Michael Roberts and Inflation - Part 13 of 16

A similar thing could be seen with land and property. All of the additional liquidity resulted in existing property prices being bid up. Higher property prices mean that landlords can charge higher rents, which means that the capitalised value of rent in land prices rises, along with a higher capitalised value due to falling yields themselves. In other words, if money tokens are printed and used to buy bonds, thereby, pushing the price of bonds higher, the yield on bonds falls. Bondholders have an incentive to move out of bonds, and into shares or land, where yields from dividends or rents are higher. As share and land prices are pushed higher, so these yields fall too.

In respect of property, higher property prices means that builders demand land to make surplus profits from these higher prices, but as they demand more land, landowners appropriate the higher surplus profits as rent, which becomes manifest as higher land prices. Now, higher land prices become a cost of production for new property, pushing property prices higher again. The cost of land as a proportion of the cost of a house has risen from around 1% in the post-war period to 50% today.  Large numbers of people cannot then afford to buy a house to live in, and it becomes speculators who buy this property initially to obtain the higher revenues of rent, compared to interest on savings, and, then, in order to benefit from capital gains from continually rising property prices, underpinned by central banks and the state, which also intervenes with measures to stimulate demand, whenever it flags. So, the higher costs of new property reduces the supply of new property – for one thing, there is no point builders producing large amounts of new housing, when the number who can buy at these high prices is falling – whilst the monetary demand for existing property, concentrated in the hands of a few speculators, increases so that property prices continue to be inflated.

Banks and financial institutions, thereby, have a direct incentive, as a result of central bank and state policies, to channel money directly into the purchase of existing financial and property assets continually pushing their prices higher, and creating continual annual capital gains. Company executives are led to do the same, as indeed are retail speculators, who see these capital gains as easy money compared to the risks of actual capital investment, and certainly compared to the negligible yields available on savings deposits. The capital gains then become a source of revenues, as these capital gains can be monetised. Financial advisers call this “taking profits”, whilst in reality its no such thing. In fact, it is the same thing as a farmer eating their own seed corn. Of course, only a portion of the capital gain is converted to revenue, to fund consumption, and for the very big owners of fictitious capital, this proportion, even given their lavish lifestyles, is very small. Where capital gains are converted to revenue, by selling one asset whose price has risen sharply, it also simply means that this revenue can then be used to speculate in some other asset, where the speculator anticipates a larger than average increase in prices.

So, by these means, a huge paper chase of money flowing from one asset class to another in search of these capital gains is established, without any significant proportion of it flowing out into general circulation. This is enhanced by other factors. Firstly, after 1999, the fundamental laws of the long wave did result in a large increase in economic activity, and the result was rising interest rates that led to to the bubble in asset prices crashing in 2008. In the aftermath of 2008, once the system had been stabilised, in 2010, not only did central banks continue this process of pumping liquidity into the purchase of assets to inflate their prices, but states also acted to reduce the potential for a repeat of the conditions that led to rising interest rates. In other words, whilst professing their desire to stimulate economies, they introduced harsh measures of austerity, which necessarily caused economic activity to be constrained, and so reduced the upward pressure on wages and on interest rates that had caused the crash in 2008. The constraints on economic growth caused by austerity, together with the channelling of money into financial and property speculation, in search of capital gains, drained money out of the real economy, and thereby created disinflationary, and even deflationary conditions for commodity prices.

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