Bank of England Fires Blanks

The Bank of England this morning, in a clear act of sheer panic, slashed its main interest rate by 66.6% from 0.75% to just 0.25%. If it had cut any more, it would have been a 100% cut, reducing the rate to 0%. It shows that capitalism has well and truly disappeared down the rabbit hole that the owners of fictitious capital and their representatives in the state, and central banks, have dug over the last thirty years. In reality, even at 0.25% this amounts to a negative real rate of interest after inflation. Inflation, as currently measured by CPI, is 1.8%, meaning that the Bank's main rate now stands at -1.55%, in real terms. The bank is paying borrowers to take money off its hands! 

Of course, those borrowers are not the likes of you and me. The best we can get from this is a mortgage rate of around 3.5%. in order to encourage us to speculate in property, so as to keep that particular asset class inflated in price along with the prices of other assets such as shares, bonds and their derivatives. If, on the other hand, you want to borrow to consume, then you face an interest rate of up to 30% p.a. on your credit card, and more on store cards. If you are in the unfortunate position of being even more desperate to borrow to consume, given more than a decade of stagnant or falling real wages, and have to borrow from a payday lender, you face interest rates of up to 4000% p.a. Nor is it it just the likes of you and me in this position. 

Small, and medium sized businesses have also been put in a similar position. Often they can't get loans from banks at all. Where they have, stories, over the last few years, have shown the way they were also tied into various costly protection schemes, much like the PPI racket that banks inflicted on individual borrowers. Its often resulted in businesses closing down, and the banks liquidating their assets. To be fair, there is often a good reason for the banks not lending to many of these companies, because they are fundamentally unprofitable. Around 75% of new businesses go bust within the first five years; a large proportion in the first year. So, its not surprising banks are loathe to lend to such companies, given that there is far more profitable and secure areas into which they can lend, such as that which finances the speculation in property and other assets, whose prices have been massively inflated, as a result of central bank and state intervention over previous decades. 

There are over 150,000 zombie businesses, in Britain, that can barely cover the interest on the bank loans they have, let alone repay the capital sum they borrowed. These firms have been given every assistance by conservative governments over the last 40 years. Starting with Thatcher, the state used its power to undermine the power of workers and their unions to defend wages and conditions. That disproportionately benefits this plethora of small private capitals that tend to be labour intensive, and rely on cheap labour, and poor conditions for their existence. Thatcher's government also gave them other incentives, including the creation of Enterprise Zones, which meant that those that could get into them were given an unfair advantage over their local competitors, because they were relieved of various costs and taxes, and exempted from having to abide by certain minimum standards. Cameron's government revived the idea, but failed to implement it, but the current Tory government is reviving it in the form of proposals for free ports. 

Conservative governments have also provided support and subsidies for these small businesses in other forms. On the one hand, the policy adopted by Thatcher in the 1980's of deregulating credit and financial markets, is what has led to the sequential bubbles in asset prices that have been blown up and then burst, since 1987. On the other hand, one purpose of that policy was to enable small companies to get away with paying low wages, because workers were encouraged to make up the difference by borrowing. The more their house price rose, the more they could borrow against it, and use the borrowed money to finance their current consumption. Its the very thing that conservatives object to when it comes to the state itself engaging in such activity.

UK Household Debt % of income

In reality, of course, despite all of the lies and hyperbola put out by the Tories, Thatcher's government, and Major's government after it, did not shrink the size of the state, they simply shifted where it spent money, and that in a bad way. Under them, state spending to finance burgeoning unemployment, and various forms of subsidies, such as Housing Benefit, increased, whilst spending on infrastructure, such as roads, railways, schools, hospitals, council houses and so on, which could have raised productivity levels, and profitability, was cut. To coin a phrase, not only did they sell off the family silver, but they failed to mend the off whilst the sun was shining. Like a bad landlord, they let the fabric of the building rot around the tenants, whilst demanding ever higher amounts of rent. 

 

UK Deficit To GDP Under Tory and Labour Governments.
Despite the Lies, the figure under Blair/Brown was half that
under Thatcher/Major.

From the 1980's onwards this conservative policy built a low wage dependent economy, with low productivity. It relied on growing debt. The biggest increase in debt was in the private household sector, as the burden was shifted on to individuals. But, the unproductive expenditure of conservative governments also increased that debt. Despite the lies told by the Tories, the average level of budget deficit to GDP during the Thatcher/Major years was double that during the Blair/Brown years up to 2007. Whilst Thatcher and Major managed just two years of budget surplus in the 18 years they were in government, Blair/Brown managed 4 years of budget surplus. 

The Bank of England's frantic measure to slash its main interest rate simply follows in this long line of failed, and destructive policies. As I wrote recently, in relation to the decision of the Federal Reserve to cut its rates, they present it as being to provide support for the economy, but nobody believes that any more. They can barely present such a statement with a straight face. The problems facing British capitalism are not down to the fact that its cost of capital is too high at 0.75%, and are not going to be resolved by cutting it to 0.25%! That is just a drop in the ocean compared to the hit to their fortune that Brexit will impose on them, which is likely to reduce UK GDP by at least 8%. 

Large UK corporations, like large corporations throughout the globe can borrow at very low rates. Unlike, the small and medium sized businesses, the large corporations generate huge amounts of cash flow. They can utilise vast amounts of realised profits to finance their own expansion. On top of that, the sheer size of their operations means that they have large cash hoards separate from such profits. With huge amounts of fixed capital, as Marx describes in Capital III, and Theories of Surplus Value, they also produce huge cash hoards for amortisation (i.e. to cover the wear and tear of the fixed capital). They do not have to keep that money sterile, but can utilise it to fund current spending and expansion, simply replenishing their amortisation fund at a later date, prior to needing to physically replace their fixed capital. Because other, particularly smaller capitals, are dependent on these large capitals for orders, the big firms can obtain commercial credit from them. They buy in materials and so on, but only pay for it later, and when liquidity becomes constrained, they simply use their power to extend the time that credit is extended to them, by making later payments. But, the large corporations can borrow in capital markets cheaply in a way that is not open to small and medium sized companies, because the large corporations can issue shares, via rights issues, or else by issuing corporate bonds. 

In fact, because the size of these large corporations is now so vast, bigger than some small economies, and because they make such large masses of profits, their bonds are AAA rated along with some of the more secure government bonds. As I wrote some years ago, describing the various bifurcations that exist in the global economy, on the one hand, we have small and medium sized businesses that need and want to borrow to finance their actual business activities, but which cannot do so, or can only do so at higher rates of interest, and, on the other hand, we have large corporations that can borrow easily, at low rates of interest, but who have little interest in borrowing to finance the expansion of their activities, because the shareholders in these companies are more interested in ensuring that they continue to be paid large amounts of dividends, or get capital transfers to them in other forms, or that the price of their shares be inflated, by the company using its profits, and its additional borrowing in the bond market, to finance the buy back of existing shares. A few years ago, Michael Roberts provided the following information. 

“as of August 2013, loans outstanding to UK residents from banks were £2.4tn (160% of GDP). Of this, 34% went to financial institutions, 42.7% went to households, secured on dwellings, and another 10.1% went to real estate and construction. Manufacturing received just 1.4% of the total! UK banking’s principal activity is just leveraging up existing property assets. I identified the same point in work done for the pamphlet for the Fire Brigades Union on the need for public ownership of the banks and found that the big five banks in the UK hold £6trn in assets. This is equivalent to the amount that more than 60 million British people produce in four years. Yet the banks have earmarked just £200bn of this to investment in industry in the UK, a measly 3% of the total.” 

The Bank of England, in its announcement, has said that it is introducing other measures of funding for the banks to encourage them to lend to these small businesses to address this criticism. But, its unlikely to be effective. The only small businesses likely to want to borrow, and to offer a viable prospect for the banks, will continue to be those involved in this same kind of property speculation. It will be people who want to become property speculators under cover of a company framework, and who borrow money to buy or renovate property in the expectation of making a capital gain from rising property prices, as central banks once more pour liquidity into the system, to reflate asset prices that have crashed over the last two weeks. There will no doubt be many small businesses that have seen their business disappear as a result of the moral panic over coronavirus unleashed in the last few weeks, but as Marx says in Capital III, their need for borrowing will not be to finance capital accumulation, but merely to be able to pay bills and stay afloat for a while longer, before going bust. Again, no matter how low a rate the banks are given by the Bank of England, it does not make lending to such borrowers any more attractive, when they risk losing the money they have loaned! 

The real purpose of the Bank of England's panic measure, as with all previous interest rates cuts, and QE, is not to support the real economy. On the contrary, it does the opposite. Its real purpose is to inflate asset prices, because it is those assets, fictitious capital, that now constitutes the form in which the top 0.01% hold their wealth. By continually inflating those asset prices, what the actions of the central banks does, is to divert money from the real economy into that speculation, and to divert money-capital that could have gone to real capital accumulation into such speculation. Who wouldn't engage in such speculation when you get to keep any capital gains you make, but when any losses you face are instead taken over by the state? 

The real nature of the Bank's measure was seen in those asset markets. Orthodox economic theory says that when a central bank cuts its interest rate, it should result in the currency of the country falling, as speculators move their money to other countries where they can get a higher rate of interest. But, as I pointed out some time ago, the Alice in Wonderland world capitalism has now entered, as a result of years of central bank intervention, means the opposite is true. Speculators are no longer interested in yield, and the lower those yields go, the less still are they interested in marginal absolute differences between one country and another. Instead they are interested in capital gain, and/or the avoidance of capital losses. So, when the Bank slashed its interest rate, the Pound rose by around half a percent against the Dollar, as money flowed into UK Gilts, whose price was bound to rise, as a consequence of the Bank's action. And, as money flowed into Gilts, reducing Bond Yields, it also, thereby made UK shares look cheaper, so the FTSE 100 rose by around 1.5%. No clearer indication of the real purpose of this kind of central bank intervention could be seen. 

But, these kinds of interventions have now been going on for 33 years, ever since the 1987 financial crash, and the introduction of the Greenspan Put. With each new financial bubble, and its subsequent bursting, the central banks have had to respond with ever lower official rates, ever more liquidity pumped into the system, ever more frantically trying to reflate the bubbles. All the time the action has undermined the real economy, and thereby the only sustainable basis for those asset prices. Within an hour, the gain on the FTSE had been halved, as I write, it has more or less disappeared entirely. 

In other words, the Bank of England fired its big bazooka. There was a loud noise, a huge cloud of smoke, but when the smoke cleared its target remained untouched. The Bank, it seems, is now firing blanks, which can only serve to instil even more panic into financial markets, and into the hearts of the owners of fictitious capital, because, at effectively zero interest rates, and below zero real interest rates, its clear that the Bank of England, like the Federal Reserve has shot its bolt. As James Bond said in Dr. No, “You've had your six, now its my turn.” 

To see, just how far down the rabbit hole capitalism has been sent, just consider what the current situation of negative real interest rates, let alone negative nominal yields on bonds actually means. When a lender lends money, then, as Marx describes, what this is is a sale of capital as a commodity. The use value of capital is that it produces the average rate of profit, and it is this use value that the borrower buys and pays for. The only difference in this sale of capital as a commodity, is that it is for a given period of time. What negative interest means is that the seller of this commodity – capital – is paying the buyer of this commodity, the borrower, to take it off their hands. It reminds me of the comment of Jed Clampett in the Beverley Hillbillies who commented what a nice fella Mr. Drysdale was for taking his $25 million and keeping it in his bank without charging him anything for doing so. 

Imagine that you went into your local TESCO, and when you went through the checkout, the cashier said, "here you are, we are paying you £50 for taking all of these items off our hands"! But, that is what is happening currently in the capital markets. Marx, in Capital III, said that a crisis of overproduction of commodities could not be resolved by having the bank buy up all of the overproduced commodities, but that is precisely what the central banks are currently trying to do with fictitious capital. Marx noted in Capital III, Chapter 23, that this fictitious capital, or interest-bearing capital is subordinate to real capital, i.e. productive-capital, because it is only productive-capital that produces profits, and its out of profits that interest is paid. If too much money went into becoming interest-bearing capital, therefore, the mass of profit would expand more slowly, whilst the price of capital itself, the rate of interest would fall. The value of money-capital would be massively depreciated, because not only would it produce a lower rate of interest, but the prices of financial assets would rise, so that the money-capital would buy fewer and fewer of them. 

“It would be still more absurd to presume that capital would yield interest on the basis of capitalist production without performing any productive function, i.e., without creating surplus-value, of which interest is just a part; that the capitalist mode of production would run its course without capitalist production. If an untowardly large section of capitalists were to convert their capital into money-capital, the result would be a frightful depreciation of money-capital and a frightful fall in the rate of interest; many would at once face the impossibility of living on their interest, and would hence be compelled to reconvert into industrial capitalists.” 

And, that is exactly what has been seen. For millions of ordinary savers, the near zero interest they get on their savings deposits would be impossible to live on. The near zero yields on the assets in pension funds, means they cannot produce the revenues required to meet their pension liabilities, so that they have had to sell the underlying capital assets in the fund, realising capital gains, to make up the difference, at the expense of thereby undermining the future potential of the fund to produce the required revenues. But, for the top 0.01% who now hold their wealth in the form of this fictitious capital, rather than in the form of productive-capital, this same fact, that instead of depending on revenues (bond interest, dividends), they can instead draw a revenue by realising capital gains, means they have no compulsion to have to convert themselves once more into productive-capitalists. At least, they do not so long as the state and central banks can continue to ensure that their assets rise in price, and they continue to obtain these capital gains. 

That is what central banks have done since 1987. It is what led to the financial meltdown of 2008. The underlying problem was not resolved after 2008. Instead, even more astronomical amounts of liquidity was pumped into the system to buy up worthless paper assets, and to reflate astronomically overpriced property. The Dow Jones today is 300% higher than it was in 2009, and similar rises in asset prices have occurred across the globe, as the interests of the owners of fictitious capital have been protected at the expense of the real economy, and real capital. The response to the Fed's rate cut was muted, little more than a dead cat bounce. The response to the Bank of England's rate cut does not even qualify as that. Watch out below!!!