How Liquidity Flows From Asset Markets Into The Real Economy - Part 7 of 17

Marx was right that those who had only small amounts of interest-bearing capital/savings, saw the interest they receive disappear to nothing, but, largely excluded from the possibility of becoming productive capitalists, themselves, in the era of imperialism, it simply led to them being also drawn into the sphere of speculation, as buy-to-let landlords, day traders and so on, again drawing liquidity into the sphere of asset purchases, in the hope of capital gains.

I have set out how the period since, about, 1987, saw falling interest rates leading to rising asset prices, and capital gains, which then led to a period in which money was increasingly diverted from the real economy (both from personal consumption and from potential productive consumption) into speculation in financial and property assets, in search of these capital gains, and this became the prime driver, rather than the pursuit of yield on those assets. Indeed, as the use of capital for productive purposes was held back, so the growth of the mass of profit was held back too, other than from what arose from rising rates of profit, and release of capital from higher productivity, and that meant, with soaring asset prices, yields inevitably fell, ultimately reaching the surreal condition of around $18 trillion of global bonds with negative nominal yields!

1987 was also the point, following the worst stock market crash in history, when central banks also committed themselves to preventing such falls in asset prices, so as to protect the paper wealth of the ruling class, and, thereby, its power and influence in society. They committed to doing that, even at the expense of the real economy. Its manifestation was the conversion of Ayn Rand devotee, and supporter of gold and sound money, Alan Greenspan, in to the world's money printer in chief. Each time stock or bond markets sneezed after 1987, Greenspan was there to increase liquidity, cut rates, and push them back up again. As with any such addiction, each new sneeze required a greater hit of the drug to satisfy it.

The increases in liquidity created a hyper inflation of asset prices, none of it trickling down or stimulating the real economy, but, instead, having the exact opposite effect. The great increase in inequality that occurred after 1990 was not one deriving from differences in income, but almost entirely one deriving from differences in wealth. Those who already owned property, or shares, or mutual funds saw their paper wealth explode, whilst those who did not saw their potential to acquire those things, and most visibly property, disappear. 

If you look for inequality data, however, you will invariably be presented with data on income inequality rather than wealth inequality, and nearly all of the media coverage of inequality is based on income not wealth. There is a simple reason for that. The data on income inequality is essentially constrained within the limits of those who obtain their revenues from labour. It is a measure of a growing inequality of the wages of the lowest paid and highest paid workers (the latter usually being described as middle-class), rather than the fundamental division in society, which is the division between all of these workers, high or low paid, as against the owners of capital, now capital almost exclusively in the form of financial and property assets. It is the basis of social-democrats arguing for redistributive tax polices on wages, taking from better paid workers to give to worse paid workers, rather than dealing with the fundamental issue, which is the ownership and control of capital itself.

In particular it is the issue of control. Workers already do, collectively, own all of the large-scale socialised capital that dominates the economy, in the form of corporations and cooperatives, but they are denied even their bourgeois right, as property owners, to exercise control over it. Instead, current company law allows its non-owners, shareholders, to exercise that control, and they do so in a way that workers never would. The shareholders, via the executives they appoint, rather than looking to the long-term interests of the company, look to their own short-term personal interests, which is why they have used profits to pay increasing dividends, and buy back shares, rather than to invest in additional productive-capital, for example.

Liquidity remained trapped in the green,
 and out of the red.

And, they have done that, because paper capital gains became their prime motivation, not the accumulation of real capital to produce real profits from productive activity. There is nothing new in that, because such financial bubbles have been blown up throughout history, and all of them eventually burst, ending the period of madness, and restoring some semblance of sanity and rationality. What has been different since 1987, is that, each time such a bubble has burst, central banks have stepped in to inflate it again, and governments have simultaneously intervened to goose property markets, deregulate credit and financial markets, and to impose fiscal austerity and so on, to lower economic activity, so as to reduce wages, boost profit rates, and lower interest rates. Because the state has intervened for 30 years, and most markedly over the last 20 years, to do that and more or less guarantee those capital gains, it was inevitable that money circulating in the sphere of assets would stay there, and just move from one asset class to another, in search of capital gains, and that money would continue to be pumped into that sphere, draining it from the real economy.

Back To Part 6

Forward To Part 8