As Marx says, in Capital III, Chapter 23, there can be no continual increase in the amount of money-lending capital, relative to productive-capital, because the result would be that interest rates fall, reducing the revenues of the money-lenders, and this would create an incentive to, then, use money for productive purposes, especially as the average rate of profit is always much higher than the rate of interest. However, in times of speculative bubbles, such as 1847, it is not the rate of interest/yield that concerns the speculator, but the potential capital gains, which can, themselves be greater than the rate of profit, especially taking into consideration the risk of such actual investment in production.
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| In speculative bubbles, the liquidity from revenues pumped into the purchase of existing assets (M` - Bank Deposits - Bonds/Shares/Assets) is always greater than the liquidity that leaks out as revenues to fund consumption (productive, i.e. Bank Deposits - M, or unproductive, i.e. Bank Deposits - C`), so that the increased quantity of money chasing a fixed quantity of assets rises, causing asset prices to rise. |
In these conditions, the money does pass from one hand to another, but instead of A paying money to B, who uses it to buy commodities for either personal or productive consumption, B uses the money to buy some other existing asset, and so bids up its price. Likewise, B, in buying this asset from C, passes money to them, but C, in turn, simply buys some other asset, causing its price to rise, so that all asset prices tend to rise, inflating the bubble, but all the time simply rotating the liquidity from pillar to post, and also drawing in additional revenues from outside, as others seek to join the game of pass the parcel. As asset prices rise, B who bought 100 units from A, at £1 per unit, only needs to sell 50 units to C, at £2 a unit, leaving them 50 units to also sell to D, who brings new money into the bubble. The only liquidity that leaks from the sphere of assets is then that used to “take profits”, by some participants realising a portion of their capital gains, so as to finance their actual consumption needs.
In such speculative bubbles, the temptation to take profits is always outweighed by the tendency to think that what has gone up spectacularly already, will continue to do so, so the amount of liquidity taken out, is always less than the additional liquidity pumped in. For the ruling class, and professional speculators, whose revenues come solely from these activities, they must always realise some of their capital gains, in order to live. For the ruling class, the amounts required as revenues to finance their consumption can be huge. To buy a super yacht, alone, costs around $250 million, with an annual running cost of, at least, $10 million. That is not to include the cost of a private jet, and so on.
Yet, even with minimal yields on assets, the ruling class can often fund their consumption from it. Someone with $40 billion of financial assets, even producing a yield of just 1%, obtains $400 million a year in dividends/interest. So, their need to liquidate assets to turn them into revenues is limited. Rather they tend to increase the quantity of such assets in their possession, and in doing so, in conditions when the number of new assets being created is limited, that necessarily pushes up the price of all those assets.
In the period, particularly, after 2010, large companies engaged in far fewer share issues, and, instead, company profits were used to buy back shares, whilst they also engaged in bond issuance, using the proceeds again to buy back shares. At the same time, although governments continued to issue bonds to cover deficits, and longer term investment spending, the austerity programmes implemented after 2010, reduced the need for such issuance, as budget deficits were reduced. The amount in new bonds issued, therefore, fell relative to those maturing. Together with the fact that central banks bought up huge amounts of the existing bonds, as well as mortgage bonds, whilst commercial banks were given cheap funds to buy up other commercial bonds that, again, acted to increase the demand relative to the supply of bonds, pushing their prices higher.
So, rather than money leaching out of the sphere of assets and the fictitious economy – part of the justification of QE, of the so called “wealth effect”, and trickle down economics – the opposite occurred. The ruling class could fund its conspicuous lifestyles even from revenues on its vast quantity of assets, even with minimal yields, and even increase the quantity of such assets; high asset prices/low yields, did not lead to governments borrowing (even at what has been claimed to be 5,000 year low rates) to stimulate economies and fund much needed infrastructure spending etc., but was, instead accompanied by fiscal austerity, to reduce borrowing and pay down debt, nor to companies issuing shares to fund investment, but to them buying back shares to inflate their prices further, and promote additional capital gains; low interest rates did not lead to consumers borrowing more to spend on consumption, but instead saw them divert consumption spending into speculation in financial and property assets, in the hope of joining in the bandwagon of money for nothing. The only consumers who ended up borrowing to fund consumption, were the very poor, who were led to resort to pay day lenders, who rather than charging near zero rates of interest, were charging up to 4000%, making the situation more like the period of usury in pre-capitalist times.
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