When Will Asset prices Crash? - Part 7

Even after the financial meltdown of 2008 caused western economies to freeze, the economy in China continued to grow at around 8-10%, and many of the other BRIC economies, as well as the economies in Latin America, Africa, and Central Asia, providing them with foodstuffs and raw materials, continued to grow strongly too. Those economies that adopted Keynesian stimulus measures quickly recovered from the financial meltdown, as the banks were nationalised, and liquidity put into the system. The US, at one point, was growing at an annualised rate of 5%. It was still growing at around 2% p.a., prior to the lockouts and lock downs, and its growth rate since has rocketed, now forecast for 2021 at around 6.5%.

The UK was growing at around 2.5% p.a. before the Liberal-Tories crashed the economy with their Austerian economic madness, in 2010. In fact, in the quarter before the Liberal-Tories took over in 2010, it was growing at 1%, quarter on quarter, or 4% p.a. if projected forward. Even with the Eurozone Debt Crisis, the Eurozone, and the EU, as a whole, largely did not fall back into recession. Some of its economies grew rapidly. Germany was growing at around 3% p.a., whilst Sweden was growing even faster. World GDP rose from around $41 trillion in 2000, to around $70 trillion in 2011. The leading economies in Africa, which had been growing at around 10% p.a. since 2000, continued to grow at that rate after 2008, making them the fastest growing economies since 2000.

But, it was precisely that growth that was the problem, and the basis of the financial meltdown, and that necessitated the policies of austerity, alongside QE that followed, in 2010, the stabilisation of the global system. The same can be seen today. The central bankers, and financial pundits continue to promote the idea that QE is required to stimulate the real economy, whereas its purpose is to reflate asset prices, whilst diverting money and money-capital away from the real economy into such guaranteed speculation on asset prices. If the purpose were actually to stimulate the real economy, then, why, after 2010, impose stringent measures of fiscal austerity?

QE clearly did not act to stimulate economic activity in the real economy, or even to promote inflation of commodity prices, in a generally deflationary environment, as large rises in productivity had massively reduced the unit value of commodities. Instead, QE by massively inflating asset prices, diverted money from the real economy, and into financial speculation. In doing so it was deflationary, rather than inflationary, in respect of those commodity prices. If it had any economic stimulatory effect it was that, as asset price inflation enabled greater levels of borrowing, and conversion of capital gains into revenues, it fuelled increased consumption of commodities that were now being increasingly produced in newly industrialising economies such as China, Vietnam, Brazil, and increasingly African economies, where, rising demand for commodities translated more readily into real capital accumulation, as capital in these places filled the gaps that capitals in developed economies were failing to respond to, as they focused instead on inflating share prices, and handing money to shareholders. The more the developed economies consumed their seed corn, by converting paper capital gains into revenues, and borrowed against it, the more they became indebted to those newly industrialising economies, like China, who now not only produced the commodities sold to them, but also loaned the money to them for them to continue consuming.

Today, financial pundits point to rising economic activity and profits as the basis for potentially rising stock markets. Undoubtedly, as speculators see inflation eroding the real value of bonds, and see rising masses of money profits, they will be attracted towards stocks as against bonds and other assets. However, a rising mass of profit, is not the same as a rising rate of profit, or potential for rising dividend yields. If increased economic activity sees the mass of profits double, but to get those profits turnover has to treble, meaning proportionally more capital is laid-out, then the rate of profit will fall. If with a fall in the rate of profit, but an increased demand for money-capital to fund the expansion, interest rates rise, then the capitalised value of revenue producing assets will fall. Instead of stock markets rising on the back of increased profits, they would inevitably fall.

That was the position that arose prior to 2007/8, and which sparked the financial meltdown. The fact that the policy of QE, and of repeated liquidity injections, after 1987, had pushed up asset prices to astronomical and unsustainable levels, and had, thereby, depressed yields on those assets to even more unsustainable levels, meant that even the tiniest absolute rise in interest rates, pushing through into yields, represented a huge relative increase, bringing with it an equally large fall in capitalised asset prices. The fact that it manifested itself, first, in a fall in property prices, and then via the sub-prime mortgages into the banking system, was merely the differentia specifica of this particular financial crisis.

What followed, was determined by that. The first thing that had to be done, in conditions where even bourgeois economists, and economic commentators were rushing to read and quote Marx, and where a general panic gripped the ranks of the ruling class, was to stabilise the system. As Samuel Brittain wrote, “We are all Keynesians now.” But, of course, that did not last long. With the system stabilised, and, as described above, growing fairly robustly again, attention turned to addressing what had caused the crash in the first place. That did not mean the over-inflated asset prices, or the fact that the global economy was now run in the interests of a tiny group of money-lenders and speculators, owners of fictitious-capital, rather than even by a small group of industrial capitalists, but rather the opposite. It meant dealing with the fact that, despite all of that, the economic growth had started to cause both wages and interest rates to rise, with a consequent squeeze on profits, and a fall in the capitalised value of assets - the main, if not the only, consideration of the ruling class and its state.

A look at the comparative charts for the US, UK, and EU after 2008 illustrates the point. The US, even under Bush, had begun a huge fiscal expansion, and Obama continued it, although, increasingly, the Republicans tried to thwart his fiscal stimuli, both in Congress, and in state legislatures. The better growth of the US, shows that, in terms of economic policy, aimed at the health of the economy itself, and accumulation of real capital, that was the appropriate response, compared to the fiscal austerity imposed in Britain and the EU, which quickly brought the economic recovery to a halt, and introduced a period of slow growth, if not stagnation. But, that was its intention!

The US, given its size and global power, much like it did in the 1960's, was able to plough its own furrow and expand its economy, throwing some of the consequences on to other countries. It offset the effects of the economic expansion on interest rates, and, thereby, asset prices by engaging in an even larger experiment in money printing, under its new Fed Chairman, Ben Bernanke, a student of the 1930's Depression, and who earned the name “Helicopter Ben”, because of his comment that the Federal Reserve can always inflate prices, because it can, if need be, simply print billions of Dollar bills, and throw them into the hands of citizens, out of helicopters. In fact, during the lockouts and lock downs, central banks and states have done, more or less precisely that, but by the much easier method simply sending cheques out to citizens through the post, and depositing money directly into their accounts.

As described earlier, the interest rate cycle follows the path of the long wave cycle. Interest rates are lowest during the stagnation phase (1987-99), as the rate of profit rises, and there is intensive accumulation meaning the supply of money-capital exceeds the demand for accumulation; they remain low in the prosperity phase (1999-), because the increased accumulation does not exceed the increased supply, and commercial credit expands to meet the requirements for working-capital, reducing the need for cash or bank credit; rates rise when the boom phase takes over, and the demand for money-capital to finance increased accumulation meets squeezed profits, reducing relatively, the supply of money-capital from realised profits; it reaches its height when the squeeze on profits reaches a point at which capital is overproduced.

The prosperity phase of the long wave cycle, should have ended some time between 2012, and 2015, given the average duration of the long wave, and its phases. However, the 2008 financial meltdown, and more specifically, the response to it, by the state and central banks, meant that the processes of the cycle were placed in hibernation. From 2010, instead of the pace of economic expansion rising, which would normally be the case at that point of the cycle, economies across the globe, most notably in Europe, were subjected to harsh measures of fiscal austerity, even before they had recovered from the economic shock imposed by the financial meltdown. As asset prices, particularly property prices, had crashed, the state stepped in to bail-out banks and their shareholders and bondholders. To cover this state spending to bail out financial speculators, state budgets were slashed in Ireland, Spain, Portugal, Greece and so on. The liberal-Tory government, in the UK, also imposed harsh austerity that sent the rapidly growing UK economy back into recession, and stagnation.

Alongside, this austerity, used to slow economic growth, central banks continued to increase their programmes of QE, long after the credit crunch and collapse in asset prices had ended. The consequence of that was inevitable. Austerity slowed economic growth, and, thereby, the demand for labour and money-capital, so any squeeze on profits, and rise in interest rates that would be typical of that phase of the cycle was prevented. Increased money printing now, meant that asset prices inevitably began to rise again, and that meant that speculation in assets, underpinned by central banks, was again preferable to investing in the real economy. The Dow Jones, which had fallen to 6,500 in 2009, from its 2007 high of 14,000, rose again on the back of all this money printing. By 2013, it had already surpassed its 2007 peak. By the end of the decade, it had risen to 28,500, a rise of 174%. Since then, it has risen further still, now up to more than 34,000.

All of this can be attributed to the hibernation of the long wave cycle since 2010, as a result of the exceptional and extraordinary measures undertaken by states and central banks during that period. I will examine that further in Part 8.

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Forward To Part 8