Monday 16 March 2020

Financial Markets Slide As Central Banks Turn Currencies Into Confetti

On Sunday night, the US Federal Reserve Chairman J. Powell, responded, again, to the moronic tweets of Donald J. Trump, demanding more cuts in interest rates, by doing precisely that. Trump began, a few weeks ago, as is his wont, by declaring that coronavirus was all a conspiracy. He seemed to suggest it didn't even exist. Then he changed tack, as cases spread through the US, instead claiming it was all the fault of China, and more recently the EU, giving him grounds to vent his xenophobia first by imposing travel bans on flights from China, and then from the EU. His comments came amongst the usual welter of blather and errors, and lies, for which he has become famous. The world could see that the Leader of the world's largest economy was indeed a moron, who did not have clue one what he was doing, or talking about. It led to an inevitable sell off on global markets. Then Trump, responding to populist demands to “Get Something Done”, changed tack again, now accepting that the virus was real, and that he would take action "bigly" by imposing yet further restrictions, and closing down whole areas of social life. As he did so, he tweeted out minute by minute movements of the stock market in response to his comments, as if to emphasise that he needed to correct the sell-off his previous comments had caused, or more likely to try to pretend that the previous sell-off was not at all the fault of his amazing talent, the like of which the world has never been blessed before. 

Trump, like other governments, has responded irrationally to the public clamour and moral panic created over COVID19. Most of the closing down of economic life they have introduced will be ineffective in preventing the spread of the virus, even if that were itself desirable, which it isn't, because it prevents the rapid development of herd immunity against it. But, more importantly, the closing down of economic life brings even greater threats to life and health than does the spread of the virus it is supposed to prevent. And, much the same applies to Powell's response to Trump's demands to cut rates and engage in further QE. The Fed's action can have no effect on stimulating the real economy at a time when that economy is being shut down wholesale as a result of government diktat. Even if the economy was not being deliberately sent into recession, the Fed's action could have no effect in stimulating it, and nor has that ever been the real purpose of such action in the past. Trump's demand that interest rates be cut, and QE increased itself had no concern to stimulate the real economy. Trump's only concern was to limit the falls in the stock market, a stock market which he has made the measure of the success of his Presidency. That measure is currently showing his Presidency deep in the crapper, with only months to go to the election. He may yet, of course, try to turn the virus to his advantage by using it as a basis for implementing martial law, and cancelling the elections. 

The slashing of interest rates to zero, together with the announcement of $700 billion of money printing is designed to staunch the haemorrhaging of financial markets. But, those markets looked at the Fed's action and rightly saw in it only the same kind of irrational panicked response that governments have introduced to the coronavirus. Instead of calming market fears it only exacerbated them. Markets said, we have a moron in the Whitehouse, who has no clue what he is doing, and could crash the markets by tweet at any moment, and we have his puppet in the Federal Reserve who also clearly has no idea what he is doing, and whose gun is now firing blanks anyway. 

With central banks across the globe having reduced their official interest rates to zero, and all, in one form or another, printing money in such quantities that they all now resemble Weimar, or Zimbabwe and other states that lost control, leading to hyper inflation, its no wonder that financial markets have lost faith in yet another group of “experts”. With the moral panic over COVID19 leading governments to deliberately close down the economy, what should have always been apparent has been made glaringly obvious. Firms do not make profits unless there is a demand for what they produce. Indeed, as Marx made clear early on in Capital, to be a commodity first requires that it be a use value, i.e. something that someone demands. Unless it is demanded, its not a use value, and has no value. Something that has no value also produces no surplus value, which is the basis of profits. If there is no demand for the goods and services that firms produce, then those goods and services have no value, and the firms that produce them cannot sell them, or, at best, they can only sell them at prices way below their value, which means that, instead of making profits, those firms make losses. Firms that make losses for any length of time go out of business. 

With large parts of the economy being deliberately closed down by government action, the demand for huge amounts of goods and services is being undermined. What has been produced is no longer demanded, is not, thereby, a use value, and so also has no value. It can produce no profits. And, the reality that Marx described long ago is thereby reinforced. Without those profits there is no dividends, or other forms of interest, and nor is their rent, which, like interest, is a deduction from profits. Without rent, land prices collapse, and along with it property prices, whose fundamental basis is the land price. Without dividends, share prices collapse, and without interest, bond prices collapse. Simple economic reality is imposing itself on the financial markets, and no amount of cuts in official interest rates, no amount of money printing that has turned currencies into so much worthless confetti is going to change it.

For forty years, share prices and bond prices have been inflated on the back of money printing by central banks used to buy up increasingly worthless bits of paper, and on the back of the idea that dividends could be simply increased year after year as a proportion of profits at the expense of investment in real capital.  The delusion is again being faced with economic reality.

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