There is a difference between the financial crashes of 1847, 2000 and 2008 with those of 1929, and 1987. The first three occurred at a time, when a new long wave upswing had just started, the last two when that upswing had passed through the crisis phase, and entered the stagnation phase. Another distinction could be made with the financial crises of 1857 and 1962, when the long wave cycle moves from the initial prosperity stage to that of the boom phase.
Looking at Marx's analysis of the interest rate cycle, and its connection to the economic cycle, described above, interest rates are lowest in the period of stagnation, when the rate of profit is high, and when that results in realised money profits running ahead of the demand for money-capital for accumulation. Accumulation takes the form of intensive accumulation, as new technologies lead to one machine replacing several older machines, and that same technological development also reduces the value of constant capital, including a huge moral depreciation of the fixed capital stock. The low interest rates cause the capitalised value of revenue producing assets to rise, and this is also in part a cause of increased gambling and speculation in such assets. It means that any sudden increase in interest rates, even small increases, during such a period, may cause bubbles to burst. However, as a period of a secular decline in interest rates, any such event tends to be temporary, and asset prices rise again, as the fall in interest rates continues.
So, for example, the period after 1914, was a crisis phase of the long wave cycle, manifest in WWI, and the subsequent social revolutions across Europe, and Asia. As it continues into the 1920's, and the new technologies developed, begin to be introduced, labour is set on the back foot, as relative surplus populations are created. European revolutions are defeated or turned back; the British General Strike is defeated, and large scale closures and unemployment accompany wage cuts, and extension of working hours; the USSR is isolated, and its revolution rapidly degenerates; the Chinese Revolution is defeated/sabotaged; fascism spreads across Europe to smash labour movements. The US was somewhat out of synch with these global developments, and its adoption on a large scale of all of these new technologies – Fordism/Taylorism – enabled it to continue to expand its economy and sell into the global market at a rapid pace. A combination of increased liquidity, with rising revenues, pumped up its stock market, and speculators from across the globe jumped on board, giving an illusion of affluence, known as The Roaring Twenties. An illusion, because, as outlined above, Europe was already in the grip of crises, and in the US, the affluence was itself, partly, simply a reflection of an asset price bubble.
All such bubbles burst eventually, simply on the basis that they reach a point where there are no bigger fools left prepared to buy at the massively inflated prices. That was what happened with Tulipmania, for example. But, the bursting of such bubbles is often provoked by a rise in interest rates. The Wall Street Crash was such an event. It represents a situation in which a huge financial bubble had been created on the back of a sea of liquidity. The bubble bursts, and it takes until the 1950's, until the Dow Jones regains its pre-crash level, in real terms, but, during that intervening 25 year period, it does rise. Why? Because during the years of Depression/stagnation of the 1930's, the conditions described above apply. It is a period of intensive accumulation of capital, of net product rising faster than gross product, of the rate of profit rising, and the rate of interest falling.
For the US, the Wall Street Crash has similarities with the financial crash of 1857. In general, 1857 is more like the crash of 1962. That is to say, it comes during a period when the prosperity phase gives way to the boom phase, when interest rates rise, rather than the stagnation phase, when they progressively fall. But, the 1857 crash was sparked by the end of the Crimean War, which had provided the US with large markets for the export of food and agricultural supplies. When it ended, a number of US financial institutions that had become over-extended on the back of the revenues from that, began to fail. In Britain, it was again sparked by a credit crunch inflicted by the 1844 Bank Act, which again had to be suspended. But, again, once that credit crunch was ended, the economic boom itself continued, until a new crisis phase began in the 1860's. In 1929, the Wall Street Crash is, in part, the inevitable bursting of a financial bubble as the supply of bigger fools runs out, but also a consequence of the fact that European economies begin to implement protective measures that impact US exports and trade.
Similarly, 1987 was at the start of the stagnation phase that ran until 1999. The bubble in asset prices blew up quickly on the back of increased liquidity, falling interest rates, a rising rate of profit, and the encouragement of financial gambling resulting from the Financial Big Bang of 1986. The twin deficits crisis of the US, led to a spike in interest rates, which sparked the stock market crash. But, the nature of this crisis, can be seen by the fact that, once the central bank had pumped liquidity into the system, the fall in asset prices was brought to a halt, and a year later, asset prices had risen by 50%. This is the difference between an asset price bubble that bursts during, and particularly close to the start of, a stagnation phase, when interest rates begin a long secular decline, and the rate of profit rises, as against, an asset price bubble that bursts near to the start of a period of prosperity, when no such further decline in interest rates is in prospect, or when the period of prosperity transitions to the period of boom, when interest rates begin to rise.
Over Christmas and New Year in 1999/2000, I was on holiday in Gran Canaria, and remember watching on CNBC as excitement built as the NASDAQ rose towards, and then blew through the 5,000 level for the first time. There was as much excitement over that as the fireworks that marked the New Year, which we watched from the top of the hill where our apartments were situated. But, as soon as attempts were made to draw back in some of that liquidity, the speculators rebelled again. The difference between 1987 and 2000, was that 1987 marked the start of a stagnation phase of the long wave, whereas a new upswing had started in 1999. It was marked by rapidly rising primary product prices, including a ten-fold rise in the price of oil. As Marx describes, such a period, when the rate of profit remains high, but when rapidly increasing economic activity means a sharply rising mass of profit, together with the capacity for firms to increase commercial credit, so as not to increase the demand for money-capital, does not require any rise in the rate of interest. But, nor does it facilitate any further falls in interest rates.
Moreover, the continued use of money printing, and liquidity injections in the period after 1987, meant that asset prices had been continually inflated over and above anything that a normal cyclical fall in interest rates would have brought about. That meant also a growing gap between real market rates of interest as against the policy rates of central banks, and the yields on financial assets, as described previously. As Marx puts it,
“For instance, if we wish to compare the English interest rate with the Indian, we should not take the interest rate of the Bank of England, but rather, e.g., that charged by lenders of small machinery to small producers in domestic industry.” (Capital III, Chapter 36, p 597)
One way in which that is manifest is that for many smaller companies access to money-capital became almost impossible. Banks diverted nearly all of their loans to financing property speculation, either in the construction of property, or else the purchase of increasingly expensive property in the expectation of capital gains. Small firms were led to borrow expensively, by using personal credit cards, and so on, or via the growing sector of peer-to-peer lenders that charged around 10% p.a. For consumers, the divergence was even more stark other than, again, for loans to buy property. To buy property, 125% mortgages were available, but to cover other borrowing, unapproved overdraft charges were even more exorbitant than the 4000% p.a. interest charged by payday lenders. Credit cards charged 30% p.a., and a whole host of other high cost credit providers sprang up in a range of different forms.
In March 2000, the NASDAQ crashed, falling by 75%, and it took other stock markets down with it. The Sunday Times, analysing the crash, talked about it requiring 20 years for stock markets to regain the levels they had reached prior to the crash. For anyone that had studied the 1929 crash, that seemed very likely, especially as, now, we were in a period of rapid economic growth in which interest rates were likely to be rising. And that economic growth did continue despite the stock market crash, for the reasons Marx described. Much as the crash in railway shares, in 1847, didn't stop the rapid and continued expansion of railways, the crash in technology stocks did not stop the rapid and continued expansion of technology and technology companies. And along with it, trade and economic growth continued apace compared to the previous period.
The extent of the new upswing, starting from 1999, can be seen in the change in the figures for world trade. Between 1980 and 1990 global trade rose from around $4,000 billion to around $6,000 billion, remaining flat until around 1994 (i.e. 50% rise in 14 years). Between 1994 and 2000 it rose from around $6,000 billion to $12,000 billion (i.e. 100% rise in 6 years). But, the sharpest rise was most notably between 2002 to 2007 where it rose from around $12,000 billion to around $28,000 billion (133% rise in just 5 years!). (Source: WTO Thomson Datastream) In 2007, Bridgewater Associates, in its comprehensive survey, found that for the first time since 1969, not one single economy in the world was in recession. It was not just the BRIC economies that were experiencing rapid growth like China's growth of around 10-12%. On the back of its demand for food and raw materials, economies in Latin America were growing rapidly, and for the first time economies in Africa and Central Asia were beginning to grow rapidly too. Azerbaijan grew at around 26% as did Angola, whereas Mauritania grew at around 18%. According to the ILO, the world labour force grew by around a third in the first ten years of this century. The number of workers employed in industry rose by around 30% or about 150 million workers, the number employed in services rose by 35%.
In Britain, there were labour shortages in a range of trades. Britain took in more than 2 million workers, from the EU, during the period, to fill these shortages, whilst its unemployment rate continued to fall. A similar picture could be painted for other major economies. It created the conditions for interest rates to rise, and so for asset prices to fall, but that was something that the state and central banks could not allow, because the wealth of the ruling class, of the top 0.01%, now takes the form exclusively of those assets, of fictitious-capital. It created the conditions both for the financial meltdown of 2008, and for its aftermath.
I will examine that in Part 7
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