Consumers v Speculators - Part 2

In Part 1, I set out that speculators have been hoping for a goldilocks scenario in which a combination of fear factors from Covid and lockdowns in China, war in Ukraine, high energy and food prices, combined with small rises in central bank policy rates, would lead to an economic slowdown so that unemployment would rise, putting downward pressure again on wages, allowing profits to rise, and also downward pressure on the demand for capital, so causing interest rates to decline. It would give central banks room to again stop raising their policy rates, and even reduce them, as well as ceasing any tightening of liquidity. All of that is required to prevent asset prices crashing, and so crushing the paper wealth of speculators and the ruling class. However, no such Goldilocks scenario is likely as, in fact, consumers remain strong, inflation pressures continue, and workers look set to get big pay rises, enabling them to continue spending and driving economic growth.

And, that was the picture indicated in an interview on Bloomberg, last Wednesday, with Brian Moynihan CEO of Bank of America. Moynihan's analysis was based on the bank's access to raw data from its customers. These are the highlights of his analysis.

1. The average depositor who had an average $1400 account balance pre-lockdown, now has around $4,000 average balance, those with an average balance of around $3,500, now have an average balance of $13,000.
   
   
2. Credit card balances have been drawn down from around $100 million, to $70 million, and has now risen to $80 million.
   
   
3. This is due to payments made to households by the state during lockdowns, when consumption was limited, so enabling debts to be paid down, and savings accumulated, meaning consumers have a lot of firepower to continue spending, as the economy opens up again.
   
   
4. In the first 2 weeks of May, consumers spent 10% more than they did in May last year, and that is not just because of higher prices. The number of transactions themselves increased by 8%.
   
   
5. The amount spent on travel rose by 10% compared to 2019.
   
   
6. Projections for the unemployment rate fall to around 2% for later this year, and down into a sub 2% level next year.

So, in the US at least, the consumer still seems to be strong, to have rebuilt domestic balance sheets so as to be able to fund continued consumption, and with projections of employment rising further, and unemployment declining to near full employment levels, with rising unionisation, wages are set to rise, to fund additional consumption. The latest jobless claims data, released on Thursday, in the US, confirmed that picture, with claims falling to 210,000 for the week, below estimates, and below the figure for the previous week. As described in other posts, even part of these numbers is attributable to a strong jobs market, because it reflects a rising “quit rate”, as workers quit their existing jobs to move to a better one. The Q1 GDP data was revised slightly worse by 0.1% to – 1.5%, but that reflects continued effects of renewed lockdown measures, and as the BEA set out,

“reflected decreases in private inventory investment, exports, federal government spending, and state and local government spending, while imports, which are a subtraction in the calculation of GDP, increased. Personal consumption expenditures (PCE), nonresidential fixed investment, and residential fixed investment increased”.

In fact, as the above mentions, and as Brian Moynihan had noted, consumer spending increased, no doubt explaining some of the increase in imports, and PCE inflation continued to rise. The effects of lockdowns were not just in the reduction in new value creation, but also in the fact that previous income replacement schemes from the state ceased, so that those payments no longer appeared as income of recipients.

“In the first quarter, an increase in COVID-19 cases related to the Omicron variant resulted in continued restrictions and disruptions in the operations of establishments in some parts of the country. Government assistance payments in the form of forgivable loans to businesses, grants to state and local governments, and social benefits to households all decreased as provisions of several federal programs expired or tapered off.”

(ibid)

As I have set out in the past, changes to inventories can be positive or negative. An increase in inventories can be because firms stock up on the basis of known increased demand, but can also be a result of inability to sell stocks. A fall in inventories can be as a result of firms seeing slowing demand, and acting accordingly, or a result of stocks having been sold, without replacements yet arriving. Given continued increases in consumption, combined with known supply bottlenecks, the latter seems a likely explanation, and so, is likely to provoke a rebound in the next quarter. However, as the economy opens up again, there is also a known switch away from spending on goods to spending on services, a fact that shows up in the sales of Wal-Mart and other retailers, combined with increasing revenues for service industries. It's firms selling goods that require inventories, as against services, whose main circulating capital takes the form of labour-power.

“The price index for gross domestic purchases increased 8.0 percent (revised) in the first quarter, compared with an increase of 7.0 percent in the fourth quarter (table 4). The PCE price index increased 7.0 percent, compared with an increase of 6.4 percent. Excluding food and energy prices, the PCE price index increased 5.1 percent (revised), compared with an increase of 5.0 percent.”

(ibid)

These are not the conditions leading to a slowing economy, let alone recession. A combination of increased employment, and rising wages, means a growing demand for wage goods, and with recognition of the effects of inflation, consumers are likely to bring forward spending – in the same way that in conditions of deflation they defer spending – which boosts demand further. Competition drives firms to increase output, and with sluggish or stagnant productivity growth – and even declining productivity due to increased frictions and supply bottle necks – that means even greater demand for labour, pushing wages higher still.

In another recent article, John Authers examines the relation between inflation and asset prices. Its normally assumed that, in times of inflation, shares outperform bonds. The real value of a bond falls as a result of inflation, as does that of the coupon, unless it is an inflation linked bond. The result is that bond prices fall, as speculators seek to protect themselves against these real terms losses. Shares, however, tend to rise, because inflation means that firms raise their prices, which, in turn, increases their nominal money profits, providing a hedge against the inflation, and also means that nominal money dividends can increase along with the profits. Shares and bonds are seen as substitutes for each other, so that when shares rise, bonds fall and vice versa. On this basis, the idea of a portfolio comprising 60% shares, and 40% bonds was developed. If share prices rise, increasing the proportion of shares in the portfolio, some are sold, and bonds bought to rebalance it, and vice versa.

But, as I have set out, in fact, bonds and shares are both financial assets, and the prices of both can and do rise and fall together. Over the last 30 years, as increasing liquidity inflated the prices of all assets, both bond and share prices rose astronomically, and it was only in the short run that one acted as an alternative to another. The same was true of property prices. Authers looks at historical data provided by Jim Reid of Deutsche Bank. Authers says,

“Reid and his team divided the stocks and bonds of 15 different countries into valuations deciles. A very low number suggests that both stocks and bonds look universally cheap, while a high one suggests both look too expensive. It’s inflation that makes both cheaper at once, and the lack of it that allows them to grow more expensive together. The higher the valuation, the lower the subsequent returns are likely to be.”

He provides the chart that resulted from their analysis.

In fact, this confirms the chart I have posted in the past, showing an inflation adjusted history of the Dow Jones.

But, as I have set out in those previous posts, what is actually being confused, here, is the role of inflation, as against the role of periods of long wave uptrend, and consequent rising interest rates. A look at the chart for UK Bank Rate illustrates the point.

It rose gradually from 4% in 1900 to 7% in 1920, and remained around that level until 1932. The former period was a period long wave crisis, and the period from the late 1920's one of stagnation. As Marx says in Capital III, its during the period of crisis that interest rates peak, and during the period of stagnation that they fall to their lowest levels. It remained at 2% between 1932 and 1951.

The fourth long wave upswing began in 1949, and by the early 1960's, the relative surplus population was beginning to be used up. Wages began to rise, and the economy expanded, as the demand for wage goods rose. Wages began to squeeze profits, but firms had to continue to expand to meet the rising demand, so causing the demand for money-capital to exceed the supply from realised profits, causing interest rates to rise. As the chart shows, Base Rate rose from 4% in 1960, to 8% by 1968, but as the period of crisis began in the mid 1970's, the rate rose even more sharply, reaching a peak of 17% in 1978. To compensate for squeezed profits, liquidity increased, and that illustrates the point that interest rates can rise, at the same time that liquidity is increased. The increase in liquidity came from two sources. The central banks, and commercial banks, and from the expansion of commercial credit.

As Marx states, credit develops alongside capitalist production. As the economy expands, commercial credit expands automatically along with it, as firms extend credit to each other, and ship more and more commodities to each other, allowing longer and longer grace periods for payment. This goes on, in periods of economic expansion, irrespective of any attempts by central banks to restrain economic activity, and credit growth, by raising policy rates. Marx notes the comments of Bank of England Governor, Neave, and of Thomas Tooke.

"The Bank has no power of its own volition to extend the amount of its circulation in the hands of the public; but it has the power of reducing the amount of the notes in the hands of the public, not however without a very violent operation."

(Capital, III, Chapter 33)

But, Marx also cites the following exchanges in parliament on the bank crisis of 1857,

Marx quotes the following exchanges.

"5306. If there should not be currency to settle the transactions at the clearing house, the only next alternative which I can see is to meet together, and to make our payments in first-class bills, bills upon the Treasury, and Messrs. Smith, Payne, and so forth." — "5307. Then, if the government failed to supply you with a circulating medium, you would create one for yourselves? — What can we do? The public come in, and take the circulating medium out of our hands; it does not exist." — "5308. You would only then do in London what they do in Manchester every day of the week? — Yes."

(ibid)

This illustrates the problem that central banks have, today, in trying to restrain inflation, compared to the situation that faced Volcker, and other central bankers in the 1980's. The 1980's, like the 1930's was a period of long wave decline. The early 80's were still a period of crisis, but already labour was on the back foot, as new labour saving technologies came in to replace them, causing unemployment to rise, and wages to fall. Gross output grew more slowly than net output, as the rate of profit was ratcheted back up, having been squeezed in the 1960's and 70's, by rising wages. When central banks raised policy rates, and reduced liquidity, to slow the economy more quickly, in the early 80's, and so squeeze out the inflation, it was the kind of “violent operation”, referred to by Neave. Yet, it was the perfect conditions for doing so. In a period of slowing economic activity, there was no immediate desire by firms to rush to expand commercial credit, as an alternative to bank credit, or cash payments.

That is not the conditions that exist today. Since 1999, a new long wave uptrend has been underway, and was the basis for the global financial crisis of 2008, as this economic growth prompted rises in interest rates that crashed asset prices that had been inflated out of all rational proportion. It has only been deliberate state policy since 2010, via fiscal austerity to restrain economies, combined with QE aimed directly at pumping additional liquidity into the purchase of financial assets, combined with government policies to artificially goose property markets, that also acted to divert money and money-capital away from the real economy and into speculation in financial and property markets, in search of more or less guaranteed capital gains, and which has inflated those asset prices even more into the realms of fantasy.

Even that did not prevent the underlying dynamic of long wave growth from forcing its way through, and, in the last couple of years, it has only been direct physical action to stop economic activity via lockdowns that has restrained it. But, as I predicted more than a year ago, that would be counterproductive, because as soon as those lockdowns were lifted, as sooner or later they would have to be – and that applies in China too – it would simply lead to a huge surge in demand, prompting an equally large surge in supply, and demand for inputs, which in conditions of oceans of available liquidity would lead to widespread, and rising levels of inflation that would hit economies in a series of waves.

In an interview on Bloomberg on Thursday, Geoffrey Yu, of BNY Mellon, pointed out that there are billions of Yuan in the hands of Chinese consumers that will hit services markets across Asia, as soon as those consumers are released from current lockdowns. The statements from Premier Li Kashing in relation to the Chinese economy, seem to contradict those of President Xi, suggesting already that public discontent at the irrational continuation of lockdowns is beginning to feed into factional disputes within the ruling party, and state bureaucracy.

As Authers also points out, history shows that inflation always comes in this series of waves, as the liquidity washes into one sphere after another, which, in a globalised economy, then washes back again.

The idea that inflation has peaked is, then misguided, because so long as liquidity continues to be increased, inflation will increase along with it, whatever central banks do with their policy rates. Indeed, with commercial credit also acting as currency, even when central banks do, eventually get around to reducing liquidity, rather than just increasing it more slowly, liquidity will continue to expand for some time after that. But, the reality is that, whilst central banks will continue to raise policy rates – and will do so way beyond the current projections – they will be bound to respond to any squeeze on profits from rising wages, by themselves increasing liquidity again. The inflation is here for much longer than is currently expected, and its only reduced profits absorbing the rising wages that offer the prospect of it eventually being driven out of the system.

What, Authers and Reid saw as a link between asset prices and inflation, is, therefore, actually a link between asset prices and interest rates. In fact, as Marx says, these Bank Rates are not actually a good measure, and we should really take the market rate of interest charged by businesses for the supply of capital, and I suspect that were that data collated over these periods, it would be even clearer. Authers does, however, provide another useful chart produced by Man Group. It shows that inflationary periods do not generally overlap with recessions, the exception being, Authers says, the 1970's. Marx makes a similar point that an inflation of prices always precedes a crisis, during which commodities cannot be sold, and during which, therefore, commodity prices fall significantly.

Its very unlikely, for the same reasons that the current inflation, which is going to be around for several years, will coincide with a recession either, or any kind of stagflation. Rather, looking at the chart, and combined with that for the waves of inflation, this looks more like the first inflationary waves of the 1960's, with the big inflationary waves of the 1970's still some ten years in the future, as the long wave proceeds, and labour shortages intensify, causing wages to rise further, and squeeze profits, resulting in a crisis of overproduction of capital. But, as inflation continues, even at these levels, central banks will have no room to claim any grounds for pausing their rises in rates, which are currently way behind the curve, and massively negative in real terms. The only way they can justify that is on the basis of the continued fairy tale about inflation being transitory, just a bit less transitory than originally suggested. The idea that it returns to 2% within the next two years is a fantasy.

When speculators in the financial and property markets realise that, the ground beneath their feet will disappear.

Back To Part 1

A Contribution To The Critique of Political Economy, Chapter 1 - Part 4 of 29

In fact, what that means is that the unit value of each of these use values is reduced. Wealth increases, as value reduces.

“From the taste of wheat it is not possible to tell who produced it, a Russian serf, a French peasant or an English capitalist. Although use-values serve social needs and therefore exist within the social framework, they do not express the social relations of production.” (p 28)

But, as Marx again sets out in his Letter to Kugelmann, this is not true in relation to value. If we take a primitive commune, or a peasant household, that produces use values, for its own consumption, value takes a very restricted form of only individual value. In other words, the value of these products is only that determined by the specific labour employed in the commune or household. As Marx says in relation to Robinson Crusoe, who he says tells us all we need to know about value,

“In spite of the variety of his work, he knows that his labour, whatever its form, is but the activity of one and the same Robinson, and consequently, that it consists of nothing but different modes of human labour. Necessity itself compels him to apportion his time accurately between his different kinds of work. Whether one kind occupies a greater space in his general activity than another, depends on the difficulties, greater or less as the case may be, to be overcome in attaining the useful effect aimed at. This our friend Robinson soon learns by experience, and having rescued a watch, ledger, and pen and ink from the wreck, commences, like a true-born Briton, to keep a set of books. His stock-book contains a list of the objects of utility that belong to him, of the operations necessary for their production; and lastly, of the labour time that definite quantities of those objects have, on an average, cost him. All the relations between Robinson and the objects that form this wealth of his own creation, are here so simple and clear as to be intelligible without exertion, even to Mr. Sedley Taylor. And yet those relations contain all that is essential to the determination of value.”

Capital I, Ch. 1. Section 4

If, however, we take a community of small, independent, commodity producers, the value of the commodities they produce is no longer that of individual value. Each producer of linen, because they are in competition with several other producers of linen, is now forced to accept that the value of their product is not its individual value, i.e. the quantity of their labour used in its production, but is a social value, or market value, which is equal to the average labour-time required for production across all producers of linen. In other words, the mean average of all those individual values. And, for this reason, individual value does not cease to exist for them, but is subsumed in the market value.

For some linen producers, the individual value of their output will be lower than this average or market value. In selling at the market value they will make an additional profit, or, put another way, they will obtain more labour for less labour. They will then be able to expand their production, so gaining economies of scale. They will be able to employ machines and better equipment, further enhancing their competitive advantage. But, other linen producers will produce linen with a higher individual value than the average, and so will make smaller profits, exchanging more labour for less labour. In this way, a process of differentiation of the small commodity producers, in the towns, sets in, and when markets in the towns grow to a big enough size, this means that the more successful producers are then able to take over the means of production of the ones who fail.

Back To Part 3

Forward To Part 5

Consumers v Speculators - Part 1

On Wednesday, I set out why the speculators, and their representatives in the financial media, are banking on the real economy slowing down again, so as to reduce pressure for rising wages (squeezing profits), and rising interest rates (cratering asset prices). They hope for a goldilocks scenario, not too much of a slowdown to cause a recession, and so lead to lower profits (a hard landing), but enough to stop the current surge in demand, leading to firms increasing supply, and so demand for labour and capital, and, in current conditions of excess liquidity, also feeding into commodity price inflation. The speculators, after all, have grown accustomed to excess liquidity going directly into inflating asset prices, to boost their fictitious wealth, not into the real economy. However, if the choice is a hard landing, implying recession, they would take that over a continued booming economy, and its effects on raising wages, and interest rates, squeezing profits, and cratering asset prices.

The mentality was described by Bloomberg's John Authers, as I described a while ago. In fact, Authers, when he was still writing for the FT, back in 2013, had set out the principles of Goldilocks, as I described in my post Bust Without a Boom. Authers commented, back then, on the Goldilocks scenario existing in the 1990's and early 2000's,

“Things were “not too hot” to force central banks to raise interest rates, but “not too cold” to rid the corporate sector of profit growth.”

As I pointed out, at that time,

“Of course, this fairytale ended badly. Goldilocks got eaten by the Bear Market that resulted from the Financial Meltdown of 2008. Now as stock and bond markets soar to stratospheric levels again, the explanation given once more has an air of fairytale once more. Authers describes it as “Goldilocks On Ice”.”

That was in 2013, and by 2014, stock markets had already surpassed their 2007 bubble heights, and with QE infinity after that, followed by QE infinity plus, in the last 2 years, during lockdowns, they soared to even more surreal levels. As I wrote back in 2013, Authers described those conditions as Goldilocks on Ice. He wrote,

“The economy remains cold. Chilly enough for the US Federal Reserve and other central banks to continue with measures to support asset prices; but not so freezing that the economy lapses into crisis again.”

The chilliness was, of course, artificial. The US, first under Bush, in 2008, and continued by Obama, injected fiscal stimulus, and was, along with China, demarcated from Europe, by the fact that its economy rebounded, in a typical “V” shape from the crisis, at least until Republicans, under the whip of the Tea Party, used Congress, and control over state legislatures to limit those measures, and to hit the economy via political crises such as over the Debt Ceiling, and so on. But, in Europe, including Britain, measures of fiscal austerity were imposed from 2010, sending economies that had been rebounding strongly back into stagnation, or even recession. In Britain, it was the era of Ed Balls famous flat-lining hand signals across the Commons Chamber, and, in Europe, it was the time of the “Eurozone Debt Crisis”, and imposition of crippling austerity on Portugal, Ireland, Greece and Spain.

In his more recent Bloomberg article, referenced above, Authers quotes Dario Perkins of T.S. Lombard,

“The odds of a policy error are increasing, especially when everyone seems to be over-extrapolating COVID distortions into a new secular inflation narrative and when central banks are channelling the virtues of Paul Volcker (or, in Europe, the ’70s Bundesbank). What we need is a “growth scare,” one that is sufficient to stop central banks freaking out but not large enough to plunge the world into recession. And with all parts of the world facing near-term problems, this scare is now a distinct possibility. Combine China’s property slump (and lockdowns) with a massive squeeze on real incomes in Europe, plus tighter financial conditions in the U.S., and perhaps the world economy will deteriorate just enough to put the authorities on a more cautious policy path. In fact, this “soft patch” may be our best chance right now of a “soft landing.”"

And, as I cited, Authers commented,

“It’s just possible that the motley forces of Covid-zero, China Evergrande Group and Vladimir Putin could somehow could allow the FOMC to bring the airliner of the U.S. and global economy safely to rest on the Hudson River. Not likely, but there’s a chance.”

In fact, as I will set out in a future post, China, which has artificially hobbled its overheating economy, deliberately, with its otherwise bizarre zero-Covid strategy, is headed for hyper-inflation, as it combines this deliberate policy of restricting new value creation, via physical lockdowns, with a further increase in an already excessive amount of liquidity in its economy, and combined with an even more irrational fiscal expansion! That is what North America and Europe also did over the period of lockdowns, but they are, at least, having to end those irrational lockdowns, whereas China continues to impose them, even when natural and artificial immunity means that the link between infection and serious illness (to the extent it ever existed in the vast majority of the population) has been broken. The rest of the world faces continued, and now embedded, inflation as a result of those policies, which will take years to wash through the system, especially as central banks respond to wages squeezing profits, by yet further accommodation, whilst the irrational continuation of them by China, in an attempt to slow its economy, and avoid an asset price crash, is leading it into hyperinflation, and an even bigger crash.

The hopes of speculators, and their media representatives, of some kind of “landing”, are going to be frustrated, as I set out recently, because, in conditions where labour is in short supply, and employment is rising, you do not get a recession, or even a prolonged slow down. For one thing, in making these assessments, bourgeois economists look at only GDP, as against output. As I have set out before, GDP is only a measure of the social working-day, i.e. of the new value created by labour, in the current year. It is not the same as output, because GDP does not include the value of constant capital (raw and auxiliary materials, energy, wear and tear of fixed capital) produced in previous years, and whose value is merely preserved and transferred to current production. GDP is a measure only of new value created, i.e. v + s, not c + v + s.

In Marx's analysis, GDP was equal to only a third of the value of output, because two-thirds comprised the value of c, which was merely transferred into current production, and reproduced directly from it. Today, the difference between the value of GDP and of output is much greater, because in the last 150 years, the technical and, thereby, organic composition of capital has risen significantly, as productivity has risen. Today, a given amount of labour processes a far greater quantity of materials than it did in Marx's day, and although, the value of fixed capital, and so, of wear and tear, as a proportion of total output, has fallen (due to moral depreciation, and technological development) the total value of wear and tear is also much larger.

Changes in GDP are not solely a function of changes in the social working day, i.e. more workers employed, or the same number employed for longer, or both, as I have set out before. Changes in relative productivity of one economy to another, can make the value created by labour in one economy rise more than another, and also changes in the proportion of complex to simple labour can have that effect, as I set out some years ago in a response to Paul Cockshott. As I set out in that post, a population of 1 million, can produce more value than a population of 10 million, even with the same working day, if the 1 million's labour is complex, and that of the 10 million simple labour. Similarly, an economy that moves up the value chain, and has a larger proportion of its labour as complex labour, will produce more new value (increase its GDP) faster than an economy that does not.

However, in the short-run, when any significant change in either of these factors can be discounted, changes in GDP are merely a measure of changes in the social working-day, which is why, GDP in many countries fell by around 20%, the same as the reduction in the amount of current labour being undertaken, as workers were forcibly locked out of production, by state diktat, and economies rebounded by similar amounts as those lockouts ended, and new value creation resumed.

The factors that the speculators and their representatives are banking on are set out in the quotes from John Authers and others above, i.e. simple media reporting of various scare stories, be it pandemics, or wars that cause consumers to be more cautious in their spending, and firms to be more cautious in the investment plans; the role of high prices for energy and so on to squeeze incomes available for general consumption; increases in central bank policy rates to deter spending, and incentivise saving. But, as I have set out before, none of that seems likely to have its intended effect, in anything other than the immediate term.

Consumers, bombarded with news stories of impending recession, stagnation or stagflation, to the extent many of them ever see such stories, might change their behaviour at the margin, but mostly those spending patterns are well established. A certain level of spending is baked in, because everyone must eat, travel, buy clothes, and so on, and as lockdowns have ended, its not so much that spending on many of these declines, but that spending on other activities that were precluded, increases.

Higher prices for things like energy, do limit what is left out of incomes to spend on general consumption, but many consumers have funds built up over, the period of lockdowns, to enable them to continue spending, and seeing higher prices, projected now into the future, workers are already demanding much higher wages, and labour shortages ensures they get them. As most consumption comes out of incomes rather than savings, higher wages will more than offset higher prices for energy etc., enabling spending on general consumption to continue to rise.

And, central bank policy rates, and, thereby, rates on savings deposits, are so low in absolute terms that even large proportional rises, still amount to only small absolute increases in rates that can have little effect on the spending and saving behaviour of either consumers or firms. Moreover, with inflation at double digit levels and rising, real interest rates have grown even more negative, creating an increased incentive for spending rather than saving.

Forward To Part 2

A Contribution To The Critique of Political Economy, Chapter 1 - Part 3 of 29

The search for some constant third measure of exchange-value was a fool's errand, and Bailey's contribution was in showing that, but, then, he draws false conclusions from it. As Marx says, in Theories of Surplus Value, no such invariable measure, as money, is required.

“He is right in thinking that this money need not be a commodity of invariable value; from this he concludes that no separate determination of value independent of the commodity itself is necessary.

As soon as the value of commodities, as the element they have in common, is given, the measurement of their relative value and the expression of this value coincide. But we can never arrive at the expression so long as we do not find the common factor, which is different from the immediate existence of the commodities.”

(Theories of Surplus Value, Chapter 20)

In Capital I, Marx also distinguishes between products, i.e. use values produced by labour, and commodities. A product has value, because it is the product of labour, but does not have exchange-value, because it is not a commodity, i.e. it is not brought into an exchange relation with some other use-value, and so the individual labour it contains is not reduced to social/universal labour. If I make a chair for my own use, this chair has value, but not exchange-value, for example. Marx makes the same distinction later, in Capital, in looking at where a farmer replaces their own seed out of their production of grain. The seed is not a commodity, but is a product, and has the same value as the grain from which it is taken. It is only the grain that is sold which becomes a commodity, and has exchange-value. This distinction is what confused Rodbertus, as Marx describes, because he thought that, because the seed did not have exchange-value, it also had no value, and so the cost of production of the farmer was correspondingly reduced, and the basis of rent.

“Whatever its social form may be, wealth always consists of use-values, which in the first instance are not affected by this form.” (p 27-8)

In other words, it does not matter whether we consider a primitive commune, a peasant community, a capitalist society, or a future communist society, its wealth is measured in the quantity, quality and range of use-values available for its consumption. As Marx describes, in his Letter to Kugelmann, explaining The Law of Value, what determines this wealth is social productivity, the ability to produce more of these use-values with any given amount of social labour. As Engels put it,

“The useful effects of the various articles of consumption, compared with one another and with the quantities of labour required for their production, will in the end determine the plan.”

“As long ago as 1844 I stated that the above-mentioned balancing of useful effects and expenditure of labour on making decisions concerning production was all that would be left, in a communist society, of the politico-economic concept of value. (Deutsch-Französische Jahrbücher, p. 95) The scientific justification for this statement, however, as can be seen, was made possible only by Marx's Capital.”

(Anti-Duhring, Note 15, Distribution)

Back To Part 2

Forward To Part 4

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Friday Night Disco - In My Lonely Room - Martha & The Vandellas

 

Moneyweek and A House Price Crash

Moneyweek magazine has generally set itself apart from much of the media in its attitude to house prices. On the one hand, there is the Tory press like the Daily Express and Mail, who know their constituency amongst elderly, home-owning Tory voters, who have seen the prices of their homes rise “exponentially” over the last 40 years, starting with the asset price inflation created by Thatcher, and which have been cheerleaders for ever more ludicrous house prices. Other parts of the media have been more circumspect, pointing out that such rises have excluded a large part of the population from home ownership, a factor that bourgeois ideologists have always considered important for a “property-owning democracy”. Others have even pointed to the destabilising effects for the economy itself that astronomical house prices create, particularly when followed by crashes. But, generally, the media has seen continually rising house prices as a good thing, just as they have seen continually rising stock and bond markets as a good thing. It follows from a view that sees wealth as emanating from these rising asset prices, rather than from the creation of new value, and use-values.

Moneyweek has been different. It is part of a stable of publications whose ideology is anarcho-capitalist, and whose economic doctrine is that of the Austrian School of Ludwig Von Mises. Mises saw the depression of the 1930's as being caused by a “crackup boom”, produced by low interest rates, and loose money, in the US. Indeed, the explanation of crises given by the Austrians, who believe that capitalism is a self-regulating system, if only the market was not interfered with by the state, or by monopolies of one kind or another, is based upon this role of credit, leading to speculative booms, that ultimately turn into busts. So, its no wonder that Moneyweek has always seen the house price bubbles across the globe, and as a UK publication, that in Britain, in that light.

I've dealt elsewhere with the fallacy that capitalist crises are caused by such “crackup booms”. See my book Marx and Engels Theories of Crises, for example. In short, credit is an inextricable element of capitalist development, and credit expands along with expansion of the economy. Low interest rates are a function of periods in which the demand for money-capital is lower than the supply of money-capital, which is essentially, when the rate of profit is high, but capital accumulation slows. That is periods when net output grows faster than gross output. That leads to higher asset prices due to capitalisation, and also leads to speculation. The speculation can lead to financial crises, but they are not the same thing as economic crises of overproduction of capital or commodities. Credit can delay the onset of a crisis of overproduction, and so exacerbate it, but it does not cause such a crisis, whose source resides in the operation of capitalist production itself.

However, when examining the rise in house prices, or other asset prices, the role of credit is significant, as it is in examining the inevitable bursting of those bubbles. Indeed, its why, as I have set out in numerous posts over the last decade, the state has been so intent on preventing a rise in interest rates, which would cause a crash in astronomically inflated asset prices bubbles in numerable spheres, because the global ruling class, now owns all its wealth in the form of fictitious capital, i.e. in the form of all these financial and property assets, and besides which, social-democratic states, dominated by the ideas of conservative social-democracy (neoliberalism) have themselves staked everything on the idea that real wealth stems from continual rises in those asset prices. They have been prepared to sabotage the real economy with fiscal austerity, full-scale lockdowns and so on, so as to ensure it, and the most ludicrous example of that is the zero-Covid strategy, and continued lockdowns imposed by the Chinese state, as it tries to prevent a heavily indebted, and bubble-filled Chinese economy from overheating.

Moneyweek's line has been to argue that the most advantageous outcome would be for Britain's property bubble to deflate slowly, as a result of property prices either falling slowly, or rising for a long period at a slower pace than general inflation, and so falling in real terms. This is the line pursued in their latest article. In it, they set out the data in relation to UK and international property prices. They set out how rising interest rates in other international property markets, that are even more bubbly than that in Britain, has already led to a slowdown and even falls in property prices, as they ask the question “Is Britain Next?”. The argument, they put in relation to rising interest rates, however, is only very partially correct, as I have set out in posts in the past. Let's look at that again.

They miss out of their argument the role of capitalisation. That is odd, because, as Marx describes, in the 19th century, liberals were very keen to turn everything into some kind of capital, including human capital. The means of doing that was via the idea of capitalisation. In other words, anything that produces a revenue is turned into some kind of capital, and the price of this capital asset is then determined by the revenue it produces, and the rate of interest. In other words, if the rate of interest is 10%, and you have a hectare of land producing £1,000 of rent per year, the capitalised value of the land is £10,000, i.e. you need £10,000 of capital to produce £1,000 of interest from it.

So, if, today, the rate of interest rises from 1% to 2%, that halves the capitalised value of revenue producing assets such as land. Over the last 40 years, land prices rose astronomically for a number of associated reasons. As interest rates fell, the capitalised value rose. As the average industrial rate of profit rose, this actually reduced the surplus profits produced from agriculture and mineral production, and so rents, which acts to counteract the rise in capitalised values. However, because asset price inflation caused the prices of existing houses, and other property to rise astronomically, the price that builders could pay for land rose correspondingly. If they had not paid higher rents then they would have made surplus profits when selling the houses/property they built on it. Landowners soaked up these surplus profits via higher land rents/land prices. That is reflected in the much higher proportion of new property price that is today accounted for by the price of land, than it was 40-50 years ago.

That was exacerbated by the fact that, although only 1% of the UK land mass is taken up as residential property, the Green Belt policy acts as a massive monopolistic weight on the land market, preventing a vast amount of it ever being available as supply. With the prospect of land prices continuing to rise by significant amounts each year, it fitted with the growing mentality of wealth generated from rising asset prices, rather than from the creation of new value, and corresponding revenues. It encouraged landowners to simply sit on land and property, even producing no revenue, in the expectation of capital gains, and so kept large amounts of such land, sterilised.

As interest rates rise, the capitalised value of land falls, and capital gains turn into capital losses. Those hoarding land, in the expectation of capital gains begin to want to sell it, and given that land and property markets are illiquid, i.e. it cannot be sold quickly in the way say bonds and shares can, any large-scale selling can quickly turn into a fire sale, causing prices to fall sharply. But, falling land prices, mean that this large component of new house prices is also reduced significantly. It means that builders can sell houses more cheaply, and those lower new house prices, particularly if they come in the context of no longer rising existing house prices, puts further downward pressure on all house prices.

Its true, however, that new houses form only a part of the total supply of houses coming on to the market, and a further source of supply is existing home owners who put their house up for sale, as they seek to move to another, usually better, home. However, Moneyweek seems not to have accounted for the fact that any such new supply, is also matched, more or less, by a corresponding new demand, which cancels it. Moneyweek's argument as to why rising interest rates will not lead to a house price crash in Britain, depends upon this latter element of supply, and on the fact that a) a significant number of homeowners do not have mortgages, and b) of those that do, many have fixed rate mortgages. It revolves around the idea that a crash can only occur if there is forced selling of houses, by people who can no longer pay their monthly mortgage bill. But, that argument is clearly false.

There is, of course, another group of sellers, besides builder and homeowners, and that is the large number of landlords, including the buy-to-let variety.  Huge amounts of rental property was, in fact, developed, including considerable amounts financed by overseas consortia, whose purpose was never primarily to obtain rents, but was based entirely on the prospect of obtaining perennial capital gains, as property prices rose.  Whilst all of the buy-to-let landlords may have entered the market on the basis of potential revenues from rents, as they offered a better return than interest on savings deposits, or pensions, that too, quickly became secondary to the potential to obtain capital gains.  Landlords have been hit by changes in taxation, and as they face higher mortgage rates on their portfolios, the maths will continue to fail to add up.  With rental yields, after tax and interest being squeezed, and with capital gains turning into large capital losses, that is a huge amount of forced selling waiting to hit the market.

The Moneyweek argument is correct in the first part of its analysis. That is that, when buying houses, people, have come to look not at the actual price, but at how much they can pay in mortgage each month. If we take a 20 year mortgage on a £200,000 loan, that is £10,000 a year, and if interest rates are 2%, that is £4,000 a year in interest. If £14,000 is the most a buyer can afford, they are limited to buying a house for no more than £200,000, assuming a 100% mortgage. If interest rates rise to 4%, however, that is £8,000 a year in interest, which means £4,000 a year more than they can afford, so they are limited to a smaller mortgage, and so can only offer a correspondingly lower price for any house they buy. It would mean being able to offer only around £150,000, so that the capital repayment becomes £7,500 a year, and interest of £6,000 a year. That means that this reduces prices by 25%.

The thrust of Moneyweek's argument is that, although this is the consequence from the side of demand, it means that from the side of supply, existing owners, seeing these lower prices would simply sit on their hands, rather than sell, and so, this reduced supply would counter the reduced demand – what is in effect a shift to the left of the demand curve. They point out that, in Britain, only a third of homeowners actually have a mortgage, and so a rise in mortgage interest rates will not affect them. Moreover, less than 10% of those with mortgages have variable rate mortgages, the rest having fixed rate mortgages. However, as they also point out, half of them have only 2 year fixed mortgages, meaning that many of them face, having to re-mortgage, at much higher rates in the near future, and at a time when they are also facing much higher costs for energy and so on.

Their argument, therefore, is that a house price crash is only possible when existing homeowners cannot afford to pay their mortgages, and become forced sellers, which requires either much higher rates than currently exist, or else requires a recession, leading to large numbers of people no longer having the income to pay their mortgage. But, that is false.

UK House prices, Inflation adjusted.

In 1990, UK house prices crashed by 40%. The primary reason for that was that interest rates rose significantly. In fact, compared to today, rates were already high. In May 1988, Bank Rate was 7.38%, by October 1989, it had risen to 14.88%, or nearly double. It was that, which led to the crash in house prices. Similarly, in July 2003, UK rates were down at 3.5%, at the height of a new bubble, before rising to 5.75% in July 2007, as the start of the financial crisis took hold that was to lead to the collapse of Northern Rock, and then into the financial meltdown of 2008. Again, house prices in the UK fell by 20%, before the state stepped in. In neither case was that crash in prices precipitated by a rash of forced sellers.

The fact is that house prices are determined by what buyers are prepared to offer for the houses that do come up for sale, not by those that do not! It is always the case that houses do come up for sale, and the fact is that if potential buyers of those houses, as a result of higher mortgage costs can pay less for them, then that is all the seller can get for them. A housebuilder, for example, does not have the luxury of being able to say, I will just sit on the house, until prices are higher, particularly in conditions, where they see no prospect of such a change in conditions. They build the houses only to sell them, and make a profit from it, and until they sell the house their capital is tied up in it, and cannot be turned over to use to build more houses, and make more profit. Moreover, with falling existing house prices, and lower capitalised land prices, resulting from higher interest rates, builders who have lower costs for land, can sell their houses at these lower prices, and still make a higher rate of profit, and, as demand rises, as house prices fall, they also sell more houses, can build on a larger scale, and so make larger amounts of profit too. So, whatever existing homeowners do, this feeds into increased supply at these lower prices.

But, the Moneyweek argument in relation to existing homeowners is false too. As they point out, two-thirds of homeowners do not have a mortgage. So, what is the effect of higher interest rates and lower house prices on them? I am in this position. In 2019, I bought my current house for £225,000. As a result of the money printing during the lockdowns, and subsequent further asset price inflation, today, it would fetch £350,000. But, I would be highly delighted if its price were to fall to just a tenth of that, to £35,000, as a result of rising interest rates, and a crash in asset prices. The reason is that, by the same token, a £1 million house would then sell for just £100,000, and there are quite a few of them I would like to be able to buy at that price, which would only require me to add £65,000 to what I got for my current house, whereas, today, I would need an additional £650,000!!!

That is also why many of the arguments about the effects of inflation are also wrong. The usual argument put in relation to inflation is that it erodes the value of savings, but it depends what the purpose of those savings is. If, here, the purpose of the savings is to buy a house, then inflation of commodity prices is irrelevant, if a consequent rise in interest rates leads not to an inflation, but a crash in house prices. Far from the value of any savings being eroded, they would be significantly inflated. Few people save to pay for everyday consumer goods, which they buy out of current income, not savings, and particularly in current conditions, where labour is in increasingly short supply, and so where wages rise, increased consumer goods inflation is simply bought out of inflated incomes.

What is more, if you are saving to buy a house, and interest rates rise, that means that instead of the paltry interest you currently accrue, it starts to be actually significant. True, if you were using those savings to buy consumer goods, whose prices are rising by, say, 10% a year, the interest would not compensate for those higher prices, but if you are saving to buy a house, and house prices are falling, then the opposite applies. If house prices crash by 90%, then every £1,000 of interest you earn on your savings becomes worth £10,000. Indeed, that becomes a further incentive to save, and hold off purchase, until house prices do fall further, because, in the intervening period, a larger amount of interest will have been added to your funds.

Someone, with a mortgage is, of course, not in such a good position, but provided they have the revenue to pay the mortgage, the same argument still applies. A small additional amount of money added to the now much reduced house price, still enables the seller to buy a significantly more expensive house than currently they could buy, and so, for anyone in that position, there is still an incentive to sell and move up. But, my guess is that we will soon see. Compared to May 1988, when Bank Rate was at 7.38%, its current rate of 1%, is ludicrously low, particularly given that inflation today is running at over 10%, whereas back then it was just 4.9%. A near doubling of the rate to 14.88% led to a 40% crash in UK house prices, back then. In fact, UK rates have already quadrupled from their low, and a move to even 2%, would mean they would have risen eightfold from it, so the effect on capitalisation, and on asset prices is going to be that much more significant. But, given inflation at its current levels, and its trajectory even higher, I doubt that Bank Rate is going to be limited to just 2%!

A Contribution To The Critique of Political Economy, Chapter 1 - Part 2 of 29

Bailey saw value and exchange-value, as identical, and as wholly subjective, and contingent, being determined only in each exchange, in which case, as with the first exchanges of products, prior to commodity production and exchange, there would be no objective basis for determining either the value of commodities or the rate of exchange between them. All theories of subjective value, see value and market price as identical, value being only a consequence of the interaction of supply and demand as the reflection of the subjective preferences of buyers and sellers. Of course, this requires us to believe that these preferences are themselves unrelated to any objectively determined material conditions and constraints, for example, the cost of production of the given commodities, which is a fundamental factor even for a simple commodity producer, let alone for a capitalist producer.

The subjective preference of the buyer, may inform us as to whether any given commodity is a use value for them or not, and so whether they will have a demand for it, or at what level that demand might be, and, as a result of fluctuations in demand, that may cause fluctuations in market prices, but the fact of a fluctuation means that it is a fluctuation around some pivot, which simply brings the question back as to what determines this pivot point, or equilibrium, as orthodox economics describes it. It is not simply a matter of subjective preference for the seller, assuming that there is demand for their commodity, but their cost of production. Either there is demand for the commodity at a price that at least equals its cost of production, or there isn't, and if there isn't, there is no reason whatsoever why producers will produce it, and sell it at a lower price. The Labour Theory of Value, reduces cost of production to value, and value is labour. So, ultimately, we have an exchange of commodities based upon each being a use-value for the buyer, and so the ratio of exchange can then be reduced to a quantitative relation of the value of each.

“But in order to be represented in this way, the commodities must already be identical as values. Otherwise it would be impossible to solve the problem of expressing the value of each commodity in gold, if commodity and gold or any two commodities as values were not representations of the same substance, capable of being expressed in one another. In other words, this presupposition is already implicit in the problem itself. Commodities are already presumed as values, as values distinct from their use-values, before the question of representing this value in a special commodity can arise. In order that two quantities of different use-values can be equated as equivalents, it is already presumed that they are equal to a third, that they are qualitatively equal and only constitute different quantitative expressions of this qualitative equality.”

(Theories of Surplus Value, Chapter 20)

It is this value that is produced by abstract labour, which acts also as its measure. Only when this value has been created can the quantity of value contained in, say, a metre of linen, be compared to that in a kilo of iron, and subsequently a relation between them be established. Assuming no change in social productivity, the measure of value by labour-time is independent, direct and absolute, whereas the measurement of exchange-value is contingent, indirect and relative.

“There is, in actual fact, a very significant difference (which Bailey does not notice) between “measure” (in the sense of money) and “cause of value”. The “cause” of value transforms use-values into value. The external measure of value already presupposes the existence of value. For example, gold can only measure the value of cotton if gold and cotton—as values—possess a common factor which is different from both. The “cause” of value is the substance of value and hence also its immanent measure.”

(ibid)

Assuming constant social productivity, if a metre of linen requires one hour of labour for its production, then this metric stands on its own. However, this constant value of linen will have many different exchange-values. It may equal one kilo of iron, but two kilos of butter, five litres of wine, and so on. In other words, its exchange-value, as opposed to its value, is contingent upon what other use-value it is being exchanged with, what other use-value acts as this indirect measure of its value. It is an indirect, and relative measure of its value, whereas labour is a direct and absolute measure of value.

The relative measure of value – exchange-value – depends upon the value of the use-value which is used as the measure. In the same way, if I measure the length of a table, I will get different results if I use a foot ruler rather than a metre ruler, even though the absolute length of the table, itself, has not changed. This absolute, direct measure of value, by labour-time, as a necessary first step, is vital in understanding the objective basis of exchange-value, as against the theories of subjective value of Bailey and the later neoclassical economists. It is also vital, thereby, in understanding the evolution of a money commodity, and its use as the means of measuring exchange-value as price.

Back To Part 1

Forward To Part 3

A Hard, Soft, or No Landing?

Speculators and their representatives in the financial media are consumed with thoughts of whether central banks, as they start to raise policy rates, and reduce liquidity, will cause the real economy to suffer a soft or a hard landing. A soft landing means that economic growth will slow, but not go into recession, whereas a hard landing means that it will go into a recession or even a slump.

The speculators prefer the first option, but if its a choice between the second option or the economy continuing to grow rapidly, so causing interest rates to rise even more, and central banks to have to tighten liquidity further, they would take the hard landing. There is a simple reason for that. Speculators, and for whom also read the ruling class, which owns all its wealth in the form of fictitious capital, has no interest in the real economy, other than indirectly. They are interested only in the continued rise in asset prices.

There are two drivers of those prices – revenues and interest rates. As far as the first is concerned it is a function of the amount of new value created by labour, and the rate of profit. If more labour is employed, creating more new value, then, even with a constant rate of profit, more profit is produced. More profit, means that, again, even with a constant rate of interest and rent, more is available to pay out as interest and rent. Interest is paid out to those who own fictitious capital, as dividends and interest, whilst rent is paid to those who own land and property. All else being equal, if the amount of rent rises, then land/property prices rise, keeping rental yields the same, and the same applies to dividends in relation to share prices, and interest in relation to bond prices.

If the rate of profit rises, as it did, significantly, during the 1980's and 90's, then, even if the amount of new value created by labour remains constant, all of this would still apply, because, its just, now, that the amount of profit rises due to the higher rate of profit, making these higher revenues possible. In reality, even during periods of long wave downturn such as the 1980's and 90's, when gross output increases more slowly, and when net output grows faster than gross output, there is still growth, still more labour employed, and so more new value created.

However, particularly since 2010, when governments have attempted to hold back gross output growth, in an attempt to prevent the demand for labour rising faster, which, in the period between 1999 and 2008, had started to cause wages to rise, which starts to squeeze profits, and to prevent the demand for money-capital rising faster, which causes interest rates to rise, new value creation, as a source of additional profits/revenues, was itself being held back. Most of the heavy lifting to increase the mass of profits, then, had to come from increasing the rate of profit, but that too posed problems.

There are three ways to raise the rate of profit – or more precisely the annual rate of profit. The first is to increase the rate of surplus value. That can be done by increasing absolute and/or relative surplus value. The first involves extending or intensifying the working day. However, that had already been done during the 1980's, following the historic defeats of workers in the first part of that decade. Even things like extending the working life, by increasing retirement ages had been done. Moreover, as Marx describes, there is a limit to that. Workers can only physically work for so long, at a given level of intensity, before they are worn out. Beyond that point, the value of labour-power rises, and that begins to reduce, rather than increase surplus value. That is part of the objective basis of the normal working-day.

The second involves, reducing the proportion of the working-day required to reproduce the worker. That can be done by reducing the value of wage goods. In part, that was done by globalisation, and, in part, it was done by the moving of large amounts of manufacturing to China and other lower cost producers. Mostly, it is a result of rapid technological development, of the kind that was seen in the late 70's, and early 80's, with the development of the microchip and so on, in response to existing labour shortages of the time. But, again, most of the gains from globalisation have already been made, and, in fact, as inter-imperialist conflicts, and economic nationalism intensify, some of those advantages have even been rolled back, as indeed occurred as a result of lockdowns. The same is true in relation to low cost producers. But, also, most of the productivity gains from the technological revolution of the 1980's, are already behind us.

The third requires increasing the rate of turnover of capital, but again, this is largely a function of technological development, as it increases the speed with which goods and services are produced, and reduces the time required to sell them, and return the capital to production.

So, all of that limits the possibility of raising the rate of profit, at a time when the actions of the state, to deliberately limit economic growth, also limited the growth of profit itself. For those that owned their wealth in the form of fictitious capital and property, that meant that the potential to increase revenues from interest/dividends, or rent were limited. Shareholders, because they exercise control over capital they do not own, could and did simply increase the proportion of profits paid out as dividends. According to the former Chief Economist at the Bank of England, Andy Haldane, where dividends accounted for 10% of profits in the 1970's, they have risen, today, to around 70% of profits. But, more profit handed out as dividends means less profit remaining as profit of enterprise, and so less available to be actually invested in real capital, in expanding the business. That is just one example of how shareholders and their representatives have no real interest in companies, or in the real economy, as against looking after their short term interest of screwing as much interest out of them as possible, and inflating asset prices as much as possible.

With rents, the landlord does not have the same facility as the shareholder. The landlord cannot simply increase rents, because, if rents rise too high, capitalist farmers cannot make the average profit, and so would cut back production, or move their capital to some other sphere. But, landlords were saved in that regard by the fact that, as asset prices rose spectacularly, so land prices, as such an asset, also rose sharply, and one reason was that house prices rose sharply, as the same kind of gambling and speculation in relation to property occurred as happened with financial markets. Landlords did not need to worry about capitalist farmers demanding their land, because with astronomical house prices, landlords could ask astronomical prices for land sold to builders. And, with states paying out large subsidies, via welfare and benefit systems to subsidise rentals, property landlords also had a safety net placed beneath them.

So, increasing revenues, from rapidly increasing profits are not an option. So, for asset prices to continue to rise, the burden rests upon interest rates. Interest rates determine asset prices via the process of capitalisation. Bourgeois economics tends to associate interest rates with inflation, and so, at the moment, the sharp rise in interest rates is being attributed to sharply rising inflation. When it suits them, of course, they admit the truth that interest rates are a function of the demand for and supply of money-capital. So, for example, in 2010, as borrowing soared, but whilst interest rates were still moderately low, they justified austerity, by claiming that it was necessary to reduce borrowing so as to prevent interest rates rising.

As I have set out before, the quantity of money in circulation is not a determinant of interest rates, contrary to the arguments of the proponents of QE. That confuses money, and more correctly money tokens, with money-capital. Interest rates are determined by the demand for and supply of money-capital. The demand comes from businesses to finance real capital accumulation, as well as from governments to finance its deficits, and from consumers to finance their own deficits. An increased supply of money tokens into circulation, by depreciating the currency, and so causing the prices of all the things that these borrowers seek to buy with the borrowed money, actually increases, in nominal terms, the amount they need to borrow!

The supply of money-capital comes from realised profits, with some also coming from unused savings. Whilst, a depreciated currency, causing inflation, also causes realised money profits to rise, as well as causing other revenues to rise in nominal terms, so increasing the nominal value of unused savings, this simply counteracts the rise in the nominal demand for money-capital, leaving things as they were before. Its not the actual level of prices that is determinant, here, but the transition from one general price level to another, i.e. the period of inflation between the two. In other words, if I lend £100 today, and inflation is at 10% p.a., in a year's time, if you pay me back the £100, it will only be worth £90. So, in determining how much interest I require, I will factor that in. I will either ask that the capital sum be inflation linked, and an amount of interest then charged, or else I will demand an interest rate of 10% plus.

So, the real problem for the speculators is not inflation, but increasing economic activity, which causes wages to rise, and interest rates to rise. For a time, capital can always accommodate this, as Marx describes in Capital III. It takes time for the relative surplus population to be used up, and although technological revolutions occur only every 50 years or so, there is gradual technological development, causing productivity to rise each year. The workforce can be supplemented by other parts of the population, and by immigration. Similarly, production can be expanded to an extent without any increase in fixed capital, but simply by utilising it more effectively, and that means that money-capital is not demanded for its expansion. Finally, as Marx sets out, production can be expanded without demanding additional money-capital to finance additional circulating capital. It can be, and always is expanded, during such periods, simply by an expansion of commercial credit used between producers.

But, all of these must eventually reach their limits. Across the globe, there are labour shortages in an increasing number of spheres. The news in Britain is currently carrying stories about rail services in Scotland being curtailed due to a shortage of train drivers. There is a shortage of 100,000 lorry drivers, and so on. Employment is at record levels, with more job vacancies than there are unemployed workers to fill them. The pressure from that to cause wages to rise is obvious, and those rising wages, then result in a lower rate of relative surplus value, and consequently a lower rate of profit. But, all of those additional workers, now also getting higher real wages, as a result of labour shortages, means they also spend more, increasing demand. Firms have to respond to that increased demand, because each knows that if it doesn't its competitors will, and it will then lose out. They must accumulate additional capital, and as their profits are being squeezed by rising wages – and in places by rising costs of materials – they have to finance more of it by borrowing rather than simply out of their profits. Even if they can finance it just from profits, it means they have less of that profit to throw into money markets, or to pay out as dividends.

In short, the demand for money-capital rises, and the supply of it from realised profits falls relative to that demand, causing interest rates to rise. This is the nightmare that the speculators/ruling class now face. You can see the fear in the eyes, and hear it in the voices of the young financial journalists on Bloomberg and other financial channels when they ask whether we have seen capitulation. Capitulation is when speculators give up hope of markets changing course, and so sell all their holdings willy-nilly. What they really mean is, “For God's sake make it stop,” as they have seen worthless assets like Bitcoin fall by more than 50%, and others by even more, meme stocks be trashed, technology stocks fall by more than 30%, and even the S&P 500, by more or less 20%.

But, its nothing like capitulation. On the contrary, its barely wiped off the froth built up in the last two years as a result of the QE imposed under cover of COVID. A real capitulation will come only when all of the froth in asset prices built up over the last 40 years is wiped away, and that means a fall in asset prices of around 75%. Will it come like the 90% fall in property prices and other assets that occurred in 1990 in Japan, or the 75% fall in the NASDAQ that occurred in 2000?  Who knows? It could be even worse, as such corrections in long term trends always overshoot, in order to restore the average, by a reversion to the mean. With inflation at high levels it could come from a variety of means, with large-scale crashes, followed by partial recoveries – bear traps that sucker in those who buy on the dip – as well as real terms falls in asset prices as they fail to keep up with inflation, as happened in the period 1965-1982, a period also, when wages had been rising squeezing profits, and during which interest rates were rising.

In the current conditions, with global employment continuing to rise from already high levels, the most likely consequence of central banks' currently timid interest rate hikes, and failure to even begin reducing liquidity, is neither a hard landing nor a soft landing, but no landing at all, with the global economy continuing to strengthen. The zero-COVID strategy imposed in China appears bizarre, until, as I wrote recently, you put it into the context of an overheating Chinese economy, with huge amounts of debt, and potential for large-scale defaults of banks and finance houses, and other speculative ventures, built upon ever inflating asset prices. But, the Chinese state is facing rising opposition to its zero-COVID policy, and such regimes are fragile when faced with large scale social unrest. Chinese dynasties always looked unassailable until populations rose up and threw them out. Even with its ridiculous lockdowns, the Chinese economy has still managed to grow at more than 4%.

Across the globe, the use of COVID as an excuse to shut down economic activity has already worn out, although it now looks like we are to be subjected to a new moral panic over Monkeypox. Its all becoming a bit desperate as a means of trying to hold back economies, and so slow wage growth, and interest rate rises. The other hope the speculators have is that sharply rising energy prices will soak up workers wages, so holding back their spending on other items. But, the Summer months mitigate against that, and workers are likely to simply demand, over a long, hot Summer of strikes and rebellion, much higher wages to compensate for existing and future price hikes, and to compensate for more than thirty years during which their real wages were screwed down, and their labour exploited. Those higher wages, will enable workers to continue to buy, and firms to have to supply, requiring even more labour and capital, causing interest rates to rise further.

The theory is that higher interest rates will themselves slow the economy, but not at these levels they won't. Consumers who have cash will not be affected in their consumption by higher interest rates, and firms seeing sharply rising profits from all of the additional demand, even with lower rates of profit, are not going to be deterred from using their profits, or borrowing additional amounts to be able to get their hands on those profits. Consumers, still face hugely negative deposit rates for their savings, compared to inflation, and seeing inflation at these high levels gives every reason to use savings to buy needed consumption goods, rather than put it in the bank. Only if interest rates went significantly positive, which, with inflation at more than 10% is a long, long way from where they are now, would that begin to have any impact on spending and investment. Even, then it is likely to be marginal, because unlike when Volcker did that in the 1980's, we are in a period of long wave uptrend and expansion, not one of stagnation.

More significantly, long before interest rates reached those kinds of levels, asset prices would have crashed significantly. Asset prices, have limited their losses to the levels they have in the hope that profits will rise significantly. In fact, the latest data shows sales rising significantly, and although profits have risen, they have not risen in proportion. That is an indication of the emerging profits squeeze, but in some cases, as with retailers, its an indication that they underestimated underlying cost pressures, and they will all have to raise prices in the period ahead to compensate, meaning hopes that inflation has peaked will be quickly dashed. Some retailers will no doubt go bust, because, in the last 30 years, far too many stores and outlets were opened. With the shift to online, and the shift of consumption to services that will intensify, but it will also mean that the profit margins of the remaining firms will improve.

Its in services that the biggest increases in activity are now being seen as economies still come out of lockdowns and the other restrictions that have been put on them, and its in services that the biggest rises in prices are also now being seen. Services, of course, by definition, are labour intensive, and as services expand further that will put even greater pressure on labour markets, pushing wages higher again. Britain, as a result of the idiocy of Brexit, is in a much worse position than elsewhere in dealing with all of these issues, and the current nonsense about the government scrapping the Northern Ireland Protocol, which would lead to a trade war with the EU, is illustrative of it.

The economy looks set fair to continue in flight for some time to come. Its the financial and property markets that are headed for a crash landing.