Predictions For 2024 - Prediction 2 – Asset Prices Continue to Fall In Real Terms

Prediction 2 – Asset Prices Continue to Fall In Real Terms

In 2022, as I had predicted, asset prices crashed, as a result of interest rates rising. Some asset prices fell by 20-30%, in nominal terms. However, in real terms the crash was bigger than that. For thirty years, the continual devaluation of currencies/standard of prices, as a result of excess currency being thrown into circulation, manifested as, and was directed into, the inflation of asset prices. That was made possible because the excess supply of money-capital from realised profits, release of capital from the devaluation and moral depreciation of fixed capital, as against the demand for that money-capital, for the purpose of real capital accumulation, caused real interest rates to fall. The period of intensive accumulation, during that stagnation/Winter phase of the long wave cycle, held back the demand for money-capital, whilst states did not utilise the surplus money-capital, and low interest rates to borrow to finance the rejuvenation of infrastructure. On the contrary, during the 1980's, and 90's, they implemented measures of fiscal austerity, and oversaw a vandalising of both infrastructure, and public services.

That period of intensive accumulation/stagnation also meant that the relative surplus population continued to press down on the labour market, meaning that even though real wages may have risen, relative wages declined. For some, real wages also declined, as is always the case in such periods, when the “stagnant population” grows in absolute numbers, even if it shrinks relatively. The consequence of these factors meant that, the devaluation of the standard of prices did not manifest in an inflation of commodity prices, which exaggerated the inflation of asset prices, in real terms.

As the long wave cycle transitioned from that stagnation phase to the prosperity/Spring phase, in 1999 that brought with it a change in material conditions. The increased economic activity brought an increased demand for capital and labour, but as Marx sets out in Capital III, at this phase of the cycle, it is not enough to cause either relative wages, or real interest rates to rise. The relative surplus population still exists, and capital responds to the changed conditions, first, by using existing workers more extensively (full-time rather than part-time, permanent rather than temporary employment, and the use of additional overtime work), which means that relative wages do not rise, even though nominal and real wages do. The rate of surplus value does not fall, but nor does it continue to rise, whilst the mass of surplus value rises, as more labour is employed.

The supply of additional money-capital comes primarily from realised profits. However, some of those profits, over the years, do not go to fund consumption or capital accumulation. They form unused savings, money hoards, and, at times, these hoards can also be mobilised, as additional money-capital. In addition, there are money reserves in the form of amortisation funds, as well as those held by all households, reflecting the time between the reception of revenues, and their use for consumption. Additional money-capital does not come from the supply of additional/excess currency, which merely devalues the standard of prices, leading to inflation.

A contradiction, then, arises between real market rates of interest, and yields on assets, as well as the policy rates set by central banks. As the ruling class owned its wealth in the form of fictitious capital, and had become addicted to speculative gains on those assets, as yields on them continually declined (even becoming negative on bonds), central banks strove to keep those asset prices inflated, by reducing their own policy rates, and by simply buying up bonds (QE), and other assets, even as the reality of the real economy was creating conditions where real market rates of interest, determined by the relation between the demand and supply for money-capital, was heading in the opposite direction. That was seen in the fact that many small businesses could not obtain loans, and had to resort to expensive forms of borrowing such as the use of personal credit cards. Usury returned in the form of the mushroom growth of pay day loans providers. Only measures of ever more excessive liquidity, and purchase of assets, together with measures by governments to curtail economic growth, and so hold back the demand for money-capital, could square that circle.

The vicious austerity imposed, after 2010, most notably in the economies of Southern Europe, as well as in Britain, and some parts of the US, was one manifestation of that contradiction, coming at a time, when central bank policy rates, and yields on bonds were at the lowest levels for 5,000 years, and so when borrowing to finance such spending should have been more than feasible. The other manifestation of it, and reason those yields were so low, was that central banks increased the already excessive amounts of liquidity in circulation, and used it directly to buy up those bonds, pushing up their prices. In fact, illustrating the extent of the contradiction, they managed to push the prices of those bonds so high that more than $20 trillion of them, globally, had negative yields. It was possible to print “money”, we were told, in order to buy up worthless bits of paper, but not to print money to finance states to buy real commodities, to employ real workers, and produce real wealth.

This latter fact provided grist to the mill of the advocates of Modern Monetary Theory, but, thereby, also simply reinforced the delusion that what was being printed was “money”, whereas all that was being printed was money tokens, which further devalued those tokens. They didn't seem to understand that the reason that excess liquidity was not leading to an inflation of commodity prices, was precisely because it was not being used to buy commodities, but was being used to buy up existing assets, causing their prices to be inflated, instead. Had, the additional money tokens been used to buy up commodities, rather than existing assets, the consequence was equally going to be an inflation of commodity prices, and that is precisely what happened, when even more liquidity was created and handed to households during lockdowns, which then gushed out in a tsunami once those lockdowns ended in 2022.

The inflation of commodity prices, and crash of asset prices in 2022 was not simply coincidental. Commodity prices rose, because the devalued currency, now washed into the real economy, whereas previously it had been channelled into the purchase of existing assets. This ocean of liquidity now surged into the purchase of commodities, commodities whose own supply had been deliberately curtailed as a result of lockdowns. The value of those commodities, was now compared to the value of the massively devalued money tokens, and so inevitably prices rose sharply. As commodity prices rose sharply, and the economies surged, the demand for money-capital also rose sharply relative to its supply. Interest rates necessarily rose, and rising interest rates caused asset prices to fall sharply via the process of capitalisation.

In 2022, the inflation in commodity prices, of around 10%, meant that the falls in asset prices of between 20-30%, were the equivalent of a fall, in real terms, of 30-40%. Globally, bond prices suffered their biggest fall in history. In 2023, bond prices have continued to fall, but with periodic rallies, each time speculators have believed that central banks would be led to cut their policy rates, as inflation fell, or economies fell into recession. As bond prices have rallied, on another bout of such euphoria, towards the end of 2023, stock markets also rallied, as lower bond yields, make shares look cheaper. That euphoria is almost certainly misplaced, as have previous bouts during 2023.

Firstly, as set out in Prediction 1, the repeated claims about imminent global recession during 2023, all were proven false, and globally, employment continues to expand, often significantly, as in the US. The increase in nominal interest rates, whilst impacting asset prices, directly via capitalisation, did not have the same impact on the demand for capital, because real interest rates remained low, or even negative, given high levels of inflation. In addition, a lot of the capital accumulation could be financed via the mobilisation of existing money reserves, and commercial credit. With workers wages growing both as a result of increases in nominal hourly wages, and additional employment, and, now, rises in real wages, the potential to fund household consumption is not at all dependent on borrowing. The only area of consumption significantly dependent on borrowing is house purchase, which simply feeds into the further downward pressure on asset prices.

In 2023, economies inevitably slowed, from the frantic pace seen following the ending of lockdowns, in 2022, but there is no evidence of any impending recession, and so no indication of either a fall in employment, or of wages, or consequently demand for wage goods and services. On the contrary, as Prediction 1 set out, the likelihood is that the existing conditions will feed into more rapid economic growth in 2024. That comes, now, however, at a time when the relative surplus population has been reduced significantly, when protectionism and curtailment of free movement means that capital does not move so easily to where labour supplies exist, and vice versa, and so where the simple operation of the demand and supply for labour will cause wages to rise further. That comes at a time when productivity growth is stalled, and so where this rise in wages will also increasingly lead to a rise in relative wages/fall in relative profits.

In short, the supply of additional money-capital, from realised profits, is set to fall, relative to the increasing demand for money-capital, as the global economy expands. That means real market rates of interest will rise, and asset prices will fall. As in the past, for example, during the period 1965-85, that will be disguised, as central banks, once again, increase liquidity, so that firms can raise prices to protect money profits, leading to further bouts of commodity price inflation, as also occurred in the 1970's.

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