It is because the dominant section of the ruling class, the top 0.01%, nowadays, own their wealth in the form of such fictitious capital, and not as productive wealth, that they have been so concerned to avoid crashes in asset prices, and it is also why central banks, as part of the capitalist state, have been so concerned to ensure that any such falls in those asset prices are prevented, or reversed as quickly as possible, when they happen. They have been prepared to do that even at the cost of destroying real productive capacity, by using monetary policy to encourage money and money-capital to flow into such speculation, rather than into the real economy, either as personal consumption or productive consumption. Its why they introduced measures of harsh austerity alongside the policy of QE.
The potential for further austerity measures had reached its limits, economically and politically, and having imposed lockouts and lockdowns, governments were even forced to have to do the opposite, borrowing huge amounts to cover spending on income replacement schemes, and so on. Lockouts and lockdowns, acted, initially, to restrain demand, and economic activity, as a proxy for renewed austerity, and that, again, combined with even greater amounts of QE, acted to, again, divert money into speculation, driving asset prices, again, to new highs, where, previously, they had begun to look fragile. But, sooner or later, the justification for those lockdowns and lockouts was going to be seen to be fallacious, and that was hastened by the rapid introduction of vaccines, which created large-scale herd immunity and brought the level of serious illness, hospitalisations and deaths down to a small fraction of what it had been.
As soon as governments were, then, forced to begin removing those restrictions, the consequence was inevitable, as consumers who had had most of their incomes protected by government income replacement schemes, started to spend, whilst the supply of commodities available for them to buy had been artificially reduced, as a consequence of those very same government imposed lockouts and lock downs. Huge amounts of inflationary liquidity, fed into a sharp rise in monetary demand, whilst artificially constrained supply was unable to satisfy it, leading to inflationary rises in prices and costs. This illustrates the extent of the contradiction that the ruling class and its state now faces.
With lockdowns, that contradiction is again manifest. Billions spent on vaccines that were supposed to – and do – provide protection, but, which then removes the need for lockdowns, with a consequent upsurge in economic activity, and upward pressure on interest rates, which will cause asset prices to crash. So, states have to continually talk about infection rates, which are meaningless, in order to divert attention from the fact that vaccines and herd immunity has resulted in serious illness, hospitalisation and death, from COVID, more or less disappearing. It necessitates a continual supply of new variants of the virus being identified as justification for further lockdowns despite the success of vaccines, whether or not those new variants represent any additional threat or not. In fact, in all cases, so far, the vaccines have been found to provide more or less the same very high level of protection against serious illness, as they do in respect of the initial variants.
The sharp rise in monetary and physical demand, spurred firms to compete to grab their share of this demand, and additional profits, causing economic activity to spike higher. During the lockouts and lock downs some firms had no earnings, and even had to run down balance sheets, others saw earnings decline significantly. Faced with a need to increase supply, sharply, they had no reserves with which to do so, and, facing rising costs of inputs, including labour costs, they faced a challenge in financing even a resumption of their previous production from internal resources, let alone any expansion.
Fortunately, as Marx describes, when economic activity increases sharply, a lot of the costs of firms are met via commercial credit. Firms buy inputs from their suppliers, on the basis that they do not need to pay for them, for say, 30 days, 60 days, or even 90 days. So economic expansion can occur without any increase in borrowing, or need for increased money supply. With workers paid a month in arrears, this is even true, in respect of labour, especially in respect of many service industries, where the rate of turnover of the capital, is very rapid. It is, also why measures of investment in productive-capital, which only take into account investment in fixed capital, rather than this expansion of circulating capital, are seriously deficient, especially in economies that, today, are 80% based on labour-intensive service industry.
But, it is not true for all such costs. Especially, where firms, faced with labour shortages, and rising wages, seek a solution in labour-saving equipment, they need to borrow to finance the investment. A firm that seeks to occupy new premises, or even just seeks to expand by the process of extensive accumulation, i.e. simply buying more of the existing technology to be operated by additional workers, needs to borrow to do so, and this increased borrowing, an increased demand for money-capital, acts to cause interest rates to rise. That is particularly the case where the supply of new money-capital, from realised profits, begins to be constrained, as a result of wages starting to squeeze profits. Profits grow absolutely, but fall relative to the demand for additional money-capital.
Moreover, its not just business that demands money-capital. The state also demands it. To the extent that the state finances its operations via taxes, those taxes are a drain on surplus value, and so on profits. In a period, where competition drives firms to invest to capture their share of a rapidly rising market, any reduction in profits, due to higher taxes, can only result in firms borrowing more, or throwing less of its realised profits into capital markets. Indeed, to the extent that the government spends more, using those taxes, it acts to stimulate the economy and demand even further, causing firms to need to spend more to grab market share. If the government taxes less, so that firms have more profits available to invest or save, the government itself has to go directly to the capital markets to borrow more to finance its activity. Either way, the demand for money-capital rises, relative to supply, causing interest rates to rise.
That process was already beginning to be seen towards the latter part of last year, even finding its way into a reflection in the highly manipulated government bond markets, as bond yields began to rise by large percentages. On cue, last year, governments re-imposed lockouts and lockdowns, to slow economic activity, and, so, the rise in interest rates. And, now, as those restrictions again were lifted, economic activity rose sharply again, inflation and employment rose sharply, and the impact on interest rates, again, began to take effect. Across the globe, countries have even had to begin to raise their policy interest rates.
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