Today, we are at the end of that process, with sequential bubbles having been built up, burst, and then reflated throughout the 1990's, and early 2000's, leading to the 2008 crisis, and even larger reflation of those bubbles by central banks on the back of an unprecedented destruction of currencies by central banks, via money printing, and associated destruction of real capital, and economies via that very process, and via measures of fiscal austerity. It has signalled the death knell of private capitalism as, now, the state has taken over the last function that private capital was claimed to perform – supplying money capital for investment. It has driven capitalism deep inside the rabbit hole, with negative interest rates. The 10% drops do not yet represent capitulation – when all those market bulls who think that falling prices are an opportunity to buy, give up, and themselves begin to sell. It represents only a bit of the froth built up over the last year, being blown off. Given the difference between now and 1987, a real capitulation will see asset prices drop by around 75-80% in a couple of days.
Today, after central banks, around the globe, have again acted to destroy currencies by even more money printing, in order to buy up those worthless paper assets, governments have proposed, as in 2008, to return to Keynesian fiscal intervention with large-scale spending to stabilise the chaos. Financial exchanges have introduced restrictions on short-selling, which is a desperate measure that history shows acts to limit falls in prices, in the short-term, by creating an artificial short squeeze, but which only results in even greater selling and panic down the road. There is after all a reason why the short sellers think that asset prices are going to fall, and are prepared to bet on it. So, after all that firepower was unleashed, today, (at the time of writing in early afternoon) has seen a dead cat bounce that has restored about half of the falls seen yesterday. So, no capitulation yet, though its Friday 13th. and, in the current climate, its a brave or foolhardy speculator who will go into the weekend holding long positions on anything.
The problem for central banks, and for states is that, in a few weeks time, all of the people that have been encouraged to take time off work will return. Over the current period, inventories are being run down. Its not just supermarket shelves being emptied by panic buying, but the suppliers of those supermarkets and other outlets that are running down their inventories so as to resupply them. With at least some of the workers in those firms being off work, production is slowing down. Their supply chains, particularly those that extend across the globe, are being broken, so that they begin to run short of supplies, and the prices of those supplies where they can get them start to rise. Its a microcosm of what lies ahead, for Britain, as a result of Brexit.
A look at Britain, in the last few months, illustrates the point. In the three months to the end of January, UK GDP was zero. In the period before the election, the economy shrank, as expectations of Brexit increased. Its being proposed that this kind of stagnation in production, or even recession will result in a fall in prices. What, however, was the reality? UK CPI inflation, in fact, in January, came in at 1.8%, compared to a figure of 1.4% the previous month, a jump of 22%. In fact, at 1.8%, the figure is a hair's breadth from the Bank of England's target figure of 2%. The RPI figure came in at 2.7%, as against forecasts for 2.6%. So, rather than a stagnant economy causing a fall in inflation, it has been accompanied by a rapid acceleration, a sure indication of stagflation appearing.
The US economy has also slowed due to Trump's global trade war, which is based on the same kind of economic nationalist nonsense as Brexit. Yet, the US also saw employment rise by 225,000 in January, and by an even larger 275,000 last month. What is more, the US has also seen inflation rising, alongside that slowdown, and alongside COVID19. US CPI rose 2.5% in January, and by a further 2.3% last month. One simple reason is that Trump's trade war, by imposing barriers to trade, and thereby imposing additional costs on production, has increased the value of a whole range of commodities, reversing a process that had been going on for more than 40 years, when the value of commodities has been falling, because of rising productivity in production and distribution. With the world awash in liquidity, pumped out by central banks, and more being flushed into the system by the hour, these rising costs are finding their way into prices. With coronavirus constraining supply even further, and inventories being run down at a rapid rate, the imbalance of supply and demand is now likely to see further rising prices feeding through, and when the panic subsides, and consumers rush to the shops to restock their larders, freezers and cupboards, and retailers rush to restock their shelves, and producers rush to buy in supplies, and take on additional workers to meet these demands, a further imbalance of supply and demand is likely to cause prices to spike even more. With employment at high levels already, its likely to cause a spike in wages.
Already, with firms being told to pay their workers two weeks sick pay for self-isolating, and with the state agreeing to bankroll some of those small firms for doing so, some of the ocean of liquidity is being sent into circulation, whilst, for some firms, the payment of sick pay will come either from their profits, or from working-capital financed by circulating credit lines. There are already reports that some large companies, facing cash flow problems, as demand for their goods and services dries up, are drawing down their credit lines from banks, and, if this happens on a large scale, this could mean that banks liquidity begins to be drained, causing them to need to liquidate assets to restore liquidity. Its for that reason that central banks have relaxed banks capital reserve ratios, but that simply increases the likelihood of another 2008 style financial crash, if they run down their cash relative to assets, and then find that they have to liquidate assets quickly, in a period of panic when the prices of those assets is dropping like a stone.
Either way, it means that firms are either not putting as much of their profits into the capital markets, or are even having to supplement their working-capital by additional borrowing simply to keep trading and pay bills, be it for wages, or to suppliers. That is happening alongside states also borrowing additional money, be it to pay out for current revenue as benefits, bungs to businesses or else to finance the capital spending programmes they have been led to announce as part of a counter-cyclical Keynesian fiscal stimulus. Yes, borrowing costs for states are at record low levels, and even, in many cases negative in nominal terms, and in many more cases, negative in real, inflation adjusted terms. So, that means that governments are being paid by speculators to borrow money. But, in reality, that is a delusion. Those low bond yields are a function of the fact that central banks have printed money so as to buy up those bonds, and keep their prices inflated, and even rising, so that the owners of that fictitious capital, the top 0.01% did not suffer large capital losses on their assets.
The low yields on those bonds, was premised on the fact that the central bank would buy them up with printed money, so as to inflate the price, so long as governments did not engage in additional borrowing, which would increase the supply (and so depress the price of) bonds, let alone that they would use that borrowing to put additional demand for goods and services into the economy. The same is true with corporate bonds. Large corporations have been allowed to borrow at the same kinds of rates as states, so long as the money they borrowed was used to buy back shares, or to speculate in the shares and assets of other companies, thereby inflating those asset prices. It would have been a completely different matter had large corporations issued those bonds so as to finance real capital investment, which would also have then stimulated the economy, and increased aggregate demand for goods, services and labour-power. The asset prices bubbles blown up over the last decade have been based on such a requirement that printed money went into buying assets and pushing up their prices, whilst governments implemented austerity to restrain economic growth, and corporations borrowed money only to finance financial speculation, and capital transfers to shareholders.
The rest of us, of course, did not benefit from those low interest rates. We have continued to have to pay 30% p.a. for credit card debt, and up to 4000% if you are unlucky enough to have to borrow from a payday lender. Some of the smallest businesses, and self-employed are in the same position, when it comes to financing their businesses. Even medium sized businesses, find themselves paying up to 10% to borrow from peer to peer lenders, and so on, unable to enter the bond or stock markets to raise finance, and finding that many banks either will not lend to them, or will do so only at higher rates of interest. In fact, for many individuals, the low interest rates on savings deposits means that those on fixed incomes get screwed, reducing their real incomes, and so depressing aggregate demand. It acts as a further encouragement to engage in speculation, either to become a buy to let landlord, or to speculate in stocks and shares. It is all part and parcel of the drive to keep those asset prices inflated, whilst depressing the real economy, and thereby to keep the paper wealth of the top 0.01% protected.
When people return to work, and, before that, when they find they must replenish their cupboards and freezers, the immediate effect will be to expose the shortages that have built up, and will result in a spike in prices, as the available supplies get rationed out by the price mechanism. Seeing this spike in prices, and consequently of profits, retailers will scramble to restock so as to sell more while that situation lasts. Having depleted their cash balances, and working-capital, they will have to borrow to do so, particularly the smaller retailers. This spike in borrowing will cause real interest rates to spike, i.e. not the rigged official interest rates of central banks, or the similarly rigged yields on government and corporate bonds, but the actual interest rates that individuals and businesses have to pay, in the market, for every day purposes. But, that too will feed through. As those businesses seek to restock, their suppliers will also face a similar problem. That problem is made worse, in Britain, due to the frictions that Brexit is imposing, and, in the US, by the effects of Trump's tariffs. It means the prices of those inputs will also spike.
Its at this point, when all of the liquidity begins to swill into the real economy, and finances rapidly rising prices caused by shortages of supply for labour and materials, exacerbated by the frictions imposed by policies of economic nationalism such as Brexit, that interest rates will rise sharply, and its at that point that we are likely to see the real capitulation, as rising interest rates cause asset prices to crash.
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