Across the globe, markets are in full retreat. Bond prices are collapsing by proportions last seen in 2006/7, meaning that yields on those bonds are rising sharply. They are rising most sharply for the shorter duration bonds, meaning that, in a number of cases, now, there is yield inversion, i.e. yields are higher on short dated bonds than for longer dated bonds. Traditionally, this is an indication of a recession a year or so ahead. Today, it isn't. Here's why.
Bond prices and yields are pretty meaningless in a world in which there has been a decade and a half of QE from central banks on an astronomical scale, and in which, for more than a decade before that, central banks were pumping liquidity into financial markets on a huge scale every time asset prices began to fall. Bond prices are a fiction, with central banks, in many countries, owning around 30-40% of the country's sovereign bonds, which they have bought with newly printed money tokens, and which was the reason that trillions of Dollars worth of sovereign bonds, until recently had negative nominal yields, and even larger negative real yields, i.e. the nominal yield minus the rate of inflation. Even, now, as interest rates across the globe surge, and bond prices crash, the large majority of sovereign bonds have negative real yields, because of soaring rates of inflation.
As Marx said in Capital, if you want to look at the rate of interest, it is the actual market rate of interest paid by average borrowers, or charged by businesses that you need to look at, not these massively rigged bond yields, or the policy rates set by central banks. That market rate of interest is rising, for all the reasons I have set out in the past, which is that, as global economic activity rises, particularly in conditions where rising wages prevents large increases in the rate of profit, firms need to either use a larger proportion of their profits to finance investment, rather than paying dividends, or putting the money profits into the money markets, or they must even go into those money markets and borrow money to finance investment, either via bank loans, or by issuing new bonds and shares.
The rate of interest is determined by the interaction of the demand for and supply of money-capital, and so these two factors – demand for money-capital rising as investment increases, and supply of money-capital from profits declining, as profits are used to finance investment, rather than being thrown into money markets – causes market rates of interest to rise. To prevent that rise in interest rates crashing asset prices, states have used fiscal austerity to slow economic growth, and so slow the demand for labour rising to a point where wages rise, and to slow investment so as to slow the demand for money-capital to finance it.
Even that failed to prevent the underlying dynamic of the economy from causing economic growth to break through, and so wages and interest rates to rise, which again threatened to cause asset prices to crash. As the ruling class, now, owns all of its wealth, and derives its political power from the ownership of these paper assets, rather than the ownership of real capital, the state, which acts on behalf of that ruling class, and the system of states – imperialism – which acts on behalf of what is now a global ruling class, could not allow that to happen, which is why they have coordinated attempts to slow global growth, and to inflate asset prices via QE.
When imposing further austerity could no longer be justified, other ways of slowing global growth was found, for example, global trade wars, such as those imposed on China, or US trade wars against the EU, not to mention the array of sanctions and so on imposed by the US on various states across the globe, most notably, now, in relation to Russia. All of the lockdowns implemented, across the globe, from 2020 onwards, were a more direct means of restricting global growth. There was no rational basis for lockdowns to begin with, as Professor Mark Woolhouse and many others have described, but in a world where 95% of people have immunity either natural or from vaccination, no possible reason for any restrictions can be made, credibly.
As economies opened up, therefore, an avalanche of revenge spending occurred, with all of the liquidity produced by central banks now flooding into the demand for commodities, which in turn led firms to have to raise investment so as not to lose out on market share to their competitors. Not only demand and investment rose sharply, but so did inflation, which, in turn, encourages consumers to want to buy before prices rise further, causing demand to be further front loaded.
As Marx describes, the quantity of money in the economy does not determine the rate of interest, but it does determine the level of prices, and so also inflation – a movement from one price level to another. Anyone lending money, therefore, does not just look at the price level now, in determining what level of interest they require, but also what they expect the price level to be at the point the loan is repaid. If I think that between now and when the money I lend is repaid, inflation will be 10%, then what that means is that every £1,000 I lend, will be worth only £900 when its repaid. So, I will generally want to factor that into the annual interest I expect to be paid, so that over the duration of the loan, I get more back than I lent. That is why, generally speaking, the yield on longer dated bonds is higher than that on shorter dated bonds. When yields invert, that is usually because, speculators think that a recession is likely that will cause future interest rates to be lower, and so bond prices higher.
But, none of that is really relevant, in relation to the current inversion of yields. The real reason that yields on short dated bonds have risen so much is that central banks are way behind the curve in terms of having to withdraw from QE, and raise their policy rates. I predicted this would happen more than a year ago, and now its happening with a vengeance. Even within the last year, the pundits were saying that central banks would not be raising their policy rates until at least 2023, or 2024, and the messages coming out of those central banks in their press conferences, dot plots and so on reinforced that view, as did the coordinated claims that inflation was only “transitory”. A year later that transitory inflation is not only still here but is rising by the day. The US Federal Reserve is now talking about raising rates at every one of its meetings, and by half points and more at each one; the ECB is now forecast to increase its rates 4 times over the next year; the bank of England has already been raising rates since last year, and is likely to have to raise them at each meeting, and at an increased pace. All of them are being force to withdraw QE, and begin actually tightening by selling bonds.
The rise in short term yields is a reflection that central banks are scrambling to raise their policy rates, and those policy rates, always relate to short-term interest rates, the rates that the central banks lend to the commercial banks. At the same time, the central banks still own vast amounts of bonds, as a result of their policy of QE. They tend to want to prevent longer-term bond yields from rising, because its those yields that are used when it comes to banks lending for things like mortgages. Sharply rising mortgage rates, mean that property buyers quickly find themselves in negative equity, as rising interest rates also cause land and property prices to fall as a result of capitalisation. Collapsing land and property markets frequently accompany collapses in other asset prices, as each acts as a substitute for another.
So, sharply rising short term yields, resulting in yield inversion, as long-term yields do not rise so fast – though they are still rising fast, just not as fast – is not at all an indication, in current conditions, of an impending recession. On the contrary, all the indications are that as lockdowns and other restrictions are lifted, economic activity is set to rise sharply, again, across the globe. It is doing so in conditions of sharply rising inflation, of labour shortages, causing wages to rise sharply, which are not yet squeezing profits, but certainly limiting their rapid expansion, and it is doing so in conditions where the economic war launched by US imperialism against China and Russia, which is the foothills of a developing WWIII, is causing primary product prices, for energy, food and raw materials also to soar, requiring firms to borrow even more to finance their expansion, causing interest rates to rise at an increasing rate.
The sharp rises in inflation, along with rapidly growing demand for commodities, means that firms see rising money profits. Speculators seeing rising money profits, see the potential for increased dividends from shares, and the potential, thereby, of higher share prices, giving them at least paper capital gains, whereas ownership of bonds, whilst it offers higher nominal yields, still is not offering higher real yields, and comes with large capital losses as bond prices collapse. There, is, therefore, an inevitable switch from bonds to shares in the portfolio allocations of speculators.
But, that can't last. As bond prices collapse, and share prices rise, firms needing to raise large amounts of money capital to finance investment, will be led to issue more shares, rather than bonds, because they will need to issue fewer higher priced shares, than they would lower priced bonds. An increased supply of shares, means that share prices will also then fall. But, they will fall for another reason, which is that, although money profits will rise as a result of inflation, real profits, i.e. after inflation will grow much more slowly, and may even contract. The rate of profit will certainly not grow so quickly, and may begin to get squeezed, as a result of changes in the value composition of capital, as wages rise, and the cost of constant capital rises, also causing a tie-up of capital.
All of that points to a crash in asset prices, reversing what has been seen over the last 30 years, but it is a crash in asset prices that also releases potential money-capital for real investment, of a kind that, again, has not been seen in more than 30 years. Marx describes, in Capital, how a capitalist farmer, who comes to buy land to farm, must first lay out money-capital to buy the land. Yet, this money-capital does not actually function as money-capital for the farmer. It does nothing to provide him with farm equipment, with seed or materials, or labour-power. On the contrary, the more he must pay for the land, before he can start farming, the less capital he has to actually employ productively in all these other forms.
And, the same is true in relation to asset prices. The higher asset prices are, then, as speculator use available potential money-capital to buy up these existing assets, the less of it is available to be used for actual productive investment, or, indeed, simply to fund consumption. In a world, in which everyone has become a speculator of one kind or another, the idea that you can obtain wealth – and by realising some of that wealth by selling bits of it, a revenue – means that people divert revenues from consumption to such speculation. Even those with very little income speculate in lottery tickets, scratch cards and so on, whilst others speculate that house prices will rise, and so pay extortionate prices for them, and even become buy-to-let landlords, and so on. Other speculate in meme stocks, or simply in mutual funds.
All of that is money that is sucked out of general circulation, and so slows economic activity. But, the most obvious manifestation is where firms use profits to buy back shares, rather than to invest in real productive capacity. Not only does that reduce investment, but it also inflates share prices, creating a further incentive to speculate in that paper, further reducing the flow of potential money-capital into real investment. Recently, I heard one pundit on one of the financial speculation channels comment to the effect “where would you invest your money other than in shares”, which, of course, illustrates this point that it confuses investment with simply speculation. The implication was that, even if share prices fall, if you have money to invest, you still have to put it in shares, in conditions when bond prices, property prices and so on are falling.
But, that is not true, and shows just how far the capitalist system itself has become deluded by this speculation. As Marx describes in Theories of Surplus Value, if I have say, £1 million, I could buy say,1 million shares, with a current price of £1. They might provide interest of £0.05 per share in the form of dividends of £50,000. But, if the share price falls to £0.80, I will have lost £200,000, meaning, net, I will have lost £150,000. However, I could, instead, use the £1 million for the purpose of actual investment rather than speculation. That is, I might rent a factory, and spend £750,000 on machines and materials, and the other £250,000 employing labour-power. If the annual rate of profit is 30%, then I will make £300,000 profit, as against the net loss of £150,000 made from speculating in shares! So, as asset prices crash leading to speculators making large capital losses, and as economies expand, creating the potential for significant profits from actual investment, the focus inevitably shifts from speculation to real investment, which, in turn, crates conditions for greater economic activity, expansion, investment, higher wages and interest rates, and further falls in asset prices.
These are the conditions now being created, and forms the backdrop to the current rout in bond markets, but also the desperate search, by states, to find ways of slowing global economic growth, to avoid it, including the fermenting of war hysteria.
No comments:
Post a Comment