Thursday, 21 June 2018

Bank of England Says Keep Gambling

The real message of the Bank of England's Monetary Policy Committee today was "Keep Gambling"!  It was a message to all those who see their personal wealth increasing as a result of obtaining capital gains from rises in share prices, bond prices or property prices, rather than from engagement in productive activity, that the Bank still has their back.  Similarly, it was a message to all those who do depend upon productive activity to provide them with revenue, as the basis of their personal wealth, that the Bank of England will continue to make life difficult for them, in order to protect the paper wealth of the gamblers.

For a worker putting a few pounds away each month into a pension fund, it means the astronomically inflated prices of shares and bonds will continue to be propped up by the Bank of England, so that their pension contributions buy fewer of those shares and bonds, to provide them with the future revenues required to cover their pension when they come to retire.  For the same worker saving to buy a house, or to be able to move up to a better house, it means their hopes will be dashed as the Bank does all it can to keep house prices high, and if possible rising, so their workers savings and wages continue to lag behind the rise in house prices, sending them further and further out of the reach of more and more workers.

At the same time, it means that their demand for rented property will push up rents even further, whilst landlords will continue to be subsidised to the tune of £9 billion a year in Housing Benefits, as more and more workers, whose wages fail to keep up with the costs of shelter have to rely on it.  And, as the state provides that Housing Benefit subsidy to landlords out of taxes, it means ultimately that this growing unproductive section of society, drains surplus value from the productive sector of society, thereby holding back economic growth further.  And, that is part and parcel of what the Bank of England along with other central banks has been trying to do for the last 10 years.  They have sought to hold back economic growth, and to divert available money-capital into gambling on stock, bond and property markets, so as to limit the demand for labour-power and rise in wages, and subsequent squeeze on profits, and rise in interest rates which will crash asset prices, and the paper wealth of the top 0.01%.  It was that rise in the demand for labour-power, rise in wages, and rise in interest rates in 2007/8, which sparked the financial meltdown of 2008.

But, however much the Bank of England, the ECB and other central banks try to maintain the delusion that wealth can come from gambling rather than the production of wealth, by the creation of new value by labour, it can't, and reality is imposing itself.  The action of central banks in trying to perpetuate that delusion was illustrated a few years ago by BoE Chief Economist, Andy Haldane, who described the fact that, in the 1970's, only around 10% of profits went to fund dividends, whilst today that figure is around 70%.  Yet dividend yields have continued to drop, as have bond yields and rental yields, because the prices of shares, bonds and property have been pushed up astronomically as a result of all this gambling, based not upon deriving a yield, but in obtaining large capital gains from those asset price rises.

Its notable that, at today's meeting, Haldane joined the 2 "hawks" on the MPC, in proposing a rate rise from 0.5% to 0.75%.  But, its difficult to describe anyone on the MPC as a "hawk" given the continuation of these low rates for so long, and given that at its meeting today it confirmed that it will not even start to unwind the stock of bonds taken on to its balance sheet, as a result of QE, until bank rate has reached 1.5%.  Even that was a more "hawkish" stance than its previous suggestion that such unwinding would not occur until bank rate hit 2.0%.

To any business thinking of investing in actual productive capacity, the Bank of England was basically saying, "don't bother, you can make more money from using your profits to speculate in your own share price."  And, by pushing up asset prices, in conditions where employment is rising, and where workers will increasingly be able to demand pay rises to compensate for rising prices and other costs, it was also saying to businesses, "better not invest in productive activity that might result in you having to pay higher wages, to cover higher pension costs, higher house prices, higher rents, higher taxes to cover Housing Benefits and so on, its much easier for you to just keep gambling, whilst we have your back, in making those bets."

But, the fact is that employment has been rising, and as a result, even whilst wages per worker haven't risen much, wages in total have risen, precisely because more workers are employed.  David Blanchflower speaking on Bloomberg ahead of the MPC decision got it nearly all totally wrong.  He's right that the level of full employment today should be seen as around 2.5%, and not 4.0%.  That simply means that we are back at the same kind of conditions that existed in the early 1960's.  But, he is wrong on two more important counts.  Firstly, he's wrong, in thinking that a lower bank rate is needed to stimulate the economy.  It won't.  For the reasons set out above, it does the opposite.  It encourages money-capital into speculation, and away from productive investment, thereby slowing capital accumulation, and employment growth.  Secondly, he is wrong in focussing on wage levels rather than the total wage share, i.e. taking into consideration the growth of employment as well as wages.

If 10 people are employed on wages of £100, the total wage bill is £1,000, and the result is £1,000 of demand for wage goods.  If 50 people are employed on wages of only £50, the total wage bill is £2,500, creating demand for £2,500 of wage goods.  Where the demand for wage goods rises, firms are thereby incentivised to satisfy that demand.  They know that if they do not, their competitors will.  Even if they make a lower rate of profit from such investment, they are thereby still incentivised to invest to meet that demand.  Firstly, if they don't their competitors will, and they will lose market share.  Secondly, even if the rate of profit they make on this additional output is lower, the total profit they obtain will be greater, because it is on a greater mass of output.

As employment is rising across the globe, even if wages stay the same, the total wage bill necessarily rises, and the demand for wage goods necessarily rises with it.  That means that firms have to invest in additional productive-capital to meet that demand, for fear of losing market share.  That is why, despite central banks trying to do all they can to encourage money into financial speculation to keep asset prices inflated, whilst yields linger near zero, business are forced by the laws of economic to accumulate capital so as to meet this rising demand for wage goods, and that sets in motion a feedback loop.  As those firms invest to meet that increased demand, especially in conditions of sluggish productivity growth, it means they take on even more labour, and the firms that supply them with inputs, also take on more labour, so that employment rises further, the total wage share increases further, and the demand for wage goods increases once again.

For thirty years, in the UK and US in particular, firms were encouraged to use their resources for speculation.  Money that could have gone into education and training went instead into progressively increasing dividend payments, subsidising landlords via Housing Benefits and gambling on share, bond and property prices.  Workers instead of seeing their future depending upon higher wages from higher education and skills, were encouraged to see it coming from gambling on higher house prices that in reality made them poorer, and only enabled them to go into more debt to cover their consumption, as their wages failed to keep up.

The Bank of England is trying to keep that delusion alive, even as it falls in atters around their feet, and as some of their more far sighted members have begun to recognise and respond to.  But time has run out for them.  The more they procrastinate, the more they put themselves behind the curve, divorced from the encroaching reality, and will be swallowed up by the enormity of the events about to unfold.

No comments: