Wednesday 26 September 2018

Tracking The Crisis of 2008 - Fictitious Capital Eats Real Capital - Part 2

The second determining thing that was happening in the early 2000's was that the consequences of the changes in the global structure of capital itself were beginning to manifest themselves. The vast majority of private wealth is held in the form of fictitious capital – shares, bonds, property, and their derivatives. That is different to the situation that existed in the 19th century, where the monopoly of private capital predominated until its latter years. 

In the period of the post-war boom, the interests of this fictitious capital, and of real capital more or less coincided. As the global economy expanded, profits rose, and out of these growing profits a growing amount of interest was paid as dividends on shares, coupon payments on bonds, as well as in rents. These payments rose, and yields more or less kept pace, because the price of these financial assets did not rise excessively. In the period between 1950 and 1980, the Dow Jones Index rose by only half the percentage rise in US GDP; in the period between 1980 and 2000 it rose by more than 5 times the rise in US GDP! 

In the postwar boom period, it's fairly obvious that the owners of fictitious capital can see their main interest being in obtaining this yield, which provides them with a regular and growing income, in the form of dividends, coupon and rents. It also provides the state with a similarly growing revenue in the form of taxes. And, it is fairly obvious that the basis of these growing yields is the growing profits of businesses, out of which these dividends, coupon payments, rents and taxes are deducted. The basis of the growing profits is growing real capital accumulation, which requires a sizeable portion of the profits to be reinvested rather than paid out as revenues to shareholders, bondholders, landlords and the state. 

But, in the mid 1970's, the post-war, long wave boom comes to an end. A crisis phase ensues, and capital responds by switching its focus from extensive accumulation of existing forms of technology, towards intensive accumulation, whereby it seeks to introduce new labour-saving technologies. These new technologies, based around development of the microchip, and new communications technologies, mean that several old machines can be replaced by one new machine, or technology. That causes a dramatic moral depreciation of the existing fixed capital stock, which creates the basis for a sharp rise in the rate of profit. It also leads to sharply rising unemployment in the late 1970's, and early 1980's. On the one hand, that causes wages to fall, which ends the squeeze on profits caused by the fall in the rate of surplus value that had been progressing from the early 1960's onwards, but by reducing the proportion of labour in total output, as Marx describes in his Law of the Tendency for the Rate of Profit to Fall, it reduces also the proportion of surplus value in total output, creating a tendency for the rate of profit to fall. By, enabling increases in output with less labour, as productivity rises, on the back of the new technology, it creates the conditions for economic growth to rise more slowly, i.e. the stagnation phase of the cycle. But, as this phase progresses, it means that the net product rises relative to the gross product, i.e. surplus value rises relative to output value, and this creates the conditions for a rise in the rate of profit, and sets the conditions for the new long wave upswing. 

From the 1980's onwards, as growth rises more slowly, the owners of fictitious capital attempt to maintain their revenues by increasing the proportion of dividends paid from profits. Andy Haldane at the Bank of England, has noted that where, in the 1970's, only around 10% of profits was paid out in dividends, today that figure has risen to around 70%. But, the growing mass of profit from the 1980's, at a time when growth is more sluggish, and capital accumulation is more limited, causes market interest rates to fall. This fall in interest rates, causes the capitalised prices of assets – shares, bonds, land – to rise. So, even though the share of dividends out of profits rises hugely, yields fall, because asset prices become massively inflated – yield is revenue/asset price. 

An indication of the problem was given in 1987. A massive rise in speculation during the 1980's had seen asset prices rise massively, and lots of ordinary people had been encouraged by conservatives like Thatcher and Reagan to speculate, for example by buying shares in privatised companies, or buying their council house, rather than renting it. But, Reagan had followed the demented conservative ideology that tax revenues can rise if tax rates, particularly on the wealthy, are reduced. The idea was even called Voodoo Economics by Reagan's Republican opponent George H.W. Bush. The US budget deficit soared, as a result of the tax cuts, and its trade deficit also soared, because a lot of the tax cuts went to finance consumption of imported commodities. To pay for the budget deficit, and the trade deficit, the US had to borrow on a large scale. It went from the world's largest creditor, to the world's largest debtor. So, necessarily this meant the US faced higher interest rates. Higher interest rates mean a fall in capitalised asset prices, and the consequence was the 1987 financial markets crash, that sent US stock markets tumbling by 25% overnight. The US is following a similar trajectory today under Trump, and some of the same economic advisors, such as Larry Kudlow that were behind the disaster of the 1980's, are behind Trump today. 

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