Post Covid Prices and Revenues - Inflation and Bubbles

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.”

(Kevin Cahill, New Statesman) 

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.

Demand, Supply and Prices of Production

2008/10