Conservative Social Democracy v Reaction (4)
The 1980's saw a massive rise in asset prices. House prices in Britain quadrupled, stock markets soared by similar multiples of the growth of GDP. The basis of this hyperinflation was that, the rate of profit rose, as the new microchip based technological revolution raised productivity, cheapened capital, created a relative surplus population, which reduced wages, and also significantly increased the rate of turnover of capital, which increases the annual rate of profit. This rise in the rate of profit, went along with a huge release of capital, resulting from the cheapening of capital. It meant there was a significant rise in the mass of realised profits available for investment, at a time when intensive accumulation meant that the mass of new new fixed capital investment, and so also the value of that investment, was growing much more slowly than the growth in output. In addition, the nature of production changed. Manufacturing became an increasing minority, whilst service industry expanded, becoming 80% of GDP, and so of new value and surplus value production. The importance of that is that previously intensive accumulation of fixed capital meant a faster growth of the proportion of raw material in production, due to rising productivity. That was the basis of Marx's Law of the Tendency for the Rate of Profit to Fall. But, now, increased productivity in service industry does not involve any increase in raw material consumption, whilst an expansion of capital, does involve an expansion of the mass of labour employed, and so of surplus value created by it. This creates a large rise in the supply of loanable money-capital relative to the demand for it. It causes interest rates to fall, a process that continued for another 30 years.
The falling interest rates cause the capitalised value of revenue to rise, and this is the basis of higher asset prices. The process is accelerated, in the late 1980's, by the deregulation of financial markets introduced by both Thatcher and Reagan in 1986. It causes a bubble to develop, which bursts in 1987, with the global financial crash of that year. But, a material change has occurred by this point. Thatcher began the 1980's with inflation being the major concern, and adopted Austrian School solutions of high interest rates, and control of money supply in response to it. Reagan, via Volcker, adopts a similar approach in the US. But, by the second half of the 1980's, inflation is not the problem. The turn in the economic conjuncture saw the power of labour subdued, as witnessed by the defeat of the miners in 1984-5, and the defeat of the air traffic controllers in the US. Unemployment had risen in both countries, as part of this process. 
Two things came together. On the one hand, in these conditions, the rising rate of profit was only of benefit if the rising mass of surplus value could be realised. High levels of unemployment, as well as falling wages worked against that. High end manufacturing output could now be achieved with much less labour, as a result of the rises in technology, via the introduction of computer controlled machinery, even before robotisation started to increase significantly. New Japanese style, post-Fordist production systems were introduced, that used the new technology to establish work groups, and flexible specialisation in place of the old assembly line.
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| UK Household Debt Exploded From 1980 |
Low end manufacturing had been transported to China, and other low wage Asian economies. Increased manufacturing output, therefore, did not create the same kind of increase in employment that it previously did, and so did not generate the same kind of demand for those manufactured products. More commonly, the increase in employment came from people being employed in retailing to sell these additional products, and new products that the new technologies were starting to make available, such as video recorders, video game consoles such as the Atari, and other assorted electronic toys, keyboards and so on. That accounted for some of the wages required also to buy these new commodities, but the other means was the huge rise in household debt, as consumer credit exploded.
That explosion in consumer debt occurred most noticeably after the deregulation of financial markets. The previous restrictions, for example, that limited mortgages to 2.5 times proven household income, and even then required house buyers to put down 10% plus deposits, were scrapped. That meant people had access to large amounts of credit to buy houses, which they had already seen rising in price rapidly in the previous few years. In addition, as employers moved all employees on to payment of wages into their bank account, rather than in cash, this rise in banking meant that many more people, for the first time, had access to overdrafts, bank loans, and credit cards. All of this made it look like it was possible to buy all of these new consumer products, virtually for free, simply by charging it to some credit account. It was the “never-never” of the 1950's, and early 60's, on steroids.
This is the start of today's housing crisis. The real problem is not shortage of supply. There are 50% more homes today, per head than there were in the 1970's. The real problem is not enough homes at prices that people can afford, because demand has been artificially inflated, which causes speculation, which, in turn, causes demand to be inflated further, creating a vicious circle. The increased demand comes not from those that need the houses, but from those that can speculate on prices rising further. That can be seen from the 40% drop in house prices in 1990 when the bubble burst, and the 20% drop in 2007, when again the bubble burst. In the US and in Europe, the bursting of property bubbles caused prices to drop by 60%, and in Japan, in the early 90's, by up to 90%.
Asset prices also, thereby skyrocketed, until they crashed in 1987. But, this material change, of an economy now dominated by this credit, and by astronomical asset prices, which appeared to create massive amounts of wealth from nowhere, simply from the resultant capital gains, had also resulted in a change of consciousness. As the ruling class and its representatives panicked, as financial markets spiralled out of control, a saviour was found in the figure of new Federal Reserve Chairman Alan Greenspan. Greenspan in a matter of weeks went from being a devotee of Ayn Rand, of sound money based on gold, and Libertarianism to being the central planner in chief, of the US state; an advocate of money printing on a huge scale. The proponents of free markets, and of Mises' belief that Socialism is impossible, because only the market can determine market prices, overnight became devotees of the idea that central planners, in the state, could determine prices, by controlling the most important price, the price of money (really money-capital), i.e. the rate of interest, simply by diktat, by the central bank dictating its own official interest rates, backed up by control of the supply of money.
The same transformation occurred in Britain. The Austrian School economics was replaced by Friedmanite, Chicago School Monetarism. It was an ideology shared by both Thatcher, and her long time friend, the butcher Pinochet, in Chile, where its dogmas were first tested, in the 1970's, and 1980's. Now, to ensure that there was adequate monetary demand in the economy, money was printed, and official interest rates lowered. Stock markets, which had fallen by 25% in one day, ended a year later up by 50%! So began the so called Greenspan Put, by which any slight fall in asset prices was met by central banks, primarily the US central bank, stepping in to cut its official interest rates, and ease money supply. This was also the basis of the so called trickle down theory, by which, the resultant rise in asset prices – which necessarily benefits those who own the assets, and benefits the most those that own most of the assets – leads to them feeling better off – the so called wealth effect – which causes them to spend more money, which then puts money into the economy, causing firms to increase production, and employ more workers, which increases wages, which creates more demand and so on.
The proponents of Thatcherism, and Reaganism, point to this period as being a period of economic boom, but, in reality, it was only a period of debt fuelled consumption. Instead of increased consumption being based upon increased value creation – this is not to say there was no increased value creation during this period, there was a lot – it was based upon increased debt. The debt was collateralised on existing capital and wealth. In the 1980's, the rise in productivity meant that there was a significant release of capital, as rising productivity reduced the value of capital, but, now, in the 1990's, there was a significant conversion of capital into revenue, to finance the additional consumption.
The most obvious expression of that is what happened with pension funds. If you have £1 million in the bank, and interest rates are 10%, you earn £100,000 a year in interest. So long as you only spend £100,000 a year, you can live off this interest without any diminution of your capital. However, if you spend £200,000, you can only do this by converting £100,000 of your capital into revenue. But, now, you only have £900,000 of capital, a destruction of £100,000 of capital, and in the next year you will only have £90,000 of revenue. The more of your capital you convert to revenue, the less revenue the capital will produce in subsequent years. Pension funds should pay out pensions from the revenue they obtain from the capital they have invested in shares, bonds, property etc. But, in the 1990's, as asset prices soared year after year, the paper value of the capital of the funds rose with it. But, as the price of these assets rise, so the yield on them falls, even if the amount of revenue they produce remains the same.
This has two consequences. New pension contributions from workers and employers, buy many fewer shares and bonds to go into the fund, to increase its capital base. The lower yield on these additional shares and bonds means that relatively less future revenue is produced by them to cover future pension commitments. The answer seems obvious. Simply cash in some of the “profits” from the capital gains resulting from the rise in share, bond and property prices, i.e. convert capital into revenue. But, although this seems to create an endless pot from which to draw, so long as asset prices continue to rise to the stars, it is a delusion, because, of course, no such endless rise can happen, and the more the capital base of the fund is undermined, the more must the prices of the assets rise, so as to provide the means of converting the capital into revenue. In the 1990's many companies, and local councils used the astronomical rises in asset prices to argue that their pension funds were so healthy that they did not need to make employers contributions to them. They took pension holidays which boosted the profits of companies, and allowed Councils to set lower Council tax levels. This is the basis of the Pensions Crisis we have today, and not the fact that people are living a few years longer, which has been more than compensated by rising productivity during the same period.
But, as early as 1994, the problem with this became obvious. In 1994, after having repeatedly reduced official interest rates, as part of the Greenspan Put, central banks tried to “normalise” interest rates. The effect was pretty immediate. Bond markets sold off, heavily with US 30 Year Treasury yields rising by 200 basis points. In the UK, house prices had crashed in 1990 by 40%, in a matter of weeks, as the bubble burst, when unemployment started to rise. An oil price shock in 1991, at the time of the first Gulf War, meant that global economies had also gone into another recession. In 1992, Britain saw its official interest rates spike to 18%, and mortgage rates rose to 15%, as it tried to defend the Pound against currency speculation. When Britain was forced out of the ERM, interest rates started to fall sharply, but it took until 1996 before, the peak of house prices from 1990, was again restored. But, from then on, they entered another hyperinflationary spiral, rising by 150%, between 1997 to 2007.
In the 1990's, the most obvious example of an asset price bubble was the rise in the price of Technology Shares. Its symbol was the NADAQ index in the US, but soon every other financial centre had to have its own equivalent index. Technology and internet companies grew up overnight like mushrooms. No one knew what many of them did, or how they might make any money. Even some of those that have persisted to today like Amazon, seemed to grow like Topsy without producing any profits, or paying any dividends to shareholders. Amazon was even referred to as “the river of no returns”. Technology share prices, however, rose by 75% a year for several years, new technology based mutual funds, such as those run by Aberdeen Asset Management, and Henderson Global Investors, became the flavour of the day creating new stars of the investment world such as Neil Woodford at Invesco, who has returned to the news more recently as his Patient Capital Fund had to close. But, like the speculators in property, the speculators in the stock markets were no longer bothered that their shares produced no revenue for them, because who is bothered about a few percentage points of yield, when instead you can have 75% of capital gains?
At the end of the 90's, fears over the Millennium Bug caused around $300 – 800 billion to be spent globally to prevent it having catastrophic effects. That meant that all computers whose hardware or software were not Y2K compliant, and would have stopped working properly on 1st January 2000, had to be upgraded or replaced. The Millennium Bug was not a fallacy, and its effects were only avoided as a result of this spending. But, it meant that technology companies got a huge boost as a result of this spending as the Millennium approached. In addition, fearful that problems might still arise, and, in any case, aware that spending over the period would increase significantly, central banks again put large amounts of liquidity into the market. I was on holiday in the Canary Isles, at the time of the Millennium and remember watching as the NASDAQ soared past the 5000 mark. It was creating as much anticipation as the ticking over of the clock to a new millennium. In January and February of 2000, technology shares rose sharply again. And, then, at the start of March, they crashed. There was a short recovery, over the Summer, before they fell again, ending the year down by 75%.
The drop inevitably caused other financial markets to fall as well. The press was full of stories about financial markets not recovering for another 20 years. In the case of the NASDAQ, that was not too far off; it took 15 years for it to recover its 2000 level. But, whilst the Dow was affected by the effects of the September 11th attacks, by 2006, it had again hit new highs. In 2000 its high point was just below 11,500, in 2006 it went over 12,000. By April the following year it hit 13,000, and in July, just before the outbreak of the sub-prime crisis it went to over 14,000.
The top 0.01% who own the vast majority of fictitious capital, had learned to live with continually falling yields on those assets, because they now relied instead on continually rising asset prices, and the ability to convert these capital gains into revenue. But, even these revenues they then used to engage in yet further speculation, driving all asset prices ever higher, and they did so in the full confidence that whenever asset price bubbles burst, central banks would be there to reflate them. And so they have. Today, we have negative yields on trillions of dollars of financial assets across the globe. Logically, even a few percentage points of positive yield in profits from investing in real productive-capital should result in a flood of capital away from interest-bearing capital and into real investment. Instead, the opposite occurs. Money continues to flow into financial assets and property, draining money from the real economy and money-capital away from productive investment. Why, because the capital gains from such speculation provide a much better total return, and one that is guaranteed by central banks. The policy of QE far from stimulating the real economy acts to depress it by ensuring that money and money-capital is drained from the real economy, and into financial and property speculation. And, by suppressing economic activity – assisted by austerity – it suppresses interest rates, which increases asset prices. The interests of the owners of fictitious capital are thereby protected at the expense of the interests of real capital.
When John Major replaced Thatcher, it was the indication that conservative social democracy had asserted its authority over reaction. The reaction inside the Tory Party was confined to the “Bastards”, as Major called them, who now took up the gauntlet of Thatcher, by uniting the forces of Euroscepticism under their banner. They were contained. Not only was the debt fuelled economy seeming to be restoring living standards, but soaring asset prices, also saw the development of the idea that the strength of the economy now resided in its huge banks and financial institutions that provided large amounts of revenue for the economy. A large part of the “profits” of these banks, again, were not profits at all, but merely realised capital gains, achieved by the investment banking (speculation) arms of those banks, which became the most important parts of those banks, overwhelming their traditional banking functions, as money-dealers. These banks and financial institutions were the epitome of conservative social democracy, resting upon fictitious capital, and so all of that plethora of small private capital was again put back in its box. A similar transition occurred in the US, where Bill Clinton took over as President, again as the representative of this conservative social-democracy.
Blair and Brown took over from Major, and continued the same agenda of conservative social-democracy. They bought into the same delusion that rising asset prices represented a growth in real wealth, because they do not understand what wealth, or capital, or value is. They could be relaxed about people becoming rich as a result of these rising asset prices, just as they could be happy with seeing those rising asset prices as providing the collateral against which borrowing could be undertaken to finance capital spending, to compensate workers for stagnant wages, so as to maintain consumption levels. Its no wonder that, during this period, they spend their time on the prawn cocktail circuit with all of those fund managers, and look to large shareholders to provide the funding for New Labour, rather than the trades unions. Just as conservative social-democracy in the US did.
But, it was all a delusion that sooner or later was bound to end as all such delusions end, with an almighty bursting of the bubble. The precedents were apparent, in 1987, 1994, 2000, and then bigger than all of these the global financial crisis of 2008. But, 2008 is materially different to these previous crashes. The basic cause of the crashes is a rise in interest rates that causes asset price bubbles to burst. In 1987, 1994 and 2000, the trend for interest rates is down. The crash comes because short term rates spike. But, in 1999, a new long wave uptrend begins. It is a very powerful uptrend, because of its material base, and because in the preceding period, capital has expanded to cover most of the globe. The upswing now is not just about an expansion in a relatively few developed economies, but an expansion of much of the globe, most notably the rapid expansion of China, and other Asian and South American countries, and increasingly, a number of developing African economies.
Normally, it would be expected that a financial crash like 2008 would occur at or around a point of conjuncture, as with the instances cited earlier in this series. That would have meant around 2012-13, i.e. around the point that the initial Spring Phase of the cycle turns into the Summer phase. When I wrote my book, Marx and Engels' Theories of Crisis: Understanding The Coming Storm, in 2014, I still believed that would be the case. I was wrong, and the reason I was wrong is that I misunderstood the nature of the 2008 crisis, and why it occurred then. It was five years early. Examining that, and its consequences deserves a section of its own, and I will look at that on Monday.
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