Fictitious Capital v Real Capital
What is specific about the role of central banks, particularly over the last 30 years, is not that they have been able to use increases in liquidity to reduce interest rates, below some “natural rate”, but that they have been able to massively inflate asset prices, by printing money tokens, and using them to buy assets, be they commercial and government bonds, mortgage bonds, or in some cases shares. Because the yield on revenue producing assets moves in inverse relation to the price of the asset, the action of central banks to provide this additional demand for these assets, most certainly does, thereby, reduce those yields, compared to what they otherwise would have been. In fact, reducing that yield, which is frequently presented as being a reduction in the rate of interest, which it is not, is not the primary objective of the central bank in undertaking such actions. Its primary objective is to reflate those asset prices following financial crises, and to further inflate them, having done so.
The reason it does that is two-fold. Firstly, these financial assets, what Marx calls fictitious capital, are the form in which the ruling-class now owns all of its wealth. It derives its power from that wealth. It does so not only as a result of its general standing in society, but because, currently, the ownership of fictitious capital, in the form of shares, gives control over real capital. The higher share prices are, the fewer of them workers and the middle class can obtain, via their pension funds, mutual funds and so on. The central bank acts to protect that wealth and power of the ruling class, by inflating these asset prices. It has shown that it is prepared to do that, even at the cost of wrecking the real economy, by the imposition of austerity, and measures to divert money-capital into such speculation, and away from real investment, and to divert money from the real economy, also, into such financial and property speculation.
“The credit system, which has its focus in the so-called national banks and the big money-lenders and usurers surrounding them, constitutes enormous centralisation, and gives to this class of parasites the fabulous power, not only to periodically despoil industrial capitalists, but also to interfere in actual production in a most dangerous manner — and this gang knows nothing about production and has nothing to do with it. The Acts of 1844 and 1845 are proof of the growing power of these bandits, who are augmented by financiers and stock-jobbers.”
(Capital III, Chapter 33)
The second reason the central banks do this is that they have become trapped by their own previous actions. The very act of inflating asset prices acted to reduce yields. At the same time, by diverting potential money-capital from real capital accumulation, it acted to slow economic growth, and the growth of profits that would result from the additional capital. Instead of growing revenues, therefore, at least in relative terms, it created conditions in which a growing dependence upon the realisation of capital gains, became a necessary alternative.
In other words, if we take pension funds as an example, the huge rise in asset prices, meant that the monthly pension contribution of workers and companies, bought less and less shares and bonds, required to produce a revenue stream to cover future pension liabilities. The Dow Jones, today, is 40 times (4000%) higher than it was in 1980, meaning that a $100 pension contribution buys only a 40th of the shares and bonds it did in 1980. Neither wages, nor pension contributions have increased 40 fold since 1980. In the UK, the average wage in 1980 was £6,000, as against £31,000 today, i.e. only a five fold increase, meaning share prices rising 8 times faster.
The same can be seen with the relation of wages to house prices. In fact, the long-run average shown is only over that period, but in 1980, UK house prices had already become inflated, as a result of the Barber Boom in 1970. The actual long-run average is somewhere between 2.5 and 3, and that was where households predominantly had two incomes to pay for it, rather than today where there is a large proportion of single person households. The average wage today of £31,000 on a multiple of 3 would give an average house price of around £90,000 (even based on a two person household), as against the actual average house price of around £270,000, i.e. 3 times the average, requiring a price fall of around 70%!
On its own that would mean that the capital base of such a pension fund would have been undermined to provide the revenue stream to cover future pension liabilities. However, add in the huge fall in yields on the actual assets held in the fund, and the extent of the problem becomes clear. The way around this was to take the paper capital gains on the assets held in the funds, arising from the inflation of asset prices, and to realise those gains, by selling some of the assets, thereby, converting capital into revenue.
But, this simply turns the pension fund into a Bernie Madoff style Ponzi Scheme. The more some of the assets are sold to realise paper capital gains, the more the capital base of the fund is itself undermined. It only continues to be possible to maintain this scam so long as the paper capital gains continue to rise on a larger and larger scale, which requires that the underlying asset prices have to be raised by ever larger amounts.
But its not just pension funds drawn into this Alice in Wonderland scenario. Firms themselves find that they can make more money using realised profits to also engage in such speculation, buying back their own shares, or those of other companies, even borrowing money by issuing bonds to do so. Speculators find that the main reason for buying property is no longer to obtain a revenue from rent, but is to make large capital gains from rising property prices, underwritten by the actions of central banks and governments. As they do so, the astronomical prices of property disenfranchises large sections of the population from owning their own home, forcing them to become tenants, and as property prices rise, so landlords also raise rents, which become only sustainable if the state also steps in to subsidise those rents. In Britain, more than £30 billion a year goes straight into the pockets of landlords via Housing Benefit, an amount that is a direct deduction from the surplus value appropriated by industrial capital.
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