The first flush of all this speculation, combined with the idiocy of conservative tax cuts, on the basis of the fallacy of the Laffer Curve, which created the huge twin deficits, in the US, was the financial panic that led to the 1987 financial crash, and the biggest ever one-day crash in share prices in history. But, in response to it, central banks increased liquidity, and channelled it into those asset markets. The prices of financial and property assets went back up, and, as central banks repeated this procedure, each time that asset prices showed signs of falling, or even just not rising, the speculators were given the clear sign that this was a one-way bet.
It no longer really mattered whether the shares you bought were a good bet or not, because, good or bad, they would rise, as the sea of liquidity raised all boats, and, given that new derivatives were developed, lumping together shares from many different companies, the good could balance out the bad. The same idea was behind mortgage backed securities (MBS), which played a big part in the 2008 financial crash.
So, even for ordinary citizens, why would you put your money into an ordinary savings account, paying increasingly minimal amounts of interest, rather than buying a mutual find, and so whose value increased along with the prices of shares. Or, you might see house prices rising, and think you must buy a house, borrowing extraordinary amounts to do so, in order not to be left behind. You might even buy several houses, not particularly for the rent you receive from them, but mainly in the expectation that the price of the house will rise 5, 10 or more percent a year.
And, it was not just individuals drawn in to this Ponzi Scheme. Companies paid out increasing proportions of their profits as dividends, rather than use them to expand. Shareholders poured the dividends back into demand for existing shares, driving their prices higher. As companies used less profits to accumulate capital, they also issued fewer new shares to finance expansion. Indeed, they used profits to buy back shares, so that a reduced supply and increased demand for shares pushed their prices higher, as well as inflating earnings per share figures.
So, by all these means, central banks were able to direct this hugely increased mass of devalued money tokens into this particular sphere, and so massively inflate these specific prices, in the process, draining liquidity from the real economy, and so limiting the rise in commodity prices. But, as Marx says, they can never totally control that, which is why, particularly after 1999, when a new long wave upswing begins, liquidity still seeps out into the real economy, as economic activity expands, and the demand for labour increases at a faster pace. A good proxy for that is the confidence of workers, represented by the Quite Rate, as can be seen in its trend since 2000.
That process of rising economic activity, demand for labour, expansion of the wage fund, increased aggregate demand, with competition driving capital accumulation, leading to increased interest rates, and falling asset prices, is what led to the financial meltdown of 2008. In its aftermath, simply printing additional money tokens was not enough. Central banks, now, have to more directly drive those devalued tokens into the purchase of financial assets – QE – and governments had to undermine the real economy via austerity, so as to prevent growth, and the increased demand for labour and capital that had started to impact profits and cause interest rates to rise.
But, not even that was enough, because, by 2018, the global economic growth was forcing its way through again, causing interest rates to rise, and stock markets to drop by 20%. That provoked the introduction of trade wars, to slow growth and, when trade simply started to flow through different channels, global growth was physically stopped in its tracks by the imposition of lockdowns that had absolutely no logical justification. The current Chinese zero-Covid lockdowns is the manifestation of that as farce, as China needs to prevent rapid growth, as its serial asset price bubbles, particularly in property, would burst sensationally, once that growth led to rising rates. But, in response to the contradictions it creates, the Chinese state is led to print even more money tokens to bail-out one sector after another, and also to announce one fiscal expansion after another, also paid for by this shadow money, creating the inevitable conditions for a hyperinflation once it can no longer put enough fingers in the leaking dykes.
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