How Liquidity Flows From Asset Markets Into The Real Economy - Part 3 of 17

As I have set out, elsewhere, more or less the same process occurs with the provision of pensions. Workers and their employers pay money, each month, into pension schemes. The pension fund, uses these contributions to buy shares and bonds, and these shares and bonds produce interest/dividends, which is the revenue required to be able to meet the fund's liability for paying out pensions.

The lower bond and share prices are, the more of them that the monthly contributions can buy, just as the lower land prices are, the more land a capitalist farmer can buy, so as to cultivate it, and produce profit. Because the price of bonds and shares does not determine how much interest/dividends they produce, just as the price of land does not determine how much food it produces, or how much profit the farmer produces by cultivating it, the lower the price of bonds and shares, the higher the yield (interest/price) on them. So, if, currently, on average, they produce £1 million of interest/dividends per 1 million shares/bonds, with a price of £10 million, the yield is 10%. If, the average price rises to £20, so that the total rises to £20 million, the yield falls to 5%. But, now, instead of the pension fund being able to buy 1 million shares/bonds, they can only buy 500,000, and this produces just £500,000 of interest/dividends for them, to be able to pay out as pensions.

That means that to cover their pensions (deferred wages) workers and their employers must increase their current pension contributions, so as to buy the same quantity of shares/bonds. Wages would have to rise, to cover the additional payment, so that, in reality, all of the additional cost comes out of surplus value, reducing profits. So, again, this amounts to a transfer from the real economy, from productive-capital to the fictitious economy, and into assets. Again, what actually happened, is that these increased contributions did not occur, and pension funds, instead, developed huge deficits in their capacity to meet future pension liabilities.

As with Housing Benefits, the state, then, had to step in to cover these deficits, and to provide benefits to pensioners, whose company pensions failed to meet their requirements. Again, that is covered via taxation, which amounts to a generalised drain of surplus value, away from the real economy and productive-capital into assets and the fictitious economy. In conditions in which workers were on the defensive, neither Housing Benefits, nor these pension benefits, provided by the state, actually made up for their increased cost of living/reduced pensions, meaning that wages were reduced below the value of labour-power, for these workers.

As with property prices, however, what pension funds did was to shift their focus from revenues (dividends/interest) to capital gains. It appeared that the increase in the nominal price of assets, and the paper capital gains arising from that, was more significant than any revenues those assets produced. So, especially in the 1990's, when the prices of many of these assets rose by anything up to 20% a year, for example, for several years of gains of technology shares, up to the Tech Wreck of 2000, it appeared that pension funds could simply sell some of these shares, and, thereby, convert capital to revenue. This is the equivalent of the process described by Marx of the release of capital. But, in reality, in this context, it is the equivalent of a farmer consuming a portion of their seed corn, as they increase their current consumption, at the expense of future production.

The financial advisors describe this process as “taking profits”. Of course, its not profit at all, but simply a paper capital gain. So, if £1 billion is paid into pension funds per year, this money can be used to buy shares and bonds. As the price of shares and bonds rise, it buys fewer and fewer of them, thereby, reducing the revenues produced to pay out as pensions. If pension commitments amount to £1.5 billion a year, and interest/dividends on the shares/bonds held in the fund amounts to £0.3 billion, the temptation is to use the £1 billion of contributions simply to meet pension commitments, which is the typical way that a Ponzi Scheme operates. That, together with the dividends/interest received still leaves a £0.2 billion shortfall. However, if the price of shares/bonds rises by 20% that is equal to say £2 billion. So, the £0.2 billion can easily be covered, by selling just 2% of the shares and bonds in the fund, whilst the value of the fund would still have risen significantly, making it appear that it is more than capable of meeting future pension liabilities.

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