How Liquidity Flows From Asset Markets Into The Real Economy - Part 4 of 17

As asset prices rocketed in the 1990's that is what happened, and this appearance led employers, both in the private and state sectors, to take pension contribution holidays, meaning that the ability to buy additional bonds and shares, was curtailed even more. It looked as though this was free money, meaning that, during that period, it appeared that this saving on employers contributions was a direct bonus for profits, or enabled lower Council and State taxes. But it was a delusion, again amounting to consuming seed-corn, of bringing forward consumption at the expense of future productive capacity. As yields fell, as well as the capital base of these funds being reduced, their capacity to cover future liabilities was reduced, putting an increasing burden on ever rising asset prices as being the only means of covering liabilities, via the realisation of capital gains. When asset prices crashed, that option also disappeared, making it vital that states prevented such crashes, and again ensured that the burst bubbles were reflated, as they did, after 2008.

And, that did not just affect pension funds. In the 1980's, workers were encouraged to buy privatisation shares, and then to put money into mutual funds via, PEP's, followed by ISA's and so on. All of this was money from wages that was diverted from consumption and the real economy into the fictitious economy, and inflation of asset prices. Workers were encouraged to pull out of their final salary, employer provided pensions, and put their money into personal pensions (itself creating an entire new sphere of business for lawyers in taking up pension mis-selling claims), on the promise of better returns, based on stock market performance, only to find that the actual returns turned out to be much worse than they would have received from a final salary scheme, also setting up division between workers, who had been conned into the former, as against the latter, who were generally those in the public sector.

Money paid by the farmer for land (rent or price to buy)
 to a landowner, can flow back out, as revenue/consumption,
by the landowner, to buy commodities (Bank Deposits - C`)

So, that is the general outline of how money was drained from the real economy and productive activity into assets and the fictitious economy, but its not the whole story, because, in Capital, Marx and Engels describe how these payments for assets do not reduce the money circulating in the real economy, in which case, there should be no such drain. A capitalist farmer, who buys 1,000 hectares of land for £1 million, loses this £1 million that could have been used as capital, but the landowner, who sells the land, now has £1 million in the bank, which they now use to fund their own consumption, so that this money flows back into the real economy.

What is lost, here, is the fact that the £1 million forms revenue, used for unproductive consumption, rather than capital, creating surplus value, but, then, its only this additional surplus value, say £100,000, with a 10% rate of profit, that is lost to the real economy, not the whole £1 million. But, even here, it could be that the landowner, uses the £1 million to become an industrial capitalist, rather than using it all for unproductive consumption. The landowner, turned industrial capitalist, needs to live, and so, they would not use all of the £1 million productively, using, say £200,000 for their own consumption.

Alternatively, they might throw the £1 million into the money markets. They might lend the £1 million to the farmer who bought their land, who, then, has it available to buy productive-capital, producing £100,000 of surplus value, of which they pay, say £30,000 in interest to the landowner turned money-lending capitalist. That is similar to the process Marx describes in The Eighteenth Brumaire of Louis Bonaparte, whereby French peasants, after the Revolution, found that they had simply exchanged the payment of rent to landlords for the payment of interest to mortgage lenders.

In these cases, the money lost to the economy is only that arising from the use of the money as revenue rather than capital, i.e. the additional surplus value that would have been produced, otherwise. That is a function of those that receive the money being non-productive, and parasitic on production. The same is true of all such parasitic elements. Their revenues are derived from surplus value, and flow back into the economy, but as revenue not capital, i.e. as demand for personal consumption rather than productive consumption.

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