The Spring or Prosperity phase of the fifth long wave cycle, commencing in 1999, should have run to around 2012-15, at which point, the move to the Summer or Boom phase should have been the catalyst for rising interest rates, and consequent crashes in asset prices. The reasons for the 2000 crash have already been described, being typical of those arising at such conjunctures, but with the specific characteristics of all the liquidity injected ahead of the Millennium that pumped up a huge technology bubble. But, what, then was the cause of the 2008 crash, at a time when low interest rates, and rising rates and masses of profits should have underpinned those assets?
The answer is that, for 20 years before 2008, every time asset prices fell, central banks intervened to inject liquidity, and reflate them. They pushed asset prices ever higher, creating a condition of moral hazard, in which everyone was led to believe that buying financial assets and property was a one way bet. The whole economy was structured around the illusion that wealth could be created, not by the production of new value via labour, but simply by a continual inflation of asset prices, and the realisation of capital gains, which amounted to nothing more than the equivalent of a farmer eating a portion of their seed corn. The consequence was that, even as executives of corporations continually raised dividends above what was justified by profits or a competitive market rate of interest, and landlords continually raised rents (supported by ever more astronomical levels of Housing Benefit), they represented ever falling yields, because the prices of the assets rose much faster than the revenues they produced.
The lower such yields fall in absolute terms, the more even the smallest rise represents in relative terms. Not only had yields been driven to very low levels, but, in order to inject liquidity into economies, central banks, in the days before QE, achieved it largely by reducing their own policy rates, the rates at which commercial banks can borrow from them. Those rates became increasingly divorced from the real rates of interest in the economy, as capital began to expand rapidly, as previously described. As inflation also started to rise, itself a function of that liquidity, central banks were led to again try to claw back some of that liquidity, by very minor rises in interest rates, but with rates at such low levels, that still amounted to large proportional rises. The process of capitalisation operates via these proportional changes, not absolute changes, so that a sizeable proportional rise in interest rates, results in a sizeable fall in asset prices. That was the real spark for the crash of 2008.
The real problem faced by the ruling class and its state is multifold. It is not omnipotent, and it faces contradictory objectives. Taking the latter, the problem has already been discussed. In terms of its short-term interests, it is that, having become dependent upon ever rising asset prices, as the source of capital gains that can be realised, as an alternative to increased revenues from surplus value, it is forced to rely on the state to continually inflate those asset prices by QE. But, that also requires that interest rates do not rise. However, interest rates are a function of the demand and supply for money-capital. In a phase of the long wave cycle when that balance shifts towards the demand for money-capital, resulting from expansion, then interest rates will tend to rise, causing asset prices to fall. So, the state must try to hold back economic growth, so as to restrain the demand for money-capital, and so prevent interest rates rising. It has done it by introducing fiscal austerity; it did it by QE itself, and by active measures to promote speculation in property and financial assets, which drain money out of the real economy; it has done it via all of the COVID paranoia that has closed down economies, a policy which was irrational to begin with, but which now appears totally ludicrous in conditions of widespread vaccination of populations.
But, all of these simply create further complications and contradictions. One has already been discussed. The economies of the developed countries have been in relative decline for around 50 years, and some, like Britain, for much longer than that. In other words, these economies continue to grow, but their rates of growth are notably slower than that of a series of developing economies, for example in Asia, Latin America, and now in Africa. The developed economies, of course, still constitute the vast majority of the global economy, and so, when they slow down, it slows down the whole global economy itself, but, within this process, those developing economies are provided with an opening to increase their weight within it. The more the state in developed economies seeks to slow economic growth, and to divert money into gambling on financial and property assets instead, the more developing economies can fill the gap, by becoming the producers of goods and services.
According to UNCTAD, the world economy is set to grow at the fastest pace in more than 50 years.
The same is true within the developed economies themselves. The small capitalists in these economies have been visibly squeezed. From the 1980's, in Britain and the US, in particular, conservative parties, based upon the petty-bourgeoisie, sought to provide support for such social layers. Under Thatcher and Reagan, the size of the petty-bourgeoisie rose notably, supported by measures that withdrew labour rights, and facilitated cheap labour, subsidised by large increases in state support for in-work benefits, which encouraged and subsidised low paying employers, who also, thereby, are low productivity enterprises. But, the large rise in this layer of low productivity producers, also increased competition between them. At the same time, as these conservative governments encouraged financial and property speculation, the availability of loans disappeared for small businesses. Yet, by various means, as economies continued to grow, some of these businesses did manage to expand. They borrowed on credit cards, and the Internet facilitated a whole new sphere of company financing in the form of peer-to-peer lending.
Marx noted that, if interest rates fall to very low levels, their recipients can no longer survive on the interest, and so are led to use their capital productively. It has been described how this is modified, as some of them, instead, rely on realising capital gains, but you still need sizeable capital gains if you are going to live on them. One consequence of that is an encouragement of further gambling via day trading, a feature that has been seen, with the introduction of trading platforms like Robin Hood, and the phenomenon of meme stocks. Many of those that have been drawn into that activity will lose their money, as will those drawn into the Ponzi Scheme of crypto-currencies. It is only the fact that central banks have continued to use QE to inflate asset prices that allows such shams to continue. For many, the only real alternative is to engage in some business that involves the application and accumulation of real capital.
Whilst, the large corporations, enmeshed in the culture of shareholder value and short-termism, have been concerned to use profits to boost dividends, to buy back shares to inflate share prices and earnings per share, and so on, even there its not the case that they have not continued to accumulate capital out of profits. They have simply not done so at the kind of pace that would have been the case had they not been diverting profits into those unproductive activities. And, in some spheres, we have seen that a potential for huge profits still outweighs huge state guaranteed capital gains from gambling. It was a private firm that first decoded the human genome, and opened the door to a multi-trillion dollar set of industries based upon that technology, including the ability, now, to completely change the basis of healthcare. Elon Musk, Jeff Bezos and Richard Branson, have used their own personal fortunes to start space technology companies that now offer up the prospect of space also being the basis of further multi-trillion dollar industries.
In short, the working of the long wave cycle, together with the basic driving force of the capitalist economy and accumulation – competition – means that any attempt to hold back economic growth, as states have tried to do since 2010, will fail, in the long-run, and will only have acted to hibernate the cycle, leading to it waking up, refreshed and ready to rush forward. As it does so, interest rates will rise, and the asset prices that have been even more grotesquely inflated than they were in 2008, will crash. Another example, of the contradictions faced by the state is given with the use of lock downs to hold back economic growth. The result has been merely to restrict supply, whilst demand has simply found alternative channels to flow into. That, together with further money printing to finance income replacement schemes has led to inflation surging. And, as soon as the lock downs are eased, it has seen demand surge even faster, whilst the speed of the increase means that labour shortages have appeared everywhere. In Britain there are currently over 1 million unfilled job vacancies. It means that wages have surged by up to 18%, which will have inevitable second round consequences for inflation that has already seen its biggest rise since 1997.
So what conclusions can be drawn about when exactly all this may cause asset prices to crash? I will look at that in Part 9.
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