The owners of fictitious capital, and their representatives in the state machine are once again in full panic mode, as they were in 2008. So far, the moral panic surrounding COVID19 has not caused the global economy to come to a standstill, despite all of the encouragement for people to stop producing, by staying away from work, school, and consuming, by staying away from public gatherings and so on. Indeed, five months in from the first diagnosis of the virus, in China, and despite draconian measures imposed by the Chinese state, to close things down to prevent its spread, even the Chinese economy continues to grow, though at a reduced pace. Last week, the US reported a 275,000 increase in the number of workers employed. That would be a good number at the start of an economic recovery, but it comes after ten years of continuous recovery, the longest in US history. It comes on top of an increase of 225,000 in January. As in 2008/9, its not an economic crisis that is causing a financial crisis, but a financial panic and crisis that is likely to lead to an economic crisis.
Over the last week or so, global stock markets already sold off by more than 10%. This morning, a further factor entered the mix. With Russia having said that it would not join OPEC in cutting its oil production, Saudi Arabia, has announced unilateral cuts in its production, which sent the oil price into a downward spiral. Russia, actually needs higher oil prices less than Saudi, because the latter depends on its oil revenues to finance its huge budget deficit, a deficit that is growing as Saudi acts as US proxy in the Gulf against Iran and Russia. It is Saudi that financed and armed the jihadists of ISIS and other Islamist groups to fight against Assad in Syria, in the same way that they provided the financing, arms, and some of the Special Forces to overthrow Gaddafi in Libya. It is Saudi that is financing and fighting the war in Yemen, against Iran's proxies in the Houthies. Its estimated that Saudi needs a price of around $100 a barrel to finance its state spending. In fact, as I wrote some time ago, oil is never likely to regain that level. The only reason that oil has recovered to over $60 in the last year or so has been down to the actions of OPEC in restricting supply, and its ability to get Russia and other producers to go along with it. It has been helped by the fact that oil supplies from Venezuela, Libya and Iran have been curtailed for various reasons.
The current collapse in the oil price simply reflects the fact that the cartel could no longer constrict supply to keep the price above the price of production. The reality is that even as global oil demand continued to rise by around 2% a year, supply or potential supply has increased faster. And, as I pointed out some time ago, global demand for oil is never likely to rise at a faster pace than it is now. Alternative energy production is replacing fossil fuel at an accelerating pace, and is becoming ever more competitive as against the latter. Its why Trump's promises to bring back coal jobs in the US have fallen flat, like most of his promises to US industrial workers. Similarly, electric cars are replacing petrol and diesel engine vehicles. More than 300 new electric car models are set to enter the market in coming months. As I've pointed out before, the writing has been on the wall for oil for a long time. Between 1980 to 2007, global GDP rose seven times faster than oil consumption, as a result of technological improvements that meant that oil could be used more and more efficiently. But, on top of that similar technological improvements meant that oil could be extracted more cheaply, and from places where it previously was not possible or uneconomical to do so.
One of those was the development of US shale oil and gas. But, as in 2014, when oil along with other primary product prices fell, as new supplies flooded on to the market, what this current price drop means is that some of those marginal producers, are now under threat of going under. As Marx put it,
“It is therefore quite possible, and under a developed system of capitalist production even inevitable, that the production and increase of the portion of constant capital consisting of fixed capital, machinery, etc., should considerably outstrip the portion consisting of organic raw materials, so that demand for the latter grows more rapidly than their supply, causing their price to rise. Rising prices actually cause 1) these raw materials to be shipped from greater distances, since the mounting prices suffice to cover greater freight rates; 2) an increase in their production, which circumstance, however, will probably not, for natural reasons, multiply the quantity of products until the following year; 3) the use of various previously unused substitutes and greater utilisation of waste. When this rise of prices begins to exert a marked influence on production and supply it indicates in most cases that the turning point has been reached at which demand drops on account of the protracted rise in the price of the raw material and of all commodities of which it is an element, causing a reaction in the price of raw material. Aside from the convulsions which this causes in various forms through depreciation of capital, there are also other circumstances, which we shall mention shortly.”
(Capital III, Chapter 6)
As I have described elsewhere, Marx analyses this further in Theories of Surplus Value, Chapter 9, in looking at the long wave movements in prices, over 50 year periods. This sharp rise in primary product prices, at the start of a new long wave uptrend, as this installed new technology and fixed capital in industry causes demand for materials to rise sharply, when economic activity rises, is seen in every such long wave cycle. It was seen at the start of the new long wave uptrend in 1999. Once established it causes a flurry of new investment in primary production, which takes around 10-12 years to mature. Then it causes, the market value of those products to fall, due to the higher fertility of the new sources of supply, but this fall in market value, which reduces the price of production of those commodities, is accompanied by a surge in supply, which causes an imbalance that results primary product prices falling by an even greater extent to clear the market. That was seen in 2014.
One reason that Russia has refused to join with OPEC in cutting supply is that it argues that it would benefit the US and its shale producers. The collapse in OPEC's attempts to constrain supply and boost the oil price means that many of those shale producers will now be producing at a loss, as will some of the North Sea oil producers. The shale producers, in particular, but this also probably applies to some of the smaller North Sea oil producers that came in to buy up existing fields, as niche players, have financed their operations by borrowing in the junk bond markets. That was the case in 2014, and meant that the potential for some of these producers to go bust, and default on their debts posed a threat to the holders of junk bonds. The actions of central banks in printing money, and buying up sovereign and commercial bonds, so as to reflate financial asset prices, and protect the paper wealth of the top 0.01%, has meant that even those junk bonds have found demand in capital markets. This is one source of panic for the owners of fictitious capital and their representatives in central banks across the globe. A debt crisis hitting junk bonds, where liquidity is low, could easily spread into the bond market in general, and from there into the wider financial system, causing a similar credit crisis as that seen in 2008. One reason that central banks have given for destroying currencies to an even greater extent by money printing in recent weeks has been to head off such a credit crunch.
But, illustrating the way the measures taken by central banks and states have taken over the last thirty years to protect the owners of fictitious capital, have simply created greater contradictions, the panic that has ensued over COVID19, has meant that money has flooded into government bonds, because all of the speculators know that the US, UK, Germany, Japan and so on are not going to outright default on their bonds, in the same way that say Argentina, or Zimbabwe might have done. Nor are they even likely to effectively default, as say Greece did, by agreeing with creditors that they should take a voluntary haircut on those bonds. Rather the US, UK and so on are doing what they always do in such circumstances, as I set out more than 10 years ago, which is to indirectly default, by money printing, QE. On the one, hand, QE keeps the prices of those bonds inflated, because it creates artificial demand for them from the central bank. It enables private capitalists to offload them to the state rather than suffer a capital loss, and when the price of those bonds goes up, it means the owners of those bonds also get a capital gain. But, it causes the yield on those bonds to fall.
Moreover, because the state pays the interest (coupon) on those bonds in funny money, i.e. money that it has significantly devalued by printing more money tokens (now electronically) it means that, in real terms, it has defaulted on what it promised to pay to the owners of those bonds. Normally, that would mean that all of this funny money would have caused a rise in general inflation, such as has been seen in recent years in Argentina, Brazil, Zimbabwe and elsewhere, and was seen in Germany in the 1920's. But, because central banks and the state have done everything they can to divert all of this liquidity into financial and property speculation, the inflation has been seen instead in a hyperinflation of asset prices, whilst money sucked out of general circulation has kept commodity prices suppressed, and thereby also constrained the growth of the real economy.
The fall in bond yields, meant that shares looked cheap, even though shares also were seeing their yields continually drop, despite shareholders sucking increasing amounts of profit out of them as dividends, rather than investing that profit in real capital. So, share prices rose sharply. The Dow Jones that fell to around 7,500 in 2009, had risen to over 27,000 before the current crash, for example. A similar thing applies to property speculation. But, whenever there is another financial panic, it means that speculators rush out of stocks and into bonds. The state via the central bank stands behind bonds, but generally not behind stocks. If you want to protect your paper wealth in a crash it makes sense to buy government bonds, at least those of the US, UK, and so on, because you know the central bank will buy them up, if the price drops. It has shown it will do that, and print money for that purpose, even where that results in the yield on those bonds becoming negative. That has been the case for German and many other European bonds for several years, and today, it became true for UK Gilts. It is close to becoming the case for US Treasuries too. In other words, in order to protect their fictitious capital, speculators are prepared to accept a negative rate of interest on the money they lend.
What is really going on can be seen in the reluctance of governments to actually use this peculiar situation to actually borrow, and thereby stimulate economic activity by investing in infrastructure, training teachers, doctors and so on. When lenders are prepared to pay you to borrow money from them, its only a fool that would fail to seize that opportunity. Yet across the globe governments are refusing to do that. The reason is that the policy of austerity over the last ten years, and their continued refusal to borrow money is driven by their desire to restrain economic growth, and to thereby keep real interest rates low. They need to do that, because once economic growth begins to accelerate, they will not be able to control it, especially given all of the liquidity that has been created over the last 30 years. Increased economic activity, rising employment, brings rising wages, which brings even faster economic growth, as the demand for wage goods rises. Firms facing squeezed profits due to those rising wages, still have to expand to meet this rising demand, or they lose market share. They have to pay less as dividends, and more money goes into capital accumulation. The demand for money-capital rises, causing interest rates to rise. That becomes reflected in higher bond yields and higher dividend yields. But, if the actual amount of dividends drops, or even fails to increase proportionally, the only way yields can rise is if asset prices fall. In other words, it requires that share and bond prices fall significantly, and the same would happen with property prices.
So, now, we have the obvious demand from the representatives of the owners of fictitious capital. If share prices fall in such a panic, because speculators flood out of stocks and into bonds, the answer must be for the state also now to protect the speculators by also buying shares. The state in Hong Kong, and in China, and in a number of other countries have done that for a long time. In the US it is illegal, although there have been conspiracy theories, usually emanating from libertarian/Misean sources, that the US state has also been involved covertly in such activity, even before 2008. The usual route chosen is via the derivatives market. Whether its true or not, is not relevant, what is relevant is that there are calls for the state, via the central bank, to openly buy shares, to boost stock markets being made.
That is significant. Lenin, in “What The Friends of the People Are”, makes the point that the Narodniks, like Mikhailovsky, misrepresented Marx's materialist analysis, and his statement about the “inevitability” of Socialism. They presented this statement about inevitability as being a prediction about the future, just as they presented the Russian Marxists statement about the development of capitalism in Russia, being a prediction about the future. But, Lenin retorts in neither case is it a prediction about the future, but an analysis and description about what already exists. Capitalism already existed in Russia, and Marx's “prediction” about the inevitability of Socialism, and the “expropriation of the expropriators”, was not a prediction at all, but simply a description of the existing state of affairs. In other words, Marx in Capital, had described the fact that, for all intents and purposes, socialist relations of production, and the social relations that arise upon them already existed, by the latter half of the 19th century, in the industrially developed economies. Not only was their socialised production, operating via an extended social division of labour, but capital itself had been socialised in the form of cooperatives and joint stock companies.
“The capital, which in itself rests on a social mode of production and presupposes a social concentration of means of production and labour-power, is here directly endowed with the form of social capital (capital of directly associated individuals) as distinct from private capital, and its undertakings assume the form of social undertakings as distinct from private undertakings. It is the abolition of capital as private property within the framework of capitalist production itself.”
(Capital III, Chapter 27)
The owners of this socialised capital, were the associated producers.
“from manager down to the last day-labourer.”
(ibid)
The obvious manifestation of this is the worker owned cooperative, but it applies to the joint stock company/corporation too. In both cases the socialised capital/means of production is owned by the company itself. Money-capital may be borrowed to enable the company to buy these means of production, but the lenders own their money-capital, not the means of production. They hand over possession of their money-capital for a given period in exchange for the payment of interest/dividends. What we face is the fact, not that we are still waiting for a transformation of the productive relations, and social relations created upon them, i.e. a social revolution, but the fact that the ideological superstructure, and legal relations that correspond to this set of productive and social relations is out of alignment with it. In other words, the associated producers do not see that they now own these means of production collectively, and should exercise control over it, but continue to see the old ruling-class, the private money-lending capitalists as fulfilling that function, and in so doing exercising control over the state, which acts on their behalf.
But, the demand from the speculators that the state should now do the logical thing, and step in to boost share prices itself cuts away one of the final strands of the ideology that justified the continued role of those private money lending capitalists. The reality is that it has always been workers that created the physical capital that confronts them as alien property in production. It is workers who produce machines, buildings, and raw materials. But it is also workers that produce the money-capital that the capitalist uses to buy that physical capital. In other words, it is the surplus value that workers create via their labour that produces the profits that the capitalist accumulates in the form of physical means of production. That is why, as Marx's analysis showed, the development of socialised capital illustrates that the private capitalist had no further social role in production. Workers can and do fulfil that role, as managers and organisers of production. The only function of the private capitalist – other than in those remnants of early 19th century capitalism represented by the plethora of small private capitalists that exist in a dependent and subordinate role to large scale capital – it has been argued is to provide the money-capital required for additional and new investment.
In truth that was always a crock too, because they did not pull this additional capital out of thin air, but only from the dividends and other revenues paid to them as owners of fictitious capital, revenues which themselves were simply a division of the surplus value produced by the worker. The reality always was as Engels described in Anti-Duhring,
“Many of these means of production and of communication are, from the outset, so colossal that, like the railways, they exclude all other forms of capitalistic exploitation. At a certain stage of development this form, too, no longer suffices: [the large-scale producers in one and the same branch of industry in a country unite in a “trust”, an association for the purpose of regulating production.”
(Engels, Anti-Duhring, p 358)
“In the trusts, free competition changes into monopoly and the planless production of capitalist society capitulates before the planned production of the invading socialist society. Of course, this is initially still to the benefit of the capitalists.”
(ibid, p 358)
“But, the exploitation becomes so palpable here that it must break down. No nation would put up with production directed by trusts, with such a barefaced exploitation of the community by a small band of coupon clippers.”
(ibid, p 358)
“All the social functions of the capitalist are now performed by salaried employees. The capitalist no longer has any social activity save the pocketing of revenues, the clipping of coupons, and gambling on the Stock Exchange, where the different capitalists fleece each other of their capital. Just as at first the capitalist mode of production displaced the workers, so now it is displacing the capitalists, relegating them, just as it did the workers, to the superfluous population, although not immediately to the industrial reserve army.”
(ibid, p 359-60)
The demand for the state to buy shares now makes it clear that there is no need for the private capitalist as money lender either, because that function could simply be undertaken by a state, which, as now, if required, printed money for the purpose. The functional role of the private capitalist ended more than a century ago, as private capital was expropriated by socialised capital. That social function of the capitalist is itself now performed by workers themselves. The workers have failed to recognise this changed set of social relations, and instead continue to absorb themselves with peripheral economistic struggles over what price they should be paid for their labour-power. In doing so, they fail to address “the property question” as Marx and Engels describe it in The Communist Manifesto. They continue to allow the owners of fictitious capital (share-owners) and their representatives to exercise control over capital they do not own. They do so on the spurious basis that the shareholders have loaned money-capital to the company. But the whole point about loaning that capital is that it involves giving up possession and control of it, in return for a payment, i.e. interest. Its like someone selling you a car, taking payment, but then insisting that they should retain control over its use! Even where workers do consider the property question, they often do so only in terms of posing one form of capitalist ownership and control with another. For example, they pose state capitalist ownership (nationalisation) as against private capitalist ownership, or state capitalist control rather than control by shareholders. In fact, as Engels describes, state capitalism means that not only do the workers not have control, but the surplus value they produce is simply paid out to money lending capitalists in the form of interest on bonds, rather than dividends on shares.
But, at least, the demands being raised by the speculators that their paper wealth be defended by having the state buy up their shares, to prevent the price of them falling, puts a further nail in the ideological coffin of private capitalism. It illustrates that they also no longer have any useful role in that field either.
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