Interest Rates
The pundits believe that interest rates are going to be lower for longer as a result of the economic slowdown, and because of unprecedented money printing. This is because they don't understand what interest rates are – as a market price for money-capital – just as they don't understand what prices are. They think that prices are purely a function of subjective preferences of buyers and sellers. So, if demand is suppressed that means prices are suppressed. If supply is increased then prices are also suppressed. So, they think that the economic slowdown, which is manifest in lower demand will hold down prices of commodities. Because they confuse money-capital with money, and confuse money with money tokens and credit, they think that, if the supply of money tokens and credit is increased, this is equal to an increased supply of money-capital, so that the price of money, interest rates will be lower. All of those ideas were put forward by bourgeois economists in the 19th century, and all were shown to be wrong by Marx, not just in theory, but by reference to actual events.
A look at recent history shows that, in the 1970's, there was a sharp economic slowdown after 1974, but during the 1970's, there was high and rising inflation, and high and rising interest rates. By the late 1970's, and early 1980's, UK inflation rose to well over 20%, despite rising unemployment. Mandel gives the following table of inflation in a number of economies for the first half of 1975. (The Second Slump, p 16)
United States
|
12.80%
|
West Germany
|
6.00%
|
Japan
|
14.10%
|
France
|
9.50%
|
Britain
|
23.50%
|
Italy
|
14.10%
|
Belgium
|
15.30%
|
Higher inflation was a consequence of increased money printing that had begun in 1970, with the Barber Boom in Britain, and similar injections of liquidity elsewhere. But, the biggest increase in money printing was, of course, from the US, which had printed Dollars to finance the Vietnam War, and its welfare programmes created by Johnson's Great Society. It led to Nixon removing convertibility of the Dollar to gold in 1971, which in turn saw the price of an ounce of gold soar from its artificially fixed price of $30, reaching $800 by 1980. That was an indication of the scale of the money printing, and underlying inflation. But, nor did this vast increase in the supply of money tokens lead to lower interest rates. On the contrary, interest rates continued to rise sharply during this period, reaching a peak in 1982, before starting their long secular twenty-five year decline.
The rate of interest is the market price of the use value of capital. The use value of capital is its ability to produce the average rate of profit. Like any other market price, it fluctuates, as a result of changes in demand for and supply of capital, or more specifically money-capital. Unlike other market prices there is no pivot around which these fluctuations occur, no natural rate of interest, because, unlike other commodities, capital has no value; it is not produced by labour. Capital is not a thing, but a social relation, and its use value is a function of this social relation. The average annual rate of profit, i.e. the use value of capital, rises if the rate of surplus value rises, or if the value of constant capital (i.e. the value of the commodities that comprise the elements of constant capital) falls. That would mean the demand for capital rises, because its use value has increased. If the supply of capital remains the same, this higher demand causes interest rates to rise.
However, even if the rate of profit does not rise the demand for capital can still rise for the reasons set out earlier. If the level of aggregate demand in the economy – whether for consumer or producer goods – rises then firms are forced, as a result of competition to increase their own production to grab a share of this increased demand. Indeed, that applies even if the rate of profit is falling, and falls further as a result of this additional capital accumulation, and rise in wages, which squeezes profits. And, as Marx describes, when the crisis of overproduction breaks out, the demand for money-capital reaches a peak, because firms demand this money-capital not to use as money-capital, but to use simply as currency, to be able to pay their bills and stay in business.
In conditions of rising demand, firms must respond by accumulating additional capital. Whether they do so by using their own profits, or else by borrowing in the capital markets, the result is the same. The demand for capital rises, and the supply of capital is reduced, and interest rates rise. And, when the crisis of overproduction breaks out firms must borrow at any cost to stay afloat, and interest rates reach their peak. Large parts of the economy would be in that condition, now, were it not for the fact that the state has taken over the payment of wages, has told banks to give mortgage holidays, and so on. But, sooner or later, that state support will end. Already, in the US, the latest jobs figures showed a fall in hourly incomes as very low paid workers who had been getting more from the government than they are normally paid in wages, returned to work. In the meantime, the fact that the state is undertaking this borrowing rather than companies and households changes nothing. Indeed, as seen earlier that state is undertaking this massive borrowing alongside massive borrowing by companies and households. It is still a huge amount of borrowing that must feed through into higher rates of interest.
The state has four ways of paying for its spending to cover wages of furloughed workers etc. It can raise taxes, but taxes are a deduction from surplus value/profit, which has already been devastated by the government imposed lock down. That would destroy economies already facing the worst economic slowdown in 300 years. The other side of higher taxes is reduced future spending, but that would again destroy aggregate demand and so the economy once more. Even after 2008, states had to stabilise the global economy by increased spending, before they began to slow its growth once more, by the imposition of austerity after 2010. Although no one believes all the nonsense about how essential workers will be more highly valued after this crisis, it is the case that after already suffering ten years of austerity, to reflate the prices of fictitious capital, and line the pockets of the 0.01%, conservative governments would face widespread opposition if they went down that route. On the other hand, the moral panic created over COVID19, has enabled Bonapartist regimes in Britain and the US, France, Poland, Hungary etc., to take on huge amounts of dictatorial powers, and restrictions on civil liberties. Instead of being opposed by socialists and social-democrats, they have been cheered on in doing so, and criticised only for not going far enough! They are unlikely to quickly relinquish these powers, and could easily use them to undermine any opposition to such a solution, just as they are using them now to undermine the protests of anti-racists protesters over the death of George Floyd.
The third option is to borrow, and across the globe, governments are planning large scale bond auctions, reversing the position of the last ten years, when they have restrained additional borrowing, and central banks bought up existing such bonds, so as to inflate their price. The more states issue such bonds, the more money-capital they suck out of circulation. Lenders of money-capital will then demand higher rates of interest. States will have to offer larger amounts of coupon on any new bonds, or they will have to sell them at a discount, but this will then mean that the prices of existing bonds will fall, causing yields to rise. In fact, following the US jobs numbers, and the start of an end to the lockdown, yields have already started to rise. This, however, will hit all bonds including commercial bonds, mortgage bonds and so on, and, as states suck money-capital from capital markets, so businesses will have to provide higher yields on any new bonds they issue. In other words, interest rates will rise across the board. Some junk bonds, such as those issued by companies engaged in shale oil production will become worthless, creating conditions where a new credit crunch may erupt, spreading out from a crisis in illiquid assets. The closing of property funds has already been mentioned, but, as happened in 2008, when large amounts of liquidity is required, and can't be obtained from illiquid assets, especially when the prices of those assets collapse, as a result of a rush for the exits, speculators have to obtain the liquidity by first selling their most liquid assets, so that their prices crash too.
Whatever states do, it is inevitable that many large businesses themselves will need to borrow on a large scale, and they will face higher interest rates to do so. Now, the borrowing will not be to buy back shares, or hand money to shareholders, but to plug holes in their balance sheets and cash flow, as well as for expansion, as post crisis demand begins to rise. Unlike the last thirty years, this is borrowing to obtain money-capital that is going to go into commodity circulation, not into asset purchases. The prices of the latter will be falling as interest rates rise, removing the only remaining reason for purchasing such assets, i.e. to obtain capital gains. As liquidity feeds into general circulation, commodity prices will rise inflating money profits, and giving a further incentive for additional productive investment, as against depreciating assets. Indeed, as demand for money-capital rises, banks and other financial institutions may need to resort to trying to attract deposits from savers, by paying higher deposit rates of interest. Again, it means a reversal of the conditions of the last thirty years, whereby borrowers were privileged over lenders.
The final way that states could pay for the spending is by printing money tokens, i.e. the magic money tree (MMT). But, the problem with that has already been outlined. Money printing in the last 12 years only failed to cause commodity price inflation because the liquidity was directed into speculation in financial and property assets, whilst austerity dampened the real economy. Central banks printed money to buy government and commercial bonds, mortgage bonds etc. They gave cheap money to commercial banks so they could also buy these bonds. Money was made available for property speculation, whilst governments intervened directly in property markets to artificially boost demand whilst constraining supply.
But, any money printing now would go straight into general commodity circulation. Indeed tens of billions of it already has in the form of the payments to furloughed workers etc. The trillions of Dollars paid out across the globe to furloughed workers, to cover unemployment benefits and so on is money going directly into funding the consumption of those workers. It is liquidity going directly into inflating commodity prices, particularly at a time when this increased monetary demand is increasing whilst the supply of commodities themselves is being artificially reduced. In short, borrowing is increasing massively by the state, business and households. They are now borrowing to consume personally or productively, and so any money-printing to cover the borrowing will lead directly to a rise in inflation alongside a rise in interest rates. The latter rises first, as demand exceeds supply of money-capital. The former rises as money printing and existing excess liquidity feeds into rising commodity prices.
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