Its often assumed that when war breaks out, stock and other financial markets will sell off, as it involves a disruption of trade, potential destruction of property, and a general hindrance to making profits. All of these things tend to be true, and yet, more often than not, following the outbreak of war, such as now in Ukraine, asset prices rise.
A war certainly means that international trade is disrupted, and just the general fear created means that people become apprehensive and hold back purchases whether of consumption goods or production goods. That means that sales fall, and with it profits. As sales fall, at best fewer additional workers are employed, and at worst some get laid off, causing demand to fall further, and do profits to fall further. War means destruction of property. Consumers lose their houses, cars and other belongings. That means their cost of living rises, as they must now buy all these things twice over. As the cost of living rises that means a rise in the value of labour-power, a rise in the amount of necessary labour, and so a fall in the amount of surplus labour, and fall in the rate of surplus value, which in turn means lower profits.
Firms lose capital. Factories are destroyed, machines are destroyed, and raw materials are destroyed, as well as finished products/commodity-capital. In other words, contrary to the view of Keynesians that such destruction is beneficial to growth, as with the increased cost of living for consumers, it means that to produce any given amount of profit, the costs for capital have risen, because it too, now has to replace all of these destroyed means of production, so that the rate of profit falls. Instead of profits being used to accumulate additional capital, it now has to go to pay again for the capital that was destroyed, much like if a firm had had its machines stolen. It represents a tie up of capital.
So, all of that, you might think, would lead to shareholders worrying about this reduction in profits, causing them to sell shares, causing stock markets to fall, which, in turn, would knock on to bond markets, property markets and other asset prices. Stock markets frequently do fall in anticipation of wars, but those falls are usually more than made up for after wars start. There are a number of reasons for that. Firstly, there is the phenomenon known as sell on the rumour, buy on the fact. That is professional speculators sell assets ahead of any war or similar event, knowing that amateur speculators will rush for cover when the war starts, expecting the worst. That means that when the war starts the professional speculators can step in and buy up assets at cheap prices, knowing from experience that they are likely to rise in price, because the reality is never as bad as the anticipation of it.
But, there is another more fundamental reason, and one that is particularly relevant and significant nowadays, and that is that all such events lead to central banks pumping additional liquidity into circulation, and doing so via QE, and by reducing their policy rates, which makes borrowing to speculate in assets cheaper, increasing the capital gain from doing so. Looking at the response of speculators to the Russia-Ukraine war, that can be seen. A week or so ago, everyone was talking about the fact that the Bank of England would again be raising its policy rates, and reversing QE. Now, the idea is abroad that the Bank of England may not raise its policy rates at the next meeting, this month. The same is true in relation to the US Federal Reserve, and the ECB, whose tightening is now put back to 2023.
The consequence is the same as seen previously after 2008. In 2009, asset prices started to rise sharply again as a result of huge amounts of liquidity pumped into financial and property markets by central banks. In 2010, that was intensified, because governments, across the globe, began to slow down economic growth via policies of fiscal austerity, which meant both that the increase in demand for money-capital was reduced from businesses, as growth slowed, but also from governments, as they slashed budget deficits and sought to pay back debt. That meant that already very low levels of interest rates were reduced further, so causing asset prices to rise as a result of capitalisation.
By 2018, even with continued measures of fiscal austerity to try to restrain economic growth, the underlying dynamic of capital accumulation in a period of long wave expansion, meant that global economic growth was ticking up at a faster pace, employment levels were rising sharply, and firms needed to either borrow or else use more profits to finance capital accumulation, to expand so as not to lose market share. It meant that market rates of interest began to rise, and the process of capitalisation then meant that asset prices started to fall. With central banks still trying to hold down their policy rates, and still involved in QE, the consequence was also rising levels of inflation. Governments too were finding it hard to justify continued implementation of fiscal austerity, both because official rates were at low levels, not seen before in history, and because populist governments were offering voters some relief in order to garner votes. As interest rates rose, and central banks were led to tighten policy, the US stock markets fell be 20%, and global financial markets followed suit.
But, given that the ruling class owns its wealth, now, exclusively in the form of these paper assets – fictitious capital – it was precisely this condition that it has looked to central banks and conservative governments to prevent over the last 30 years. By the end of 2018, therefore, Trump had initiated his global trade war, which was focused on China, but also drew in restrictions on trade with the EU, where trade was already starting to be affected by consideration of the effects of Brexit uncertainty, and where any slowdown in China, caused by Trump's trade war, would impact the EU's largest economy Germany, which exports large amounts to China. Sure enough, as Trump's trade war began to slow global economic trade and growth, that impacted the demand for money-capital, putting downward pressure on interest rates. Central banks took it as their cue, and again started up QE, and cuts in their official rates. Financial markets and asset prices, surged once more.
But, every dose of QE is less effective than the last, and the addicts soon crave the next larger fix. Trump's trade war and Brexit could only have a relatively small, temporary effect, as the underlying dynamic of the long wave uptrend continued to push its way through, and economies simply began to route trade along different channels. By the latter part of 2019, and into 2020, trade and global growth was ticking up again, meaning that interest rates were again set to rise, central banks would again have to get from behind the curve, and start raising policy rates and withdrawing QE. Inevitably, asset prices would fall, with nowhere for the ruling class to turn for a solution to being left holding vast amounts of worthless paper.
Just in time for them came lockdowns and lockouts. There was never any need for such blanket lockdowns and lockdowns as a supposed solution for Covid. As many said at the time, and as Professor Mark Woolhouse has set out in his recent book, a policy of focused protection of the 20% of the population – mostly the elderly – who were actually at risk from the virus, would have been a far more effective measure. Given that the elderly, mostly, are not in employment, it would have implied no reduction in output, but also, with the whole of society, more or less enabled to continue as normal, there would have been no reduction in demand, causing a consequent reduction in production. What is more without all of the artificially constructed fear and panic, generated by a 24/7 sensationalist media that can only speak in hyperbole, which combined in totalitarian manner with the state apparatus to spread such panic, life would have gone on as normal. It was a typical example of a Hobbesian state.
Once again, not only did this artificial restriction on the real economy lead to a reduction in interest rates, but it also enabled central banks to engage in even more large-scale liquidity injections via QE, and cuts in policy rates, which led to asset prices soaring once again. However, as I pointed out at the time, with lockdowns things were different, and would come back and bite the ruling class and its state in the arse. With lockdowns and large numbers of people prevented from working purely by government diktat, the government was forced to act as employer of last resort, becoming the provider of variable-capital, i.e. it had to pay out the wages of millions of workers, but did so without those workers engaging in labour at all, and so not only not producing any surplus value/profits, but not producing any new value whatsoever.
The consequence could only be rampant inflation as eventually this large amount of money tokens flowed into circulation in search of goods and services, goods and services which had not been produced, precisely because the government had prevented workers from working! Initially, prevented from spending this money on a range of commodities no longer available, it found its way into paying down household debt, or even savings, or into demand for a range of services that were available online. The prices of those rose as a result but was not reflected in indices of inflation. As soon as lockdowns were eased, demand for all goods and services soared, causing shortages and large prices rises. Yesterday, I went to do some initial investigation, prior to replacing my car. I knew that there was a shortage of new cars, and that used car prices have risen by 40% in the last year. What I found was that there is a 12 month lead time to get a new car, and where, usually, new cars lose 30% in the first year, that's no longer the case, because used car prices have risen so much as to erase this difference.
The fundamental dynamic of the long wave uptrend has again enforced itself, and all that QE has now done is to increase inflation sharply, which means that this compounds the rise in interest rates required, and the inevitable effect that will have on asset prices. Fiscal austerity is dead as a means of restraining economic growth, lockdowns are no longer credible as the vast majority of society not only is not at risk from COVID, as was always the case, but is now also vaccinated against it, so that the numbers of people ill from it, or dying from it, even on the rigged official data, is insignificant. With a war to focus their attention on, the sensationalist media have dropped COVID stories like the plague, if you'll excuse the pun.
John Authers, in his Bloomberg Newsletter, pointed out that global stock markets had not really sold off prior to or following the start of hostilities. As he states, one reason is that global speculators, and that would also apply to the global ruling class that now owns its wealth in these paper assets, saw Putin's objectives in Ukraine as limited, and that the likelihood is that he would achieve them fairly quickly, and at little longer-term cost. Speculators and the global ruling class is far less concerned about the national self-determination of countries like Ukraine, or the lives of people than are the liberals, and social-patriots and other moralists. It is concerned with cold hard cash, or more precisely the upward ticks on the prices of its assets, as indicated on the boards of the financial markets.
Bond prices have risen marginally, reflecting a “flight to safety”, but not by any significant amount. And, a switch into bonds implies a switch out of equities, reflecting a small drop in stock markets. In recent days, the narrative has been to claim that Russia seeks to annex the whole of Ukraine, and that it has been frustrated in that aim by a brave and courageous struggle by the Ukrainian government, which will lead to the Russians getting bogged down. That would, as Authers suggests, change the calculation, especially if it led to the widening of the conflict, let alone if it raised the prospect of nuclear war. But, all that is likely nonsense, other than for some accident.
Its unlikely that Russia wants to annex Ukraine, even more so than it ever wanted to annex Georgia. In 2008, after the delusional butcher Mikheil Saaksashvilli sent Georgian troops into South Ossetia, committing war crimes against its people, Russia, responded by sending in its troops and kicking the Georgians out. Russia made limited incursions into the rest of Georgia to chase off the Georgian troops and denude its capacity to respond. NATO, Georgia and the western media shouted that Russia was using a “false flag” operation as pretext to invade and annex Georgia. In fact, the accounts of the BBC's Tim Whewell, as well as the accounts of Human Rights Watch showed that it was no false flag operation, but that actual war crimes had been committed by the Georgian military. Russia did not annex the rest of Georgia, and has remained inside South Ossetia for the last 14 years.
But, Ukraine is vast compared to Georgia. It would be impossible for Russia to annex it, and retain control, as its experience in Chechnya, let alone Afghanistan has shown. The only thing going for it, in that respect, is that, despite western propaganda, a large proportion of the Ukrainian population itself continues to be pro-Russian – though not a majority – as the election of the pro-Russian Yanukovich in 2010 illustrated. Western propaganda has tried to present Yanukovich's election as somehow fraudulent, but it was overseen by the OSCE, and EU, whose observers declared it
“of "high quality"” and “After the second round of the election international observers and the OSCE called the election transparent and honest."”
But, even having half of the population hostile to you, makes any such annexation impossible, which is why Russia almost certainly does not intend it. Why would they? Its a bankrupt country that will be even more bankrupt as a result of this war, and to the extent that its US and EU capital that pays to repair the damage that is a cost to them that Russia can avoid, but that it would not if it annexed the country. It simply makes no sense, and although western propaganda has tried to portray Putin as somehow suffering the same kind of megalomania as Hitler in his bunker that is just silly western propaganda aimed at the western masses, who lap up such nonsense. On a balance of forces, Russia has around 150,000 ranged against Ukraine, whereas Ukraine has around 300,000 troops, including the Nazis of the Azov Battalion and other assorted fascist militia. It has the latest NATO military hardware, and advantage of NATO intelligence, including all of the cyber warfare capacity that comes from the US being the home of all the big tech companies, control over the global internet, much of the world's cloud storage and so on.
Military strategists say that an invading army needs a 4:1 advantage over the defending army, in which case Russia would have needed 1.2 million men rather than its actual 150,000, if it intended to annex Ukraine. Its actual numbers and strategy are compatible with securing the CPR and LPR, and undertaking selected strikes to knock out Ukraine's military capacity to respond, including its command and control structures, mostly by air and missile strikes. That is what NATO did against Serbia when it ripped Kosovo away from it. As I wrote recently, Russia has simply copied NATO's military play book from that war.
So, the speculators are probably right that with limited objectives, Putin will achieve hem in relative short order, and the war will be over. It will have given another temporary respite for asset prices, as the fear slowed trade, and allowed central banks to increase liquidity injections once more. Asset prices will rise, and after a short interval, the thieves in the thieves kitchen will simply agree on their new distribution of the spoils.
No comments:
Post a Comment