The media, particularly the financial media, has ben full of reports in the last few days of the collapse of Greensill Capital, and in the last 24 hours, of David Cameron's lobbying for it, to obtain COVID loans. What this illustrates is just a small glimpse of the corner of a rug under which a whole mountain of dust has been swept, and which is now about to escape into the air, choking everything in sight.
The huge amounts of liquidity pumped into circulation, over the last 30 years, has created a never ending series of examples of misallocations of capital. The most obvious one is one that has been deliberately fostered. That is the allocation of vast amounts of potential money-capital for the purchase of speculative rather than productive assets. In other words, the profits from companies, instead of being used for actual investment, the purchase of additional buildings, machinery, labour-power and so on, has been used just to buy existing shares in companies, or bonds, thereby inflating their prices, and the paper wealth, or fictitious capital, of those that own them. As John Weeks pointed out some time ago, read the financial press, or watch the financial media, and you will be told that this activity, which is nothing more than the same kind of gambling as betting on a horse race, or buying scratch card, is “investing”. It isn't, its a zero sum game, where some win the bets, and others lose.
What government imposed lockouts and lock downs have now done is to make the conditions for that crash imminent. Cameron lobbied for lock down loans for Greensill, but it is governments that have made those loans available in the first place, as they have decided that its no longer necessary for anyone to undertake labour to produce new value, as it can instead be created by central banks simply “printing money”. Marx long ago demonstrated that any such proposal, as had been put forward by John Law and the Pereire Brothers, is simply "fraud". Banks were sensible enough not to volunteer to hand over their own money to businesses in the near certain knowledge that, in conditions of lock downs, those businesses would not pay them back. But, when governments said that they would underwrite the loans, in the same way that central banks, over the last thirty years, have underwritten gambling on asset prices, the banks obviously took them up on the offer.
But, the consequence is inevitable. The Billions of pounds lent under these lock down loans will never be repaid, and so the state will have to pick up the tab, just as it has picked up the tab on all of the other debt it has created as a result of cratering the economy via the imposition of lock downs and lockouts. As I have pointed out in many previous posts, when the lockouts end, and people start to spend – its reported that there is £50 billion, in Britain alone, waiting to be spent just on holidays by consumers – firms, whose profits and working-capital has disappeared, will have to borrow to finance the expansion they will undertake to meet this rise in demand for their goods and services.
A recent story in City-AM, illustrates the point. Based upon research by Insider Pro, it reports that UK manufacturing firms, due to a combination of falling profits and revenues, and increased costs, now need to raise an average of £1.7m per firm. But the case with Greensill also shows another point here. Greensill provided loans amounting to £400 million under the lockdown loans scheme introduced by the government. In fact, it appears that loans to the extent of 8 times what should have been allowed were made, according to the Sunday Times. The state, meaning the taxpayer, backs these loans to the extent of 80%. The gamble undertaken by Gupta and Greensill, then turns into a gamble by us the taxpayers, who never had any say in the matter, and though we pick up the tab, would never have received any of the rewards. This is just a repetition of the corporate welfarism seen in 2008, used to bail out the rich after they made reckless gambles that turned out to be losing bets. At least all the mugs ploughing their hard earned savings into gambles on Bitcoin, or Gamestop and so on, are knowingly throwing their own money away in their own gambling, making the new casino owners at Robin Hood, or E-Toro rich, in the same way that gamblers have made William Hill and others rich in the past.
Gupta, of course, has been praised as a saviour of the British economy in the last few years, as he bought out the collapsing British steel industry, again having been given taxpayers money as an incentive to do so. Now that industry, increasingly under pressure due to the undermining of the UK economy as a result of Brexit, will be under the cosh again. The government, already seeing UK exports decimated due to Brexit, and keen to hang on to the votes in those “red wall” seats, in which these old industries tend to be concentrated, will no doubt be led to pour even more billions of pounds into propping them up, and encouraging some other big time gambler to take them over for a few years, just as in the past, they paid such gamblers to take on BL an other companies.
Spending billions on those bail-outs is just the start, because many of the other, actually viable, large businesses that have been crucified as a result of the government imposed lock-outs also need working-capital running into tens of billions of pounds. The state will end up stumping up for them too, rather than see the economy disappear completely down the pan. The current levels of borrowing by the state are being reported as “historic”, but compared to where that borrowing is going in the year ahead to cover all these bail-outs, to cover its underwriting of all the loans, to cover its loss of tax revenues and increased payments for welfare and so on, the current level is nothing. This is similar again to what happened in 2010 in Ireland, when the initial level of bail-out required for the Irish Banks was deliberately stated at only a fraction of what it was known it was going to be, as was described in a series of posts on the Irish Marxism blog.
But, its not just the state that is going to be engaged in this huge borrowing. As the City-AM report indicates, manufacturing firms are already known to need to raise billions in working-capital. The larger firms can raise money by issuing bonds, or additional shares. Some have already done so, reversing a trend over the last 20 years, during which the buy back of shares, to inflate their prices, was much more prevalent than new share issues. The issuing of new shares and bonds, of itself, reduces their price, as supply rises relative to demand. The ending of large scale share buybacks, has the same effect, by reducing demand for shares. That puts pressure on asset prices, at a time when the state is in no position to bail them out. Central banks continue to print money tokens, but now that is going to finance additional consumption, which is causing global inflation to rise, and leading to an even greater demand for working-capital, as firms face higher costs due to that inflation. As I wrote recently, in the last six months, prices of primary products have risen by around 50%, and all of this additional borrowing, along with rising inflation is causing global interest rates to rise.
The US 10 Year Treasury Yield has quadrupled in the last six months; the 10 Year UK Gilt Yield has risen by around 9 times. But, this is just the start. So far, many households have been cushioned. Furlough payments, at a time when large areas of consumption have been prevented, means that many households have been able to pay down some of their most expensive debt, for example, credit card debt. In reality, the debt hasn't gone away, its just been transferred to the state, reversing what has happened previously when the state reduced its debt by transferring it to households. But, when the lockouts end, and people are able to consume as they please, there seems little doubt that consumption is going to splurge. Its already been seen whenever lockouts have been eased. No longer in receipt of furlough payments, people will again resort to credit cards to fund much of that increased consumption, so that debt will again rise sharply.
Many small firms no longer in receipt of state support will go bust, or lay off workers. Other firms seeing a sharp rise in demand will need to take on additional workers. Both in different ways leading to increased borrowing, the first to cover a loss of income, the second to finance additional productive investment. So, the sharp rise in global interest rates seen over the last six months is going to continue and to intensify. A bear market is said to exist when the price of a class of asset falls by at least 20%. That is already the case with global bonds, as Ray Dalio at the world's largest hedge fund, Bridgewater Associates has pointed out.
Of course, you can see why some people would buy government bonds. On the one hand, central banks, for the last 30 years have underpinned their price, making them a one-way bet, which is why we do have negative yields on them. But, look at some of the alternatives available to most people. If you have even just several thousand pounds of savings, you can't put it all into buying baked beans, to hedge against the inevitable rise in inflation that has started, and that further central bank printing of money tokens will lead to. You could buy gold, but you have to store it, and a large part of the gold price already contains an element of speculative price, though, as I wrote at Christmas, I expect the coming inflation and money flowing out of other speculative assets to raise the price to around $3,000 an ounce. You could buy a house, but house prices are themselves astronomically inflated, as a result of state sponsored speculation over the last thirty years. By all historic metrics, house prices, in Britain, are about four times what they should be meaning that, sooner or later, either by a big crash, a slow deflation relative to other prices, or a combination of the two, they will fall by around 80%, as part of a process of mean reversion. Do you really want to spend £200,000 on a house at this moment, and see it fall in price to only £40,000, and not recover in your lifetime, whilst you are left with the mortgage debt and ever rising interest on it?
Or take the returns that you can get on savings deposits. Most banks and building societies pay you essentially nothing on your savings. The state's savings bank, National Savings and Investments is no better. It has sequentially reduced its interest rates to savers over the last year, even though, for the last six months, global interest rates have been rising. The yield on the US Ten Year is already at 1.7%, and seems likely to go above 2% in the next couple of weeks. That looks great compared to 0.001% on some of these other savings. Of course, if you buy a US 10 Year, and see yields rising fast, you might want to sell it, to move your money elsewhere. But, then the rising yields are the other side to falling bond prices, so that, to get your money out, means taking a large capital loss, which is Dalio's point. Its why the smart money is already getting out of those bonds before the deluge. You could get the face value of the bond back by holding it to maturity, but that means ten years, and who knows what conditions might exist then.
One answer is to buy 2 Year Bonds, so that you don't have your money tied up for so long, but the problem here is that with global inflation rising sharply, and set to rise even faster as economies come out of lockouts, and central banks continue to flood them with funny money, the real value of the money you get back will have been depreciated. The inflation adjusted return will be much less, and potentially zero. Even with just 5-10% inflation, you end up with a negative total return. That's one reason that there has been a big rise in demand for inflation protected bonds or TIPS.
For the majority of people, however, what all this means is that there are no good options. The best option for most people is probably if you have cash hold on to it, because although you will get little in interest on it, that is going to change, and at least with cash, unless we get hyperinflation in the very near future, you will not suffer the kind of dramatic capital loss that is coming the way of people with money in shares, bonds, houses and other such speculative assets. After all, if an increasing number of people who are in a position to do so, move their savings out of bank deposits, out of NS&I, and so on, to buy inflation protected bonds, the banks and the state, as they are faced with rising demand for borrowing, will need to start raising their own deposit rates too.
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