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.
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%.
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.
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