The Real Purpose of The Fed's Rate Cut

Yesterday, the US Federal Reserve cut its official interest rates by 0.5% points. Its the biggest cut since the 2008 financial crisis, and also the first emergency, inter-meeting cut. The justification being given by Fed officials is the global coronavirus outbreak. Yet, even they can't hold the line on that argument, and continue to present that argument with a straight face. The real purpose of the rate cut, as with previous ones, and which they are forced to admit, when pushed, is to inflate asset prices. Of course, even when they admit that, its couched in terms of a need to inflate asset prices so as to create a wealth effect, instil consumer confidence and so on. In other words, its all really for the benefit of Joe Public. That, of course, is also total nonsense. The real purpose of boosting asset prices, is that they are nowadays the main form of wealth of the top 0.01%, and thereby the basis of their economic and social power. 

If, the central banks, and capitalist states really wanted to protect Joe Public, and safeguard the real economy, then, instead of printing even more money, and cutting official interest rates to even more ridiculously low levels, they would  be taking measures that stimulate real economic activity. They would be introducing not monetary easing, which has proved itself useless at stimulating the real economy, even with negative yields and interest rates, but by introducing large fiscal stimulus packages, such as work on repairing the shattered infrastructure that many developed economies now suffer from, as a result of a decade and more of fiscal austerity. It would mean that Trump would scrap his global trade war, and the tariffs he imposed, which acts to increase the costs of trade, reduces global trade, and thereby damages the economy. The same would be true of Brexit, which has the same effect. Britain would say that it was suspending its Brexit plans, and extending the Transition Period so as not to hinder the existing trade between the UK and EU, and so on. 

But, that is not what the authorities are doing. In the same way that, in 2010, we were told that the reason for monetary stimulus was to promote economic growth, and yet it was accompanied by the imposition of fiscal austerity, in the UK, and EU, and in parts of the US, where Republicans held office at local and state level, so, today, we have governments saying they want to stimulate the economy, whilst at the same time telling millions of workers not to go out to spend, and not to go out to work, but instead to self-isolate for two weeks. It doesn't take a genius to work out what has greatest effect on the real economy, a cut in official interest rates, which were already at near zero levels, or telling tens of millions of workers to stop everything for a fortnight. And, of course, as I've set out in the past, the very policy of QE, and of cutting official interest rates itself acts to restrain economic growth, not promote it. It does so for several reasons. 

Firstly, by promoting speculation – in financial assets, property, gold, Bitcoin etc. - it draws money out of general commodity circulation, so promoting a deflation of commodity prices, and also by drawing potential money-capital out of circulation that could have been used for real investment, the purchase of additional buildings, machines, materials, labour-power etc., it holds back capital accumulation, and so growth of the economy. Of course, if demand in the economy is being restrained, by diverting money from it towards speculation in assets, not to mention being further constrained by the imposition of fiscal austerity, the pressure on productive-capital to accumulate is in any case reduced, so encouraging money-capital to go into speculation rather than real investment is like pushing on an open door. No wonder companies have used more and more of their profits to buy back stock to inflate share prices, rather than use those profits to expand the business. 

Secondly, higher asset prices for property and financial assets have raised the value of labour-power, and thereby squeezed the rate of surplus value, and rate of profit. Higher property prices mean that its more costly for workers to buy a house or to rent a house. They need higher wages to pay for it, hitting profits, and so potential capital accumulation. Alternatively, the state has to hand out subsidies to cover the shortfall. The level of Housing Benefit now reaches £22 billion a year, paid for out of tax, which means out of surplus value/profits, which is £22 billion that goes into the pockets of landlords rather than going into real capital accumulation. Rising share and bond prices make pensions provision more expensive. For every, £100 that workers and their employers put into a pension fund each month, they now buy a tiny fraction of the shares and bonds  they did, say, 30 years ago. That means the capital base of the fund does not grow so quickly, and so the growth in yields on those assets does not grow so quickly, which is what is required to pay future pension liabilities. Indeed, with the yields on those assets falling to near zero, the revenue produced by the fund itself falls to near zero, so that it produces no income to cover future liabilities. Future liabilities can then only be covered out of capital gains on the assets, which means selling those assets, which further undermines the capital base of the fund. 

Getting speculators to put money into stocks and bonds, of course, would seem to become ever more difficult if, in the process, the higher asset prices cause yields on those assets to continually fall. That is why central banks have had to increasingly become the buyer of last resort of those assets, printing money to buy up worthless paper assets, and in the process pushing yields into negative territory, a ridiculous situation, given the fact that any revenue producing asset is supposed to produce exactly that, a revenue, and not that the owner of the asset should actually pay someone else to borrow from them! But, the rationale for that becomes clear when its understood that as a result of the action of central banks over the last 30 years, the reason for holding such assets long since ceased being to obtain a revenue/yield, but became simply outright casino style gambling on being able to make large capital gains from the increased price of the assets. Of course, its different to actual gambling in a casino, where the gambler always loses in the end, because in the financial asset markets, the top 0.01% are protected by the central banks. If the gamble fails, and they risk losing money, as asset prices fall, the central bank steps in to buy up their worthless assets, and push the prices back up. Since 2009, global stock markets have risen by 300%! 

The extent to which the speculators have no interest in yield, but only in these speculative capital gains can be seen in the amount of property that is bought, but left empty, because property speculators are only interested in making a capital gain from increases in the property price, rather than obtaining a rent from the property. Its like the speculator in wine, who buys wine not to drink, but only to stick in a wine cellar for several years, in the expectation that they will be able to sell it for an even further inflated price to some other speculator. Its the same kind of idiocy that lay behind the Tulipmania.  I gave an example a few weeks ago.

The Austrian government issued a 100 year bond in 2017 with a 2% yield. The coupon, the amount of interest paid on such bonds is fixed, for example, the coupon on a £100 bond with a 2% yield is £2 p.a. The yield, therefore, moves up and down with the price of the bond, falling when the bond price rises, and vice versa. Now you might wonder who would be prepared to risk their money for up to 100 years into the future, for just 2%. The answer is plenty of people. Since the issuance of the bond, it has made a capital gain of 60%. 

In the same post, I also referred to a Moneyweek article which had said that the real threat to global financial markets for 2020 was “What Happens if Everything Goes Right”.

Well, it appeared that everything was, if not going right, certainly not going to hell in a handcart, which is what the global yields on assets were priced for. Despite the hit to global economic growth caused by Trump's trade war, Brexit etc., as I had predicted earlier, trade was eventually settling into new paths; not as great as it would have been otherwise, due to the frictions and higher costs that those impositions entailed, but on the rise nevertheless. The danger for asset markets, as I have outlined, and as Moneyweek suggests, is that, if, as in 2018, even gradually rising global economic growth begins to cause global interest rates to rise, then asset prices will crash. In 2018, US stock prices fell by 20%, for example. Well, what do you know, as Trump's global trade war began to lose its impact, and was itself beginning to unwind, as even the dolt Trump realised that it was damaging the US economy, and his chances of winning the 2020 election, and as that, plus a sort of resolution on Brexit, began to see EU economies start to strengthen, along comes the Coronavirus moral panic. 

A look at the PMI data, out today, shows the dilemma the authorities face. Despite the fact that the Cornavirus has been stalking the world now for nearly six months, and despite the fact that, in the last month, the media has gone into overdrive to try to stoke up a moral panic, the PMI data shows that growth is continuing. Any figure for PMI over 50 represents growth. Today, PMI data for several EU countries shows a slowdown from the previous month, and compared to flash estimates, but by no means a falling off a cliff. For Germany, Services PMI came in at 52.5, meaning growth. It was down from 54.2 the previous month, and compared to a flash estimate of 53.3. The composite Index combining both services and manufacturing fell to 50.7 compared to 51.2 in January, again still reflecting growth. The Services PMI is most significant as Service industry accounts for around 80% of new value and surplus value production. 

In France, the services PMI came in at a four month high of 52.5, and compared with a reading of 51 in January. Spanish services PMI came in at 52.1. 

In short, not rampant expansion, but not contraction either, despite the moral panic over COVID19 that has been stoked now for several weeks. And, this shows the problem. The first effect of the panic was to cause stock markets to correct by around 10%. Nasty, but containable given the 300% rise since 2009, and even the rise over the previous year. For speculators such a correction is not cause for worry when the central bank stands by to act as speculator of last resort. When the Federal Reserve stepped in to cut rates, it was a sign for bond prices to rise, and yields to fall, which makes shares look cheap, which creates the basis for further speculation in already astronomically overpriced assets. But, official interest rates, and bond yields are at levels you would expect if there was expectation that the global economy was about to collapse, not that, despite every obstacle that has been thrown at it, it continues to rise relentlessly, even if modestly. The US has experienced its longest period of continuous growth in its entire history! 

Throwing more money into asset markets to try to inflate their prices has become increasingly ineffective. And, necessarily so, because it can't change fundamental economic laws. The global economy continues to grow. As it does, more labour is employed, more wages are earned, and as more wages are earned, so they are spent causing demand for goods, and, nowadays, particularly, services increases. The effects on productivity of the last technological revolution have begun to wane, but, in any case, the nature of service industry tends to be that it is labour intensive. So, as demand rises, yet more labour has to be employed.

Across the globe we have seen this relentless rise in employment levels. For the reasons I've set out elsewhere, the consequence is that, eventually, capital cannot expand absolute surplus value, and as the demand for labour starts to hit a barrier of labour supply, wages rise. As wages rise amidst a growth in employment, that causes demand for wage goods to rise even faster. Competition between firms to meet this rising demand means they must accumulate additional capital. But rising wages also squeeze profits. Firms must borrow more, or throw more of their profits into actual capital accumulation, rather than into the money markets, or into buying back their shares and so on. The result is rising interest rates, which means that asset prices fall. Given the astronomical and artificial level that asset prices have been driven, by the actions of central banks, over the last 30 years, the rise in interest rates required to spark such a global asset price crash, which now must make that of 2008 look like just a minor warning tremor, is very slight. Hence the great fear and panic amongst central bankers, and amongst the top 0.01%, who face the prospect of their paper wealth falling by as much as 75-80%, when that crash eventually erupts. 

The dilemma, as with the ferocity of the crash when it comes, has been heightened as a consequence of the actions taken by central banks to repeatedly try to stave it off, via money printing and corruption of the global financial system to meet the needs of the top 0.01%, as against the interests of the real economy, and of real capital. Take the calls for millions of workers to stay at home from work. If they did so – and many won't because years of conservative attacks on workers rights mean that millions would get no sick pay - the effect would be to cause a sharp slow down in supply. But, in today's economy that does not mean a corresponding slow down in demand. For the last three years I have pretty much bought everything on line, as do many other consumers. So, staying at home does not at all impact on consumption and so demand. I can continue to buy my groceries on line without going out of the house, and so on. So, it is basic economics that, if end demand continues at the same pace – and it may even rise if people are sitting at home biding their time, by browsing for things to buy on Amazon etc. - but supply falls, because millions of workers are not producing, then this imbalance will cause prices to spike. Given the amount of liquidity out there, its not a stretch to see it flooding in to facilitate this rise in prices. But, a spike in inflation is the last thing the authorities want to see, because that prompts calls for interest rates to rise, and as soon as the panic ends, it is certain to provoke a mad rush to make satisfy all of this pent up demand. 

And, the fact is that the authorities do not take their own propaganda seriously.  We have talk about putting the army on the streets etc., and yet, at the same time the so called precautions are ludicrous.  When the original tourist to China returned home, and were put in quarantine, the buses on which they were transported were shown on TV.  There was no indication of the coaches not then being used again, or the drivers being quarantined etc.  A week or so ago, when someone in a firm in London announced they had some symptoms, all 20 workers in the firm were sent home, thereby bringing them directly into contact with thousands of other travellers on the Tube.  The government is telling individuals to self-isolate for a fortnight, but saying nothing to the other members of their families, who are then free to go forth and spread the virus.

But, the panic simply does not reflect the actual facts on the ground.  Six months into the virus, we still have global deaths at less than 3,000.  In 2018, 17,000 people died in the UK alone from flu.  We have the TV news every day announcing that some individual has been diagnosed as having contracted the virus.  Not that they have died mind, or even that they have become seriously ill, but only that they have contracted the virus.  Imagine if every year the TV announced when some new individual had contracted the flu!  And, to put the global deaths from coronavirus in context, that 3,000 compares to 50 million people who died from Spanish Flu in 1918.

Now it makes sense to take precautions against the spread of any virus, and it may yet, mutate or begin to be as fatal as Spanish Flu, but so far the reality compares markedly from the level of panic that has being spread.  Far more people are likely to die across the globe, particularly poorer people, as a result of an economic contraction caused by the panic than are likely to die from the virus itself.

What we have is a global economy geared not to the needs of real capital, and so the real economy, but to the interests of the top 0.01%, who today own their wealth in the form of this fictitious capital and not in the form of real productive-capital, which today takes the form of socialised capital. We have real capital being destroyed and sacrificed simply to keep the paper wealth of the top 0.01% artificially inflated. It is a situation that cannot last, and so why it must result in a monumental financial crisis. It is an indication that the current state of things also cannot continue. This situation has only been possible because the owners of fictitious capital, primarily the shareholders, have been able to exercise control over capital they do not own, i.e. the productive-capital of the large corporations. That productive-capital is socialised capital. It belongs to the firm itself, not to shareholders. The firm can only rationally be conceived as comprising the associated producers within it, the current workers and managers, and so it is only rational that control over that capital should be exercised democratically by those associated producers. 

Yet, the shareholders are the ones who exercise control. They appoint the Boards of Directors, and executives that sit over the actual day to day, managers, or functioning capitalists, as Marx calls them. Those directors and executives are there, not to represent the interests of the company, but of the shareholders. That is why they have diverted 70% of profits into dividends, compared to just 10% in the 1970's. It is why they have used profits to buy back shares, and for other forms of transfer of capital to shareholders, rather than using those profits for real investment in the company. And, these same forces are represented in the big banks that concentrate this economic power, via the Stock Exchange. And, the ultimate representation of that is the central bank itself, which uses its vast resources to do the same thing, to boost asset prices at the expense of the real economy. 

It illustrates why we need a democratic revolution that extends the political democracy fought for in the 19th century, into the workplace with the introduction of industrial democracy. The worker owned cooperative should be the model, extended to all socialised capital, be it a corporation or a nationalised industry. And, on that basis, the workers in these industries must then form one large cooperative holding company, so that the profits they produce can be used for capital accumulation, removing the need for the class of money lenders altogether in a short period.