Where Keynesian fiscal intervention cut short recessions during the long wave upswing, they could not do so, as soon as the downswing begins. The starting point of the downswing is the period of crisis, where crises of overproduction of capital begin to arise as capital is overproduced relative to the labour supply/social working-day, so that absolute surplus value cannot be expanded, and increased demand for labour-power causes wages to rise, reducing relative surplus value, and squeezing profits. As Marx describes it,
“There would be absolute over-production of capital as soon as additional capital for purposes of capitalist production = 0. The purpose of capitalist production, however, is self-expansion of capital, i.e., appropriation of surplus-labour, production of surplus-value, of profit. As soon as capital would, therefore, have grown in such a ratio to the labouring population that neither the absolute working-time supplied by this population, nor the relative surplus working-time, could be expanded any further (this last would not be feasible at any rate in the case when the demand for labour were so strong that there were a tendency for wages to rise); at a point, therefore, when the increased capital produced just as much, or even less, surplus-value than it did before its increase, there would be absolute over-production of capital; i.e., the increased capital C + ΔC would produce no more, or even less, profit than capital C before its expansion by ΔC. In both cases there would be a steep and sudden fall in the general rate of profit, but this time due to a change in the composition of capital not caused by the development of the productive forces, but rather by a rise in the money-value of the variable capital (because of increased wages) and the corresponding reduction in the proportion of surplus-labour to necessary labour.”
(Capital III, Chapter 15)
Under these conditions, there is no underused resources. Unemployment rises, not because of any short-term frictions or disequilibria, but because any further employment of labour would simply cause wages to rise further, thereby squeezing profits further, turning any existing profits into losses. The last thing capital needs, in these conditions is for the state to enter competition with it for labour-power, or for resources, or for loanable money-capital.
If the state introduces fiscal stimulus, causing aggregate demand to rise, capital responds not by additional capital investment, but by taking advantage to raise prices, and thereby money-profits, especially as the state backs up this fiscal stimulus by increased liquidity either in the form of direct money printing or additional credit creation. Capital, in order to resolve the crisis of overproduction it faces, does not use such conditions to accumulate additional capital, and employ additional labour, but to continue to innovate, to replace existing technologies with new labour-saving technologies, which, in fact, leads to rising unemployment, via the creation of a relative surplus population. The fiscal intervention can no longer cut short the recessions, and only now leads to rising inflation, and thereby stagflation. That is what was seen in the 1970's.
In this crisis phase of the long wave cycle, firms demand money not to finance capital accumulation, but simply as currency to be able to pay their bills, as credit dries up, and payments crisis unfold, what Marx calls in Theories of Surplus Value, a crisis of the second form. In Theories of Surplus Value, Marx, in discussing the rate of interest, quotes Massie who says that the rate of interest is limited by the rate of profit, because firms will not pay a higher rate of interest than the rate of profit – because otherwise their profit would be wiped out – however, as Marx says, in this crisis phase, firms demand money not for investment, but for survival. They demand currency, and will pay almost any rate to get it, creating similar conditions to those that exist under usury.
“The rate of interest reaches its peak during crises, when money is borrowed at any cost to meet payments. Since a rise in interest implies a fall in the price of securities, this simultaneously offers a fine opportunity to people with available money-capital, to acquire at ridiculously low prices such interest-bearing securities as must, in the course of things, at least regain their average price as soon as the rate of interest falls again.”
(Capital III, Chapter 22)
In the period after this, when the economy is characterised by stagnation, capital invests predominantly in new labour-saving technology so as to raise productivity, replace labour, lower wages, and raise profits. The concomitant of this replacement of labour leading to rising unemployment, is a slower growth of aggregate demand. Gross output grows slowly, but net output grows relatively faster, reflecting a rise in the rate of profit. This means that the supply of additional money-capital (from realised profits) rises faster than the demand for it, causing interest rates to fall, and so asset prices to rise. This sparks a new round of financial speculation, and creation of bubbles, of the kind seen from the 1980's onwards.
In the 1970's, and early 1980's, increased money-supply in support of fiscal expansion cannot drive increased growth, and leads simply to stagflation. Increased money-supply in the late 1980's and 1990's, cannot lead to increased capital accumulation, as capital seeks to replace labour with capital, rather than significantly raise output. Instead it appears to be, as Keynes put it like pushing on a piece of string. However, as the increased rate of profit leads to an increase in the supply of loanable money-capital, so it causes interest rates to fall. Asset prices rise, and speculation on stock, bond and property markets goes into overdrive.
With the dominant section of the ruling class owning its wealth exclusively in the form of these assets – fictitious capital – when these bubbles inevitably burst – 1987, 1990, 1994, 1997, 1998, 2000, 2008 – the state has to step in, via the central banks, to rescue them. The central banks cut official interest rates, pumping liquidity into commercial banks, with an encouragement for them to buy bonds and stocks; property prices are inflated, and bank lending becomes almost exclusively focused on lending for property speculation, causing funds for small and medium sized enterprises to dry up; in some economies, the state steps in to directly buy, not just bonds, but also shares, with a suspicion that this happens in other economies where this was not supposed to happen; as all these methods, increasingly, fail to prop up the prices of financial assets and property, central banks step in on a massive scale to print money tokens for the sole purpose of buying these speculative assets, and saving the necks of the ruling class.
When even this does not work, and increased economic activity threatens to cause interest rates to rise, as economic growth causes the demand for money-capital to rise, to cover increased capital accumulation, governments have to intervene to deliberately reduce that economic growth and encourage money into speculation. They introduce fiscal austerity to reduce aggregate demand, they provide subsidies for house purchase so as to inflate house prices, and so on, and all the time money printing by central banks pushes up asset prices, encouraging anyone who can to enter into this speculation, leading savers to speculate in buy to let property, or become amateur day traders, firms use increasing amounts of profits to buy back shares to inflate their price, they issue bonds to raise money to buy back shares, whilst central and commercial banks begin to buy up these bonds, with newly minted money tokens, and so on.
We are not in conditions where resources are underused and fiscal intervention can remedy the situation, or where money printing can facilitate such fiscal intervention. Indeed, money printing has facilitated the situation we are in, whereby asset price bubbles are inflated, diverting money-capital away from real capital accumulation into speculation. We, in fact, need those huge bubbles to burst and stay burst, so that money-capital begins to flow into productive investment in all of the huge range of new highly profitable industries waiting to develop.
Anyone who doubts that all the money printing has caused hyper inflation need only look at the rise in asset prices since 1980 – Dow Jones up by 2300% to 2000, and the further rise since 2000, up by around 250%. Now, as this money printing is being used to directly finance unproductive consumption, rather than speculation, we can expect to see a similar hyperinflation, but now in commodity prices rather than asset prices. As astronomical levels of unproductive spending to cover the costs of lockdowns are being met by huge levels of borrowing, the inevitable consequence will be sharp rises in interest rates, and collapses in asset prices. Any attempt to cover the additional borrowing with money printing means, because this borrowing is undertaken to cover unproductive consumption, the money printing will simply lead to even higher levels of inflation, creating similar conditions to those that led to the hyper-inflation in the Weimar Republic in the 1920's, or which have been seen in more recent times in Zimbabwe, Argentina and elsewhere.
Under these conditions, the Magic Money Tree, will indeed bear strange fruit.
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