Post Covid Prices and Revenues - The Reversal

The Reversal 

The economic crisis created by the lock down of social activity, imposed by some governments, has created a completely different situation. After 2008/10, governments imposed austerity. It had a specific purpose. That was to slow down the increase in economic activity that had been seen between 1999-2008. That increase in economic activity had already seen significant increases in wages in certain spheres. The greatest increases globally had come from those areas of the world that had seen the most rapid growth, and growth of a working-class, in Asia, Latin America, the former Stalinist States of Central and Eastern Europe, but now, it was in the developed economies, where wages had been stagnant for twenty years, that began to see large increases. UK tanker drivers, in 2007, won a 14% pay increase after just a two-day strike. It alarmed the pundits, who, even hours before it was conceded, were saying that obviously such a large rise was impossible, so used had they been, for twenty years, of workers simply rolling over. German engineering workers also won significant increases with little effort. This was like the recovery of labour in the 1950's, and that is not surprising, because the 1950's was the equivalent phase of the long wave uptrend, in the previous wave. 

Rising wages meant constriction on profits, although those profits themselves, at this stage were at their high point for the long wave cycle. The first response in such conditions is for the state to print more money tokens so that companies can raise prices, but that leads to inflation spiralling that spook markets and lead to preemptive rises in interest rates, unless productivity can be increased enough to prevent it. However, in 2008, 23 years had passed since the peak of the Innovation Cycle, and the new technologies that came out of it, and raised productivity were now the standard technologies, no longer capable of bringing their former large productivity gains. Its no surprise that the Chancellor, Alistair Darling, appeared on TV to tell workers not to press for wage rises to compensate for rising prices. 

The rising economic activity alongside wages, which albeit only marginally squeezed profits, meant the demand for money-capital, to finance expansion grew faster than the supply of money-capital that was, in any case, largely being drained into financial and property speculation. The result inevitably was rising interest rates. Rates did not rise that much in absolute terms, but were, at that time, at historically very low levels. Yields on assets were even lower, as a result of repeated injections of liquidity to inflate asset prices, which had risen much faster than the revenues of those assets. The consequence was again inevitable; a rise in interest rates could only manifest itself in a sharp fall in asset prices. To see that its only necessary to understand how capitalisation works. Rising interest rates meant bond prices would fall, but then money moves from shares and property to bonds, to get the higher yield, but then share prices and property prices fall. 

The banking system and financial markets had been based on continually rising asset prices. Mortgages were sold to to people who were likely to default, and mortgages were given for 125% of the market price of properties, because ever rising property prices meant the bank would be sure to get its money back when they foreclosed and sold the house. Mortgage backed securities could be sold on the same basis, and on the basis that the proportion of good mortgages would cover defaults on bad ones. But, now, suddenly, when interest rates rise, and asset prices fall, the house of cards collapses. Its no longer the case that lenders will get their money back, or that the proportion of good mortgages will cover defaults on bad ones. The majority of mortgages appear potentially bad ones, as market prices for properties fall way below mortgage advances. One lender stops lending to another, and as much of the borrowed money now came from such short-term interbank lending, money created by the banks themselves out of thin air, on the back of the astronomically inflated collateral on their balance sheets, rather than from money the banks had obtained from the injection of capital, or from deposits from savers, that meant that all lenders faced an immediate credit crunch. Overnight bank lending rates like LIBOR soared. 

A credit crunch enveloped the system, when depositors in banks like Northern Rock took fright, and asked for their money, they found their was none. It was like the kind of bank runs that caused numerous financial crises prior to the 19th century, and prior to the Bank of England becoming lender of last resort, and before bank legislation set in place capital asset ratios that were supposed to prevent such bank runs. The trouble, here, was that those capital asset ratios were based on a huge fiction. The huge assets they appeared to own in the shape of government bonds, corporate bonds, shares, and collateral on property, whose prices were massively inflated, were now seen as nearly worthless when valued at current market rather than book prices. The same thing had happened in Japan in the early 90's, when its bubble burst, and property prices fell by up to 90%. 

It should have been the end of irrational exuberance, and start of a return to rationality. But, the wealth and power of the top 0.01% is tied up in all of this fictitious capital. Moreover, conservative governments depended on a continuation of this financial delusion. They saw rising house and other asset prices and borrowing against them, as the means to pay for elderly care, as well as the means to sustain consumer spending, whilst they attempted to constrain wages. So, instead of a return of rationality, the 2008/10 financial crises, once the system had itself been stabilised, simply prompted even greater irrationality. Even more liquidity was injected, turning bond yields negative, whilst austerity was introduced to slow economic growth and, thereby, rises in wages and interest rates. It could never work, and didn't. 

The economic laws of capital, and of the long wave cycle, meant that, despite government attempts to slow economic growth, and divert money into financial speculation, the economy would continue to grow, more labour would be employed, so that the demand for wage goods would rise, creating further growth. Competition between companies forces them to expand to meet the rising demand, so as not to lose market share. The peak of the Innovation Cycle came in 1985, with its base technologies being rolled out in labour-saving devices over the following 15-20 years. But, by 2008-10, most of the productivity gains from that had been had, as it replaced older technologies. Now expansion meant proportionately more labour employed than in previous periods. And, given that now, 80% of new value was created in service industry, which is labour intensive, either because it uses lots of simple labour, or smaller amounts of highly complex labour, any expansion of capital meant an even greater expansion of labour as against a more or less constantly decreasing proportion of value accounted for by constant capital. 

When, after 2014, the large expansion of production of primary products resulted in a flood of cheaper supplies of raw materials, and food, this gave a boost to profit rates, and further expansion of industry. Despite austerity, global growth continued to rise, and again interest rates rose, sparking a 20% crash in US and other stock markets, in 2018. Trump's global trade war, along with Brexit, slowed global trade and growth, which provided some respite for interest rates, and the Federal Reserve, which had been reducing its balance sheet, resumed QE, reflating financial assets again. But, as 2019 progressed even all that was failing to prevent global growth continuing to rise.

2008/10

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