heads up the Executive, and appoints the rest of the Executive, whose functionaries operate as an equivalent of a mixture of what in Britain would be a Minister, and their top Civil Servant.  That means that where these political appointees are reflective of the President themselves, any opposition to the policies they adopt, from the permanent state, has to come from its subordinate layers.

So, having idiotic Presidents, in the US, is nothing new.  Reagan was a dolt, and his economic policies were described by George Bush I, as Voodoo Economics, which led the US from being the world's largest credit nation into being the world's largest debtor nation, having terbled the US budget deficit, massively inflated its trade deficit, and which led to the 1987 Stock Market Crash.   But, Reagan was able to push forward with these idiotic economic policies, because he was able to appoint others to positions in his economic team who promoted such idiocy.  Trump has appointed some of the same people like Larry Kudlow to his own team of economic necromancers.  

George Bush II, engaged in the Iraq War, with almost an equal level of ignorance about geography, let alone global politics, as Trump.  He saw the Iraq War as a personal vanity project, and it was opposed by the US permanent state, who recognised that such a war was against long-term US interests.  And, they were right.  The greatest beneficiaries of the Iraq War, have been Iran, on the one hand, which was able to extend its strategic reach into Iraq, in support of its Shia allies, and thence into Syria, and on the other hand, the Sunni jihadists of Al Qaeda, and its offshoots, including ISIS.  The gains of the latter from the Iraq War, together with the support given to them from the Saudis, who have used them as mercenaries to fight proxy wars against its regional opponents in Iran, Syria, Yemen etc. was also the basis for Iran to intervene in this assorted conflicts, and thereby to extend its own reach.

But Trump seems to be a qualitatively different level of moron.  He seems to have been able to continue, however, because behind him stand more intelligent, better organised right-wing forces driving the US further down the road of Bonapartism.  In that they mirror the path trod in Turkey and elsewhere, all of whose regimes are tied together by a similar right-wing, nationalist and populist ideology of National Bolshevism.  It operates via a series of personal alliances that are visible on the surface such as the ties between Trump and Netanyahu, and the Saudi Royals, the connections to people like Farage, who is the face of that wing of right-wing nationalism operating in the Tory Party, along with people like Le Pen, Wilders, Orban and so on, and of course, Putin. 

All of them operate via a series of empty vessels, like the conmen who operate the shell game, reliant on continually distracting attention from one thing to another, as the impotence of their snake oil is exposed in one instance after another.  They rely on focussing attention on some external threat, in order to distract attention from the fact that the real source of the problem is with the actual political-economy they themselves espouse.

For example, Netanyahu is reliant on focussing attention on a supposed danger from surrounding Arab states, and from an impotent resistance from Palestinians with rocks, whilst the fact is that it is a heavily armed, and nuclear armed Israel that has occupied Arab lands, continues to occupy and extend settlements in the West Bank, imposes a humanitarian crisis on Gaza, via its blockade, and so on.   It thereby justifies the Bonapartist regime in Israel, which depends upon keeping the state in a militarised condition, undermines normal class politics, because its foundation is that same authoritarian nationalism that was promoted by the Zionists from the beginning.  It means that any real opposition to that Zionist agenda is squashed in Israel itself, and where it is opposed outside Israel, including as we have seen recently in Britain, by Jews themselves, it is labelled anti-Semitism!

In Britain, the problems of poor jobs, a failing NHS and social care system, and so on is similarly blamed on immigrants, foreigners and the EU, whereas the real reason that the NHS needs £350 million a week extra, is not that that money is going to the EU, but that Tory governments going back to Thatcher, have repeatedly underfunded it, have focussed spending on large vanity projects rather than primary care, so that vast amounts is siphoned off to large construction companies, pharmaceutical companies, and a bloated bureaucracy.  Similarly, the problems in social care, housing and so on, are not the fault of immigrants or the EU, but of the austerity measures introduced by conservative governments again going back to Thatcher.    

The relations between all of these different right-wing, nationalist groups operates like a series of corrupt business people whose real tax affairs, and financial manipulation is hidden from view by operating via a succession of interlinked, and secretive shell companies, one hidden inside another like a Russian doll.  The various companies that comprised the operations of Cambridge Analytica, which itself was a progeny of these same forces, is merely emblematic of the way they operate at a global level.

Trump himself is emblematic of that too.  He tells us that he is a brilliant businessman, and master of the Art of the Deal, a claim that is as ridiculous as his belief that people really thought he deserved a Nobel peace prize.  The fact is that like nearly every rich person alive today, he inherited his money.  His businesses then went bankrupt four times!  Questions still surround where the money came from for his current businesses, and as with the financing and support for various right-wing nationalist forces across the globe, attention has focussed on the role of Russia.  The Mueller investigation may throw some light on that, and in the process some right wing nationalist UK politicians might start to feel a little hot around the collar too.  Its perhaps why Trump and his right-wing supporters have been so keen to try to shit down that investigation.

Theories of Surplus Value, Part II, Chapter 16 - Part 2

On average, capitals of equal size produce equal profits, irrespective of the organic composition, and irrespective of whether the constant capital comprises a large amount of fixed capital and small amount of circulating capital, or vice vice versa. Ricardo correctly observed this fact, but was unable to explain why this average rate of profit was 20%, rather than 200%, because he had no basis for objectively determining the amount of surplus value. He is left, thereby, explaining this profit only on the basis of an addition to costs, whose limit is determined purely by competition. 

And, Ricardo's followers were thereby also led into all sorts of errors, because they were unable to connect this average rate of profit, via all of the intermediate stages, back to the surplus value, which is its objective basis. 

“Ricardo realises that the rate of profit is not modified by those variations of the value of commodities which affect all parts of capital equally as, for example, variations in the value of money.” (p 427) 

In this respect, Ricardo is superior to those modern Marxist economists, and the Austrian School, who attribute crises to the adoption of credit money, in place of gold. But, having made this observation, he should have concluded that the rate of profit is affected by variations in the value of commodities that do not affect all parts of capital equally, “that therefore variations in the rate of profit may occur while the value of labour remains unchanged, and that even the rate of profit may move in the opposite direction to variations in the value of labour. Above all, however, he should have kept in mind that here the surplus-product, or what is for him the same thing, surplus-value, or again the same thing, surplus-labour, when he is considering it sub specie profit, is not calculated in proportion to the variable capital alone, but in proportion to the total capital advanced.” (p 427) 

Marx quotes from Ricardo's “Principles”, where he describes three different situations. In the first, Ricardo describes a situation where the value of money falls in half. The result is that the commodities produced by a capital double in price. But, by the same token, Ricardo says, the money price of the capital has also doubled. If the money price of the capital rises from £1,000 to £2,000, and the exchange-value of the output rises from £1200 to £2400, the money profit in the first case is £200 or 20%, whereas in the second case the money profit is £400, but this still represents only 20%. The fall in the value of money has made no difference. 

In the second case, described by Ricardo, he says that if a given capital, as a result of some rise in productivity, is able to produce double the quantity of output, so that the value of this output remains unchanged, then this would also produce the same rate of profit. However, that does not necessarily follow, It could be that labour is replaced by a machine, which thereby raises the productivity of the remaining labour. As a result, the proportion of capital comprising constant capital may rise, and that representing variable capital fall. The mass of surplus value then falls, whilst the value of output may remain constant. But, with the same value of advanced capital, and a smaller mass of surplus value, the rate of profit would fall. 

The third example, given by Ricardo, continues the previous two, so that a capital of a given value doubles its output, but the value of the output remains constant. At the same time, the value of money is halved, so that the money price of the output doubles, whilst the money value of the advanced capital also doubles, thereby leaving the rate of profit unchanged. Ricardo's formulation is not precise enough, Marx says, because, where Ricardo refers to the output as “produce” of the capital, he should say “surplus produce”, or surplus value. 

“For the rate of profit is equal to the surplus produce (value) divided by the capital employed. Thus if the surplus produce is 10 and the capital 100, the rate of profit is 10/100, which equals 1/10, which equals 10 per cent. If however he means the total product, then the way he puts it is not accurate. In that case by proportion of the value of the produce to the value of capital, he evidently means nothing but the excess of the value of the commodity over the value of the capital advanced.” (p 428) 

Back To Part 1

Forward To Part 3

Theories of Surplus Value, Part II, Chapter 16 - Part 1

RICARDO’S THEORY OF PROFIT

[1. Individual Instances in Which Ricardo Distinguishes Between Surplus-Value and Profit]

“It has already been shown in some detail, that the laws of surplus-value—or rather of the rate of surplus-value—(assuming the working-day as given) do not so directly and simply coincide with, nor are they applicable to, the laws of profit, as Ricardo supposes. It has been shown that he wrongly identifies surplus-value with profit and that these are only identical in so far as the total capital consists of variable capital or is laid out directly in wages; and that therefore what Ricardo deals with under the name of “profit” is in fact surplus-value. Only in this case can the total product simply be resolved into wages and surplus-value. Ricardo evidently shares Smith’s view, that the total value of the annual product resolves itself into revenues. Hence also his confusion of value with cost-price.” (p 426) 

As said previously, by “cost-price”, Marx means here price of production. 

Marx sets out a number of ways in which the rate of profit differs from the rate of surplus value. The rate of profit can rise or fall as a result of a rise or fall in rent. Marx doesn't mean a change in the rate of profit of enterprise here, i.e. the profit left over after the payment of rent and interest. He means the effect of changes in rent arising from variations in the organic composition of capital in agriculture as opposed to industry, which affects absolute rent. 

The total amount of profit is equal to the total of surplus value. However, the total amount of surplus value depends not only on the rate of surplus value, but on the quantity of labour exploited. The same mass of surplus value can be produced by a smaller number of workers with a high rate of surplus value as by a larger number of workers with a lower rate of surplus value. 

“The same amount of profit is therefore possible, with a falling rate of surplus-value and a rising number of workers and vice versa, etc.” (p 426) 

If the rate of surplus value is given, the rate of profit depends on the organic composition of capital. It is to be noted that this applies to the rate of profit rather than the annual rate of profit, for reasons that Marx comes to momentarily. 

With a given mass of surplus value, and composition of capital, the rate of profit will be affected by changes in the value of different components of the capital. This is the point that Marx makes in Chapter 6 of Capital III, dealing with variations in the prices of raw materials etc. And, to return to the point referred to previously, in relation to the rate of profit as opposed to the annual rate of profit, it will vary according to changes in the rate of turnover of the capital. 

As a result of his own analysis, Ricardo should have been led to distinguish between surplus value and profit, and between the rate of surplus value and rate of profit. But he doesn't, and this leads to his failure to understand the difference between exchange value and price of production. With no objective basis to determine the quantity of surplus value, and thereby of profit, “he appears in some passages to descend to the vulgar view—as has already been indicated in the analysis of Chapter I “On Value”—the view that profit is a mere addition over and above the value of the commodity; for instance when he speaks of the determination of profit on capital in which the fixed capital predominates, etc.” (p 427)

Back To Chapter 15

Forward To Part 2

Theories of Surplus Value, Part II, Chapter 15 - Part 56

Finally, in this chapter Marx summarises some of the arguments by de Quincey, contrasting Ricardo's position to other economists. 

““When it was asked” [by the economists before Ricardo] “what determined the value of all commodities: it was answered that this value was chiefly determined by wages. When again it was asked—what determined wages ?—it was recollected that wages must […] be adjusted to the value of the commodities upon which they were spent; and the answer was in effect that wages were determined by the value of commodities.” ([Thomas de Quincey], Dialogues of Three Templars on Political Economy, Chiefly in Relation to the Principles of Mr. Ricardo in The London Magazine, Vol. IX, 1824, p. 560.)” (p 424) 

And, in the same journal, the question of the determination of value by the quantity of labour, as opposed to the value of labour, is taken up. 

““So far are the two formulae from presenting merely two different expressions of the same law, that the very best way of expressing negatively Mr. Ricardo’s law (viz. A is to B in value as the quantities of the producing labour) would be to say—A is not to B in value as the values of the producing labour” [l.c., p. 348].” (p 424) 

Marx adds that if the organic composition of the capital in A and B were the same, then it could be said that the relation of A to B was proportional to the value of the labour in A and B. But, that does not mean that the value of A or B is equal to the value, i.e. the wages of labour in A and B. The exchange value of A and B would be proportional to the wages in each for the same reason as it would be proportional to the constant capital in each. 

“Assume the composition to be 80 c+20 v and the rate of surplus-value equal to 50 per cent. If one capital were equal to £500 and the other to £300, then the product in the first case would be £550 and in the second £330. The products would then be as 5×20=100 (wages) to 3×20=60; that is as 100:60, as 10:6, as 5:3. [And] 550:330=55:33 or as 55/11:33/11(5×11=55 and 3×11=33); i.e., as 5:3. But even then one would only know their relation to one another and not their true values, since many different values correspond to the ratio 5:3.” (p 425) 

de Quincey writes, 

““If the price is ten shillings, then […] wages and profits, taken as a whole, cannot exceed ten shillings. […] But do not the wages and profits as a whole, themselves, on the contrary, predetermine the price? No; that is the old superannuated doctrine.” (Thomas de Quincey, The Logic of Political Economy, Edinburgh and London, 1844, p. 204.) 

“The new economy has shown that all price is governed by proportional quantity of the producing labour, and by that only. Being itself once settled, then, ipso facto, price settles the fund out of which both wages and profits must draw their separate dividends” (l.c., p. 204). “Any change that can disturb the existing relations between wages and profits, must originate in wages” (l.c., p. 205).” (p 425) 

And Marx summarises de Quincey's conclusion in his own words. 

“Ricardo’s doctrine is new in so far as he poses the question whether in fact it sets aside the law of actual value (l.c., p. 158).” (p 425)

Back To Part 55

Forward To Chapter 16

Back To Theories Of Surplus Value, II, Index 

Global Yields Set to Gap Higher

Global bond yields are set to gap higher, i.e. sovereign and corporate bonds are set to sell off.  The further ramification will be a corresponding sell off in shares, and property markets.  The US 10 Year Treasury Yield, has already moved decisively above 3%, and within a short space rose to over 3.1%, though it has sunk back to around 3.08%.  Goldman Sachs were predicting a week or  so ago that it could hit 3.60% per cent by next year, but it looks like it could hit that level or at least 3.50% within a matter of a few weeks, at most.

In my predictions for 2018, I suggested that Trump would send the US economy into a rerun of the 1987 Twin deficits crisis that led to the 1987 Stock Market Crash, which until that time was the worst in history.  I pointed out that Trump was applying the same Voodoo Economics that were applied by Reagan, based on the cranky ideas of Art Laffer that if you cut taxes (particularly for the rich) you somehow magically increase the amount of taxes collected.  Those policies under Reagan showed that idea is bonkers.  It trebled the US budget deficit, and turned the US from being the world's biggest creditor country into the world's biggest debtor country.  Since I wrote that, Trump has appointed Reagan's old advisor Larry Kudlow as his economic spokesman.

I pointed out at the start of the year that the consequence of Trump's tax cuts as happened with Reagan's tax cuts, would be to reduce government revenues, fail to increase US economic growth, and would suck in imports, resulting in the trade deficit ballooning.  The US Congressional Budget Office has now confirmed that.  What there is no sign of yet, which would increase US productivity and growth is the $4 trillion infrastructure spending plans, required as a minimum to restore the crumbling US roads, rails, bridges, telecoms and so on, to the standards required of an efficient 21st Century economy.  The US is not alone in that requirement.  The implementation of conservative policies over the last 30 years and more, that concentrated on the illusion of financial wealth, meant that those conservative governments literally failed to mend the roof of their economy's infrastructure when the sun was shining, so as to minimise government borrowing, and thereby keep down interest rates, so as to keep the prices of financial assets and property inflated.  Now they have huge backlogs of expenditure to have to undertake, just like a landlord who fails to maintain their property, and then finds their lack of routine spending has undermined the fabric of the building.

The pundits on the speculation news channels have worried over the fact that yields on shorter dated bonds have been rising much faster than on longer dated bonds - yield flattening.  Traditionally, when the yield curve becomes inverted, so that longer dated yields fall below those of shorter dated bonds, it is an indication of an impending recession.  The logic being that speculators think that a recession in the near future will cause the demand for money to fall back so that interest rates fall.  In part, the current approach is based upon wishful thinking.  The financial speculators do not mind a bit of recession, if it reduces interest rates again, because those lower rates push up asset prices again.  In part, its based upon the application of a mantra rather than looking at the current reality.  The reason there is curve flattening is that shorter dated bonds are selling off as central banks have been forced to withdraw from QE - the only ones still involved are the BOJ and ECB, and they are likely to stop in the next few months - and the central banks, already way behind the curve in terms of actual market rates of interest, i.e. the rates that small businesses must pay if they can get loans, and the rates consumers have to pay for consumer credit, have started to raise their official interest rates.  That means speculators first sell these short dated securities, which are the first to get hit by the current central bank tightening.  The longer dated securities' prices simply reflect that large quantities of them are in the hands of the central banks themselves.  The fact that their prices have not fallen so much yet, is not an indication of a recession on the horizon, but simply of the fact that the central banks are not selling them!

As I also pointed out a few months ago, the reason that global interest rates are rising, is not because of inflation, but because the demand for money-capital is rising relative to the supply.  The demand for money-capital is a function of how much industrial capital needs money-capital to finance capital accumulation.  The supply is a function of how much realised profits increase, so that they are available either for direct accumulation by companies, or else are thrown by companies into money markets available for others to borrow.  It also depends upon how much of the existing stock of savings are mobilised as money capital rather than simply as money for spending purposes - including spending for the purpose of financial speculation and other forms of gambling.  If global growth rises, and companies seek to accumulate additional capital, the demand for money-capital rises.  If realised profits rise by a smaller proportion, the supply falls relative to demand, and interest rates rise.

In the last few months, we have seen the confirmation of the other point made in my predictions for 2018, which is that although global growth is continuing on a pretty synchronised basis, the usual three year cycle, would result in a relative slow down from the third quarter of 2017 to third quarter 2018.  That relative slowdown has been seen, and has slowed the rise in global interest rates.  But global growth continues at a faster pace than seen for about a decade, and it is set to rise again in the next few months.  At the same time as capital itself is expanding, and the demand for money-capital is rising, whilst tighter and tighter labour markets are starting to push up wages, and thereby, although still only tentatively, begin to squeeze profits, governments are having to increase spending on infrastructure etc. so that more government bonds are being issued, increasing their supply, and pushing down their prices, so causing yields to rise. 

As I've pointed out before, and Marx noted this process 150 years ago, as global growth is rising, and as more labour-power is employed, also at higher wages, this creates an inevitable increase in demand for wage goods.  The producers of wage goods, as a result of competition, for fear of losing market share to their rivals, then have to increase capital investment.  Interest rates are pushed higher again, and as they rise the capitalised value of financial assets begins to crash, the money flowing increasingly into real productive investment in search of profits rather than paper capital gains.

The UK, as I again pointed out at the start of the year is an anomaly.  Its economy has, and will continue to be dragged along on the coattails of this growing global economy.  But, already it can be seen that it is acting as an increasingly long tail, dragging along behind.  The UK economy, already an economy in long-term relative decline, from its 19th century heyday, was placed in even worse condition to deal with the global economy, as a result of the conservative economic policies introduced in the 1980's, and continued thereafter, to the present day.  It is itself now a bit like a 19th century aristocrat, living off its assets, and borrowing against them to fund its continued consumption.  That is another reason that conservative governments - in which I include the governments of Blair and Brown - have attempted to keep asset prices for things like shares, bonds and property massively inflated.  But, Brexit has blown that model apart far more quickly than would otherwise have been the case.  The UK has rapidly gone to the back of the pack in terms of growth, and its productivity level continues to deteriorate.  The UK economy is likely to continue to stagnate as a result of Brexit, whilst it will not be able to escape the global rise in interest rates, which will quickly burst all of those various asset price bubbles, in stocks, bonds and property.  In 1990, when interest rates rose by a much smaller percentage (as opposed to percentage points) than it is rising now, it caused house prices to fall by 40%, in a matter of a couple of months.  Conditions are more conducive to an even bigger crash today.

On top of all that is the effect of these movements on currencies, and particularly in relation to the Dollar as against emerging market economies.  I also pointed out at the start of the year that a number of inflexion points were approaching.  We have started to see the Dollar strengthening as US official rates rise, a reversal of what has been the case over the last couple years.  The US 10 Year Treasury is now the providing a positive real yield, whereas the bonds of most other G20 countries are still lower than their inflation rates.  As US rates continue to rise, the Dollar will strengthen, and EM currencies will fall, leading to them needing to raise their own official rates.  That is being seen already with Turkey.  But, the UK is also falling more and more into the category of these emerging markets, and that will increase the more it is separated from the EU.

The fall in the Pound following the Brexit vote pushed up UK inflation quickly, at the same time that it increased the slow down in the economy, creating the foundations of stagflation.  It has not been the strength of the Pound in the last six months that led to it rising against the Dollar, by around 10%, but the fall in the Dollar.  Now, as rising US official interest rates, start to exert upward pressure on the Dollar, and the impact of Brexit on the Pound, causes it to fall, that process of a weaker Pound causing higher imported inflation is likely to resume.  UK inflation is already way above the BoE's 2% target, and is likely to then start to rise again, increasing the tendency towards stagflation.  Moreover, recent reports have shown that another impact of Brexit is that the flow of migrant labour into Britain has slowed considerably, the racist hostile environment policy is also likely to have impacted that.   Its effect on labour shortages in the NHS and in social care has been well documented.  But, other recent reports show that the real problem for an industry like fishing is now the inability to recruit the required migrant labour, rather than the EU's Common Fisheries Policy.

Globally real market rates of interest have been rising for some time.  The real global economy is continuing to grow, as part of the long wave boom, and that growth looks set to pick up faster in the next few months.  Money-capital is becoming in increasing demand to finance the expansion, and the prices of financial assets have only been kept inflated as a result of a tremendous effort by central banks to keep them floating in the stratosphere.  For years, there has been no basis to own those assets as sources of revenue, because even where they were not offering nominal negative yields (which many of them continue to do), they were providing negative yields in inflation adjusted terms.  The only basis for holding them was in the expectation of large capital gains, as further speculation backed by central banks pushed their prices even further into outer space.

When speculators see the prospects of prolonged capital losses rather than gains on shares, bonds and property they will rush for the exits.  Yields on global bonds are set to gap higher, and that will be the start of the end of the current period of irrational exuberance.  For many who think that it can continue, or that current paper prices have any substance to them, it will end in tears.  But, as always happens in such crashes, for others it will be a bonanza.  Cash is King, and ironically, all those who currently had to rent, because they could not afford to buy, will find themselves in a privileged position.