Inflation and Bubbles
Over the last 30 years, large amounts of excess liquidity has been put into circulation. In the 1980's and 90's, that meant that the large rises in productivity that new technologies brought with them did not result in deep falls in prices of commodities, even though the values of those commodities had been slashed. But, as the rate of profit rose sharply, as a result of the sharp falls in the value of both constant capital and labour-power (because of the huge rise in productivity) the sharp rise in profits (supply of money-capital) meant that interest rates fell. Falling interest rates leads to rising asset prices, because asset prices (shares, bonds, property) are determined by the capitalised value of the revenues of those assets (dividends/interest, rent). That created the asset price bubbles that led to the bursting of those bubbles in 1987, 1990, 1994, 1997/8, 2000 and 2008/10.
As these asset prices inflated, large amounts of the excess liquidity put into the system found its way into the purchase of those assets. Its often said that money printing has not caused inflation, but it has. In the 1980's and 90's, commodity prices should have fallen, as a result of falling values, but were inflated by rapidly depreciating currencies, and those rapidly depreciating currencies created a hyperinflation of asset prices. The world and their dog speculated in bonds and shares, via mutual funds, ISA's, pension funds and so on; middle-class, and some working-class people became property flippers and buy-to-let landlords, global consortia of middle class people were formed to speculate in property developments in hot spots like London where new expensive properties were built, and then left empty, because their owners were more interested in capital gains from price rises than in obtaining rents.
And, when the bubbles kept bursting, central banks responded by printing even more money tokens, so as to reflate them again. The dominant section of the ruling class, the top 0.01%, now owns its wealth in the form of this fictitious capital, and so, when these bubbles burst, it was to protect their interests that central banks reflated them. The onset of a new long wave uptrend, in 1999, created severe problems in that respect, because it now meant that the demand for money-capital, for real investment, would rise, threatening a rise in interest rates that would reverse the conditions of the previous twenty years. It also meant that economic growth and rising employment would eventually lead to rising wages and a growing squeeze on profits, thereby hitting the supply of money-capital. Rising demand for and falling supply of money-capital could only mean rising interest rates and crashes in asset prices.
The increasing diversion of currency into speculation also acted to drain liquidity from general circulation, thereby creating disinflation, and constraining economic growth, especially as central banks rigged the casino so that speculators always placed winning bets. But, continually rising asset prices, whilst real capital accumulation was constrained could only mean that the ratio of asset prices to profits, and, thereby, to dividends expanded. The consequence had to be falling yields, which is what has been seen most clearly in bond markets where many yields on many bonds are now even negative. In shares, it was offset because shareholders representatives on company boards placed the shareholders interests above that of the company. In the 1970's, dividends accounted for just 10% of profits, whereas today they account for 70%. Shareholders representatives diverted profits that should have gone to real investment instead into lining the pockets of shareholders.
Something similar happened with land/property prices and rents. Rising land prices, as a result of the property bubble, meant that landowners had an incentive to convert agricultural land to development land, as rental yields represented a decreasing amount in relation to development land prices. Had landowners put this land on the market, as development land, the increased supply would have lowered land prices, and thereby new house prices. It would have burst the property bubble, which would, in turn, have caused land prices to fall further, because they had been inflated, in the first place, by those astronomical property prices. But, governments instead paid out huge subsidies to farmer/landowners, thereby creating a disincentive for land sales.
“If the 65,000 "farms" of under two acres are subtracted as economically meaningless, what you have is 50 per cent of the population, the taxpayers, paying 0.28 per cent of the population to hold the bulk of the country's landed assets and to make those plentiful assets scarce. The result is that the cost of a building site is two or three times what it should be for 70 per cent of the population. This is Britain's great property swindle.”
This is supplemented, in Britain, by the insane Green Belt policy which artificially prevents large amounts of land from being used for development, and so again keeps land prices, and so property prices very high. The consequence of high property prices, combined with stagnant wages, and the disappearance of council houses, meant that increasing numbers were forced into private renting. Again, private landlords would have been constrained, in the level of rents they could charge, by the income of potential renters. If rents could not rise, then the price of rental properties could not rise, as yields collapsed, because a better return would be available elsewhere. But, again, the state stepped in to protect the rentier class. It provided huge subsidies, this time in the form of Housing Benefit, now amounting to over £26 billion a year, so that private landlords could continue to charge exorbitant rents, and property prices could continue to rise.
2008/10
"Rising land prices, as a result of the property bubble, meant that landowners had an incentive to convert agricultural land to development land, as rental yields represented a decreasing amount in relation to development land prices."
ReplyDeleteHow much of the deindustrialization of Britain from 1980 onwards was driven by the fact that commercial and industrial land also had a much higher selling price if converted to residential use?
This difference provided a huge incentive to asset strippers seeking to destroy industrial companies and convert their land to residential use, and came about because commercial and industrial land is taxed (via Business Rates) far more heavily than residential land: less tax on the land rent means more rent is privately collected (and thus available to be capitalized into the selling price).
Is it also perhaps the case that one reason why Germany has become the industrial powerhouse of Europe was it because it lacked a powerful landed interest, because land ownership in western Germany was traditionally extremely fragmented, while the Junkers of eastern Germany were dispossessed in 1945 by the Red Army?
George,
ReplyDeleteI don't think it was high residential land prices that drove deindustrialisation. Understanding the latter requires more time than I have here, and involves a look at the new international division of labour that I discussed back in the 1980's, as well as understanding the nature of the conservative regimes of Thatcher and Reagan.
The situation in Germany has always been different. See Engels On The Housing Question, which also gave rise to a different spread of the development of capitalist production in Germany, as Lenin also discusses. What is a fact is that the predominance of renting in Germany - at least until quite recently - has meant that it has not suffered from he same property bubbles, and effects on land prices, as has happened in the UK and US, and elsewhere, and this also has a significant effect on the value of labour-power in Germany, i.e. without property bubbles inflating the cost of shelter, the value of labour-power is lower - and more stable - it does not require either high wages to cover mortgage/rent payments, nor huge amounts of housing benefit to enable private landlords to charge the astronomical rents required to provide even a minimal yield on even more astronomically prices property. That means that is surplus value available for accumulation.
It also means that Germany did not need artificially low mortgage rates to prevent the bursting of a housing bubble, and all of the distortions that has brought in Britain and the US. In fact, it did not need such low rates at all, which is one reason it held out against the ECB. Higher interest rates meant the attractions of financial speculation for capital gain were less attractive than the potential for actual profits from productive investment, though Germany could not avoid the global inflation of asset prices and distortions it brought with it.