Someone asked me, recently, on another blog, when asset prices would crash, and by how much? My answer was the same as it has always been. Its impossible to say, because asset markets operate on the basis of completely different laws from the real economy; if I knew the answer to the question of exactly when asset markets would crash/rise, and by how much, I would already be a billionaire, and probably would not be sharing that information with anyone!
Back in July 2008, I predicted that the global financial meltdown was about to occur, and its likely severity. Sure enough, the crisis erupted, on schedule, and to the predicted severity, within just a few weeks. But, from what has been seen since, its at least possible that it would not have done. Had the Federal Reserve acted to bail out Lehman Brothers, in the same way that, after 2008, other big banks have been bailed out by the state, its possible that the actual collapse, or its severity, might have been delayed. But, it would only have been a matter of a delay, rather than averting the crisis, or removing the conditions that inevitably mean that such financial crises will occur.
It is a point I made in my book, Marx and Engels Theories of Crisis: Understanding The Coming Storm.
But, that has been true for as long as those central banks had once again inflated those asset prices, and so recreated the bubble conditions in which such a crash became inevitable. Yet, during that period, since the start of 2013, when the Dow Jones, regained the 14,000 level, although there have been repeated corrections, and even a technical bear market in 2018, when markets fell by 20%, the central banks, combined with the actions of governments, in imposing austerity, whilst actively encouraging gambling on asset price inflation, have been able to continually bail-out, and boost those asset prices, even though it has meant deliberately undermining the real economy to do so. In Capital III, Chapter 23, Marx says, the money owning capitalist,
“has the choice of making use of his capital by lending it out as interest-bearing capital, or of expanding its value on his own by using it as productive capital, regardless of whether it exists as money-capital from the very first, or whether it still has to be converted into money-capital. But to apply it to the total capital of society, as some vulgar economists do, and to go so far as to define it as the cause of profit, is, of course, preposterous. The idea of converting all the capital into money-capital, without there being people who buy and put to use means of production, which make up the total capital outside of a relatively small portion of it existing in money, is, of course, sheer nonsense. It would be still more absurd to presume that capital would yield interest on the basis of capitalist production without performing any productive function, i.e., without creating surplus-value, of which interest is just a part; that the capitalist mode of production would run its course without capitalist production. If an untowardly large section of capitalists were to convert their capital into money-capital, the result would be a frightful depreciation of money-capital and a frightful fall in the rate of interest; many would at once face the impossibility of living on their interest, and would hence be compelled to reconvert into industrial capitalists.”
Yet, something like that is precisely what was seen, both in the 20 years up to 2008, and in the 13 years since then. On the one hand, the money-capital has certainly suffered a “frightful depreciation”, as witnessed by the reduction in the amount of assets it now buys, or put another way, in the hyper-inflation of those assets that has taken place, and by its reductio ad absurdum, in the form of negative yields on trillions of dollars worth of those assets across the globe. For millions of small savers, and those dependent on fixed incomes from those assets, negative yields, and near zero interest rates, do indeed, mean they “face the impossibility of living on their interest”, but, rather than being compelled to “reconvert into industrial capitalists” they have been further encouraged to gamble to an even greater extent. Marx's wholly rational conclusion failed to take account of the extent to which central banks, and the state would resort to measures that appear wholly irrational, simply to keep those asset prices inflated. It also failed to take into account that executives, acting in the interests of shareholders rather than companies, would also act to use profits to boost dividends beyond reasonable levels, would issue bonds so as to buy back shares, to boost share prices, and so act to undermine real capital so as to inflate the price of fictitious capital.
Marx made the wholly rational assumption that the owners of these assets were dependent upon the revenues produced by them, i.e. interest/dividends on bonds/shares, rent on property. The narrative of financial pundits, today, continues to make this assumption of a “search for yield”. Marx was aware that, it was also possible to obtain wealth, as opposed to income from capital gains, and that wealth can always be converted to income, by converting capital to revenue. But, he also knew that such activity, unless it is based upon a release of capital generated by increases in social productivity, always amounts to the same thing as a farmer consuming their own seed-corn, of capital destruction, and asset stripping.
A farmer, who has 100 kilos of grain in the form of seed, uses the seed to produce more grain during the year. At the end of the year, out of their production of, say, 1000 kilos of grain, they must set aside this 100 kilos to replace the seed, in order to produce again the following year. If, as a result of higher social productivity, their output rises to 2000 kilos, the 100 kilos required as seed, now constitutes only 5%, rather than 10% of their output. It is as though they have had capital released, equal to 100 kilos of grain, which can now be used for additional consumption, or accumulation. (See Theories of Surplus Value, Chapter 22) However, if there is no increase in productivity, but the farmer decides to consume an additional 100 kilos of grain, they can only do this by consuming that grain that constitutes their seed corn. It would mean that, in the following year, they had no seed, and so no possibility of production.
Marx makes the same comment in relation to financial assets. If I have savings of £1 million, and the rate of interest is 5%, I have a revenue of £50,000 a year. If I live on this revenue, then my wealth remains at £1 million, and each year, it will continue to provide the revenue of £50,000. However, if I increase my consumption to £100,000 a year, I can only do this by converting some of my wealth/capital into revenue, in the same way as the farmer consuming their seed corn. But, if I consume £50,000 of my saving, as well as the £50,000 of interest, then, the next year, my interest itself will be reduced. I will obtain only £47,500 in interest, and so, if my consumption remains at £100,000, I will now have to consume £52,500 of my savings, in addition. So, now my capital has been reduced further, and my revenues will fall further still, and so on. Of course, if interest rates fall to 4%, then, as Marx says, if I require £50,000 of revenue to live off in a year, I will be £10,000 short, so that I would similarly, have to consume £10,000 of my capital each year.
At base, this is what has happened with pension funds, creating the black holes. Money-capital became “frightfully depreciated”, because more and more of it went into the purchase of financial assets, such as bonds and shares, which are simply debt instruments, certificates of money lent by the owners of money-capital, and so continually pushed up the prices of those assets. The process was encouraged and accelerated by the process of QE, as central banks printed money tokens, and used them to also buy these assets, so stoking an asset price inflation that meant that anyone who did not want to see their wealth diminished relative to these assets, had themselves also to get on that particular gravy train. The clear manifestation of that was then that, every £100 of pension contributions of workers and their employers, became increasingly worthless, relative to the assets those contributions had to purchase, so as to provide a pension income. In 1980, the Dow Jones Index stood at 800, today it stands at over 34,000. That is an increase of more than 40 times or 4,000%. Put another way a £100 pension contribution today, buys just a 40th of the bonds and shares the same £100 bought back in 1980. Neither wages, not pension contributions have increased 40 fold since 1980 to compensate, which is why this hyperinflation of asset prices has made workers' pensions increasingly unaffordable. Something similar can be said about the astronomical inflation of property prices.
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