Marx, having noted the antagonistic relation between interest-bearing capital (fictitious capital) and industrial capital, also noted that it was impossible for the former to exist without the latter, because it is the latter, which produces the surplus-value (profits), out of which the interest/dividends of the former are paid.
“The idea of converting all the capital into money-capital, without there being people who buy and put to use means of production, which make up the total capital outside of a relatively small portion of it existing in money, is, of course, sheer nonsense. It would be still more absurd to presume that capital would yield interest on the basis of capitalist production without performing any productive function, i.e., without creating surplus-value, of which interest is just a part; that the capitalist mode of production would run its course without capitalist production. If an untowardly large section of capitalists were to convert their capital into money-capital, the result would be a frightful depreciation of money-capital and a frightful fall in the rate of interest; many would at once face the impossibility of living on their interest, and would hence be compelled to reconvert into industrial capitalists.”
Yet, it was, essentially just this absurdity that the model of conservative social democracy, from the 1980's onwards, was based upon. Marx's analysis that there would be a “frightful depreciation of money-capital”, and fall in the rate of interest was correct. It was first of all the huge rise in the rate of profit, from the early 1980's, and release of capital, resulting from the rise in productivity, that increased the supply of money-capital (realised profits) relative to the demand for it, (capital accumulation). So, interest rates fell, and those falling rates were the initial cause of rising asset prices, via the process of capitalisation.
For working-class and middle-class people, who might have acquired a modicum of savings, the fall in the interest rate had the result described by Marx, i.e. the absolute amount of interest received fell to a level that was insignificant. That was true, also, for one of the most common forms of private pension, the purchase of an annuity, which pays a fixed amount each year for the rest of the pensioner's life. Rates of interest on savings dropped to below 1% p.a., and annuity rates not much higher. One result was that such people were encouraged to put their savings into riskier assets. Besides buying bonds and shares, usually via mutual funds, it prompted the development of a whole new class of small landlords – the buy-to-let landlords, who used their savings to buy cheap properties to rent out. In so doing, it gave another twist upwards to the growing asset price bubble.
The issue of falling yields/interest rates was not an issue for the ruling class, for the same reasons set out by Marx. If you have financial assets of $10 billion, even a yield of 1% gives you interest/dividends of $100 million a year. If you only spend $80 million, you still accumulate an additional $20 million. But, more significantly, the falling yields were the other side of rising asset prices. If the price of those assets rose by 10% during the year, that is a paper capital gain of $1 billion, far outweighing the low level of yield. Increasingly, the owners of fictitious-capital, became concerned not with the revenues they could obtain from these assets, but by the much larger capital gains they could obtain, as asset prices rose year after year.
When in 1987, those asset prices crashed, as the US Twin Deficits crisis, caused by Reaganomics (copied by Truss in 2022), resulted in a sharp rise in interest rates, central banks, led by the US Federal Reserve, began the process seen in the following decades, of simply bailing out the speculators and gamblers. So began the so called Greenspan Put, whereby, whenever financial markets appeared to be going to fall, which would have caused a sharp drop in the paper wealth of the ruling class, central banks intervened to cut policy rates of interest, increase liquidity and so on, to push those asset prices higher once more. The mantra, “Don't fight the Fed”, was readily accepted by speculators, who learned that this was a one-way bet, the privatisation of private capital gains, and the socialisation of capital losses. Who would bother putting money into real investment in business, under those conditions, rather than just buying bonds, shares or property, whose prices were guaranteed to rise each year?
The problem is that the rise in those asset prices could not be guaranteed, for ever, no matter how much central banks and the state attempted to defy the laws of capital by the illusion of asset price inflation, and the devaluation of the currency/standard of prices. Falling yields were the flip side of rising asset prices, in conditions where the mass of interest could no longer rise proportionate to the rise in asset prices. The mass of interest/dividends (and rent and taxes) had risen faster than the mass of profit, (as seen by the rise in proportion of profit going to dividends rising from 10% to 70%) but that was no longer tenable. The mass of profit had grown at a slower pace than the rise in asset prices, because an increasing proportion of profit had gone into the payment of interest/dividends, rent and taxes, rather than into capital accumulation, i.e. the expansion of employment, and so production of surplus value.
The rising asset prices were initially caused by falling interest rates, as the mass of realised profits grew faster than the demand for money-capital for capital accumulation. That is another way of saying, as Marx sets out in Theories of Surplus Value, that net output was growing faster than gross output. But, after 1999, when the new long wave uptrend began, that situation began to change, for the reasons set out earlier.
In short, employment rose at a faster pace, the mass of wages rose at a faster pace, causing the demand for wage goods to rise at a faster pace than during the previous 20 years. Ultimately, competition drives each firm to try to capture, at least, its share of this increased market. To do so, it must accumulate additional capital. To accumulate additional capital, it must either retain a greater proportion of its profits, or must borrow additional money-capital. Once the demand for money-capital begins to rise at a faster pace than the supply of additional money-capital from realised profits, or the mobilisation of previously unused savings, interest rates must rise. Rising interest rates, then, cause asset prices to fall. The continued use of the Greenspan Put to artificially inflate asset prices, over the previous 20 years, meant that, even a tiny rise in interest rates, by historical standards, not only represented a large proportional rise in those rates, and was enough to bring the entire fiction crashing down in 2008.
But, conservative social-democracy has no ready solution. Just as in the 1970's, when the old Keynesian orthodoxy, which represented the objective interests of socialised industrial capital, failed, resulting in stagflation, so, now the Monetarist orthodoxy adopted in its place, in the 1980's, and representing the objective interests of fictitious-capital, also failed. To protect the interests of the ruling class, conservative social democracy has had to adopt ever more authoritarian, Bonapartist methods, to try to forcibly hold together the growing divergence of the illusion with reality.
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