When Will Asset Prices Crash? - Part 10

What do we see today? Well, since 2010, each time that central banks have sought to raise policy rates, or have sought to withdraw from their policies of QE, the owners of bonds have inevitably started to panic, for the reasons described above. On the first occasion, it was called a “taper tantrum”, when the Federal Reserve announced that it was even just reducing the amount of QE, not even reversing it. This puts central banks in a difficult position. They need to continually inject liquidity to inflate asset prices, but, if the economy begins to expand at a faster pace, especially in conditions where the productivity gains from the technologies developed during the last Innovation Cycle, are waning, and so where extensive accumulation is replacing intensive accumulation – and that is more notable in economies that are now 80% service based rather than manufacturing based – this results in the demand for labour rising faster than supply, and, particularly in specific sectors, that means rising wages. An increased quantity of labour employed, and higher wages means a larger amount of demand for wage goods, and that was seen particularly in the period before 2007.

Competition means that capitals have to respond to this increase in demand, for fear of losing market share. If large capitals do not do that, then the plethora of small capitals will do so, and largely they will have to do that by borrowing of some kind, rather than from retained profits. In a globalised world, failure to respond to increased demand, means that some other producer, even more than before, will eat your lunch. The only way that states and central banks can counter that is by deliberate attempts to slow economic growth. If growth is restricted to only what can be accommodated by productivity growth, and normal expansion of the workforce, then the pressure on wages is constrained. Even then, simple expansion of the workforce still results in increased volumes of wages, and demand for wage goods. Fiscal austerity, within economies, can act to constrain growth, but global competition between economies, means that developing economies can simply fill the gap. That requires constraints on trade, such as Trump's trade war.

It shows the height of the contradiction of capitalism in its current stage, as the interests of fictitious capital contradict those of real capital, in the short-term, and so the state, which should act in the interest of that real capital, which is the basis of the future of the state itself, and also the long-term interests of the owners of fictitious capital, is, instead, led to hamper the development of the real capital, in the short-term interests of the owners of fictitious capital! But, no state, no politician, could openly declare that they were doing so. Who could stand up and say, we are deliberately holding back the economy, so that interest rates can be contained, and the top 0.01% can, thereby, continue to see their grotesque levels of paper wealth protected and expanded! Yet, that is what they have done by their policy of fiscal austerity combined with money printing to buy paper assets.

Ultimately, it is unsustainable, as all those subterranean processes continue to expand economic activity, even at a slow pace, in the developed economies. The fact that it becomes extensive rather than intensive accumulation, begins to shift the balance to increased wage share, as the demand for labour rises faster than the supply. Wages rise further, demand for wage goods and services rises faster, and domestic producers either accumulate capital to meet it, or else foreign producers, increasingly in developing economies, will. Revenues, including taxes rise, government transfers for benefits fall, and when that reaches the stage of governments running budget surpluses, the basis of fiscal austerity is completely undermined. They are pressed either to cut taxes, or increase spending, both of which lead to an increase in aggregate demand, a further stimulus to economic activity, requirement for capital accumulation, higher wages, and squeezed profits leading to increased borrowing, higher interest rates and falling asset prices.

In 2014, the vast investments, after 1999, in new sources of primary products led to a massive increase in the supply of such products. The existing shortfalls of supply against rising demand were reversed, and, as this new supply was coming from virgin sites, using the latest technologies, and, now, in the context of expanding new infrastructure, to ensure distribution to world markets, the value of these new supplies acted to reduce the market values of all these primary products, be they oil and minerals, or food and agricultural products. Global prices for these primary products crashed in 2014, now also, thereby, creating a powerful deflationary force on commodity prices. But, it also gave an impetus for demand, as these lower input costs created a release of capital, and rise in the rate of profit.

By 2018, the subterranean forces in the global economy were again pushing their way through, and economic growth was again rising. The US Federal Reserve and other central banks were again led to start tapering their QE programmes and even raise policy rates. The US financial markets dropped 20%, and, as usual, it spread into global financial markets. In the same year, Trump began his global trade war in earnest, imposing restrictions on China and the EU. Concern that Britain was going to be pushed in the direction of a crash out Brexit also began to emerge, which, together with slower global growth, resulting from Trump's trade war, was enough to slow growth in Europe, the world's largest economy.

It was enough for the US to stop its QE taper, and to again reduce its policy rates. Financial markets promptly resumed their upward spiral. But, rather than reversing the increasing global growth, all that happened was that it began to flow into different channels. China, as the third largest economy, behind the EU and US, but the one growing fastest, played a decisive role in that, because of the new trade deals it was developing with economies in the rest of Asia, in Latin America, in Central and Eastern Europe, and increasingly in Africa. As 2019 proceeded, these new channels of trade and economic development were again beginning to make themselves felt, only to be choked off by the government imposed lock downs and lockouts introduced, supposedly, in response to COVID.

I have never suggested that the strategy of lock downs was a deliberate conspiracy to hold back economic growth, so that wages and interest rates could be contained, and, thereby, asset prices inflated once more. What, however, cannot be denied is that that is what the effect of those strategies has been. The strategy of lock down of entire populations – which was never achievable or achieved in practice – was, from the start, a ludicrous one, as a means of responding to a COVID pandemic, which only ever posed a serious risk to around 20% of the population, a cohort who were well defined, and easily able to be isolated. Government scientists, themselves, initially argued against such a course of action, and proposed the development of natural herd immunity amongst the 80% of the population who were not at serious risk from it, until such time as safe vaccines for all could be developed. But, that was quickly drowned out, and, within weeks, the scientists were falling into line with the blanket lock down narrative.

What it did do was to quickly send economies into the worst economic slow down seen in 300 years. At the start of 2020, as COVID was pronounced to be an existential threat to societies – which it never was, even compared to past flu pandemics such as 1968, 1957, and 1918 – financial markets at first sold off heavily. But, within weeks, as lock downs were introduced, and economies put in the deep freeze, the old mantra that what is bad news for the economy is goods news for financial markets asserted itself with a vengeance, again. With central banks then, again, taking the opportunity to engage in QE on an even grander scale, and with official interest rates cut to zero and beyond, asset prices again headed for the stars.

But, as I suggested recently, that has only stoked an even bigger contradiction, which will be resolved by an even bigger crash. QE only worked to inflate asset prices, but not commodity prices, so long as economic growth could be suppressed, so that wages did not squeeze profits, and demand for money-capital did not exceed supply causing interest rates to rise. It meant the increased liquidity all flowed into speculation. Well, lock downs certainly led to economic activity, in terms of GDP, being seriously curtailed, as it meant that the amount of new labour undertaken, and so new value created, was reduced by around 30%. However, whilst that meant that the amount of new value was curtailed, along with the consequent supply of goods and services, governments were led to have to compensate all of those they had prevented from working by making transfer payments to individuals and businesses. They paid for it by an astronomical increase in borrowing, and central banks largely monetised the borrowing by printing even more money tokens to buy up the new government debt.

However, that is a complete reversal of what happened with QE used to inflate asset prices. That depended on the supply of new debt not increasing at a rapid pace, whilst the demand for all the existing debt was continually increased. If, in the past, governments had continued to issue debt in order to spend it on roads, schools, hospitals and so on (the proposal of MMT), and central banks had printed money tokens to buy it up, then a) the increased supply of debt would have caused the price of that debt, i.e government bonds to fall, and QE would only have mitigated it, rather than being able to cause the price of bonds to rise, but, also b), having been gifted all of these newly minted money tokens, the government, as it spent them employing additional workers, buying materials and so on, would have put all of that liquidity into circulation, and the consequence would have been that the money prices of commodities would have risen, inflation.

Its possible that the inflation might have been transitory, provided that it resulted in a stimulus to production, so that the volume of commodities in circulation rose to match the increased nominal value of currency in circulation, but, the result would have been a much faster increase in employment, speeding up the point at which existing labour supplies start to get used up, the production of absolute and relative surplus value starts to slow down, that the rate of profit starts to be squeezed, and yet, where this rapidly rising level of demand forces firms, under pressure of competition, to retain market share, to expand their own production, which they must now finance by a higher level of borrowing. And, the same is true of corporate bonds. Had firms borrowed to actually expand production, then money printing by central banks, feeding into the purchase of those bonds, would have had the same effects as above. Its only because firms issued fewer shares, bought back a lot of those already issued, and, where they issued bonds, did so, not to finance capital accumulation, but to be able to buy back shares, and make transfers to shareholders, who used them to buy even more of the existing shares pushing their prices ever higher, that the result is inflation of asset prices, but not commodity prices.

But, now, as a result of lock downs, we have huge amounts of government borrowing, with large amounts of money tokens printed to cover it, and those money tokens have been simply dropped into the economy, into the bank accounts of consumers. That had several consequences. Firstly, with many of the traditional arenas for spending closed by government diktat, the demand for those goods and services collapsed, and with that the prices of them. As large components of the basket of goods and services used to calculate inflation indices, that had a large artificial impact in suggesting that inflation had fallen. For many everyday items, however, consumers were able to simply shift from going to the supermarket to buying them online, a process that was already underway prior to the lock downs, and which shows that Labour's proposal for subsidising the old brick and mortar retailers, by taxing more heavily the online retailers and tech companies, is a really reactionary proposal. The fact that consumers continued to have currency to spend, whilst lock-outs were curtailing production and supply, was the real reason why, at the start of the lock downs, supermarket shelves began to empty. Its also why an existing shortage of truck drivers before the lock downs became exacerbated, particularly in Britain, where Brexit has massively intensified all of these frictions.

Secondly, with large areas of discretionary spending no longer available to consumers, the continued flow of income into their bank accounts from furlough payments etc., meant that they could pay down some of their existing debt to pay day lenders, or at least to credit card companies. But, that has simply created a large reservoir of savings and available credit available to consumers to spend, once the restrictions are lifted, what has been termed “revenge spending”. And, indeed, whenever restrictions have been lifted that has been seen. The first time restrictions were lifted, demand from people for the services of hairdressers, for example, rose sharply, and they took advantage to significantly increase their prices.

Back To Part 9

Forward To Part 11