US Stock and Bond Markets Tank

On Wednesday, following the decision of the US Federal Reserve to increase its rates by just seventy-five basis points, and to play down thoughts of such a move at its next meeting, US bond markets rose sharply, sending yields lower, and its stock markets rose by more than 2%.  Yesterday, having mulled the decisions, stock and bond markets thought better of it, and sold off hard, knocking more than a trillion Dollars off the paper wealth of the ruling class.  The NASDAQ fell by more than 5%, and the S&P and Dow fell by around 3%.  They are all in bear market territory, following earlier falls during this year.  In total, this year, falls in US stock markets have knocked around 8 trillion Dollars off the paper wealth of the global ruling class, showing just why its so desperate to crater the real economy, so as to hold down interest rates and keep the prices of these paper assets inflated.  As Marx put it,

"The credit system, which has its focus in the so-called national banks and the big money-lenders and usurers surrounding them, constitutes enormous centralisation, and gives to this class of parasites the fabulous power, not only to periodically despoil industrial capitalists, but also to interfere in actual production in a most dangerous manner — and this gang knows nothing about production and has nothing to do with it. The Acts of 1844 and 1845 are proof of the growing power of these bandits, who are augmented by financiers and stock-jobbers."

(Capital III, Chapter 33)

So, why did speculators change their minds between Wednesday and yesterday?  The ideal for the ruling class is that the increase in GDP can be restricted to a level, which does not require more labour to be employed than can be accommodated by the natural rise in the workforce.  At that level, there is no upward pressure on wages, and so no downward pressure on profits.  GDP represents only a small fraction of national output.  In Marx's models, it accounted for only a third of national output, because two-thirds of output value comes from the value of constant capital - raw and auxiliary materials (energy etc.), and wear and tear of fixed capital - which were produced in previous year's, and consumed productively this year, so that their value is not newly created, but merely preserved in this year's output, and the use values themselves, are, thereby, physically reproduced out of current output, whilst creating no revenues for anyone.

Today, of course, the value of national output is much greater, compared to GDP, than it was in Marx's day, because, as Marx describes, rising productivity brings a rising technical composition of capital - more constant capital is employed, as machines and materials compared to labour - and this tends to lead to a higher organic composition of capital, because even as the unit value of machines and materials falls, the proportional increase in the quantity of materials used is greater than the fall in its unit value.  This is the basis of the long-term tendency for the rate of profit to fall.

So, national output can also rise much more than the rise in GDP.  The value of national output would rise proportionate to the rise in GDP, and so with the increase in the social working-day, if productivity was unchanged.  But, if productivity rises, which can be due to economies of scale, removal of trade frictions, utilisation of more fertile lands/mines, or because better machines are introduced, then a greater quantity of constant capital will be processed, and its value is then preserved and transferred to the value of output, even though the amount of labour undertaken remains constant, and so GDP is unchanged.

A rise in productivity has other effects alluded to above.  It reduces the unit value of fixed and circulating constant capital, so that even though a greater physical quantity of it is consumed in output, its total value may not.  That is certainly true, as Marx describes, in Capital III, Chapter 6, and in Theories of Surplus Value, Chapter 23, in relation to fixed capital.  A new machine might cost twice as much as the old machines it replaces, but if it replaces 4 of the old machines, then relatively it costs only half as much, and so passes on only half as much value into final output as the old machines.  And, it may also be true in relation to materials too.  

So, if it does that, the value of gross output will rise by a proportionately smaller amount than net output, and the rate of profit will rise.  But, also this rise in productivity means that the value of labour-power will fall, and so surplus value will rise, causing the rate of profit to rise.  Obviously, that is an ideal situation for the ruling class, because this proportionally greater rise in net output is the physical equivalent of the rise in profits, and rate of profit, and means that more can then be distributed to them as interest/dividends, and rent.

The problem they have is that productivity is not rising, or at least not rising fast enough.  The technological revolution brought about by the last Innovation Cycle, peaked in 1985, in terms of the new base technologies created around the microchip.  Those developments rolled out over the following 20 years, which created the internet and telecoms revolution, as well as the impact on other areas of science and technology, resulting from additional computing power, are mostly in the rear view mirror, although their application to new consumer goods is still at an early stage.  In addition, globalisation brought a huge rise in productivity, as trade frictions were also removed with new single markets and so on.  But, that is also now in the rear view mirror, and in the case of Brexit, and the trade wars being introduced by the US and its NATO allies, even being reversed.

The last technological revolution, like all others in the past, was driven by the fact that labour had become relatively scarce during the 1960's, and by the 1970's was at a stage, like that described by Marx in Capital III, Chapter 15, where not only is it not possible to expand absolute surplus value, by expanding the social working-day, but also workers were able to demand higher wages, and real living standards, which squeezed profits, causing a crisis of overproduction of capital. It was to resolve that crisis that firms sought out new labour-saving technologies. But, we are a long way from such a condition, today. Technological development continues, but it does not represent a qualitative change such as those that brought about the steam engine, the internal combustion engine, electrification, or the microchip.

Net output is growing, but its growing at a slower pace than gross output. Meanwhile, asset prices have continued to be inflated, and yields are a function both of those prices, and the revenues produced by the assets. Given that net output is growing at a slower pace, and so profits grow at a slower pace, interest/dividends and rent, which are deductions from those profits become inevitably constrained, so that yields must fall. John Authers in his Bloomberg Newsletter, refers to a comment by Jeremy Grantham, in which he describes the stock markets as like a Brontosaurus.

“Last year, he made the bold call that markets were in a bona fide bubble and cruising for a fall...

Back in the summer of 2007, Grantham warned that the stock market was like a brontosaurus, whose brain and nervous system were so inefficient that it would take a long time to realize that it had been bitten in the tail. Sure enough, subprime lenders began to go bankrupt in early 2007, and the stock market didn’t collapse until the fall of 2008. This time around, sauropod stocks are still taking their time to adjust to rising interest rates and high inflation. But they’re getting there.”

In essence, speculators are slowly coming to the realisation that the chances of the kind of smooth landing, or Goldilocks scenario they hope for is not going to happen. They have thrown everything, austerity, trade wars, lockdowns, actual wars, artificial inflation of energy prices, every encouragement to speculate so as to drain money from the real economy, and constrain growth, whilst printing astronomical quantities of money tokens to inflate asset prices, and yet, still it isn't working. Speculators, on stock markets seem to be slowly realising that absent the soft landing, no scenario looks good for them.

If, the combination of economic war, actual war, zero-Covid lockdowns, demand destroying inflation, and interest rate hikes causes a recession, then along with it also goes company profits, and probably also some companies, meaning that interest/dividend payments are hit, and even some interest-bearing capital tied up in shares of defunct companies disappears. That was the fear in early 2020, when speculators thought that lockdowns were going to decimate company profits, and led to a huge stock market sell-off, before states intervened to assure them that they would bail-out all those companies and print money to pay wages, and to further buy up paper assets, causing asset prices to soar to ever new heights.

Alternatively, the economic war fails to make much impact, as new trade relations are established, the actual proxy war being fought out in Ukraine either drags on, as Russia consolidates its aims in Donbass, or else is resolved, as Russia secures Donbass, and Ukraine and NATO have to suck it up, either way, it appears that most of the world has lost interest in it, other than its effects on energy and food prices, China is forced to scrap its ridiculous zero-Covid lockdowns, and economies continue to grow at a faster pace, as demand snaps back, and firms have to expand. In that case, wages rise and profits whilst expanding in absolute terms, start to get squeezed by rising wages. The demand for money-capital then rises faster than its supply from realised profits, so interest rates rise, and cause asset prices to drop, a scenario that bond prices are already signalling.

This latter option seems far more likely for the reasons I've set out before. This is not the 1980's, when Volcker's interest rate hikes knocked at an open door of conditions where labour saving technologies were leading to higher unemployment, and economic stagnation. Nor is it the 1970's conditions for stagflation. It is conditions in which, as economic activity expands, and more workers are employed, they will demand and get higher wages. Central banks will raise rates, but they are so low that they would have to rise multiple fold to have any effect on demand for capital, in conditions of rising monetary demand and money profits. What they will do is print more money tokens so that firms can raise prices to cover the higher wages they have to pay.

So, we are in for a period of sustained and high levels of inflation, as the means to mollify an inevitable squeeze on profits, as wages rise. Speculators in bond markets seem to be getting their heads around that, which is why there has been historic drops in bond markets, though they have way, way further to fall, but sooner or later, it is going to dawn on stock speculators too. Much higher levels of inflation, continuing for several years into the future, means the future value of both bonds, shares and their revenues is going to be hit hard, which can only be mitigated by sharply reducing what you pay for them today. Hence the sell-off, and there is much more to come.