Prediction 2 – Asset Prices Continue to Fall In Real Terms
As inflation has fallen during the year, its affect on real asset prices has been reduced. Property prices have gone through phases of rises and falls, in response to every movement of bond yields, and, thereby, of mortgage rates. As noted, at the end of 2023, there was a lot of anticipation of central banks cutting rates, which led to rising asset prices, but, as also predicted, those anticipated cuts by central banks repeatedly failed to materialise, and the paths of future cuts were subsequently postponed. Consequently, bond prices fell, and yields rose, until mid year, when the Federal Reserve began to cut its rates more aggressively, and the ECB, despite more persistent inflation, began to follow suit. That caused bond prices to rise, periodically reversed, as continued strong payrolls numbers and growth contradicted the idea that an economic slowdown was a requirement for lower inflation. But, the opposite has also been seen. That is, having fallen significantly, as a result of a relative tightening of liquidity (QT), inflation plateaued and has shown signs of rising once more, despite a moderation in the pace of economic growth.
Growth has slowed from the frenetic activity that followed the lifting of lockdowns, and which totally disproved all of the catastrophist predictions of a “post Covid slump”, but the growth in the US, and even a Europe hamstrung by the effects of its boycotts of Russian energy, and return of policies of fiscal austerity, has still seen a continued rise in employment. Relative labour shortages have seen firms compete for labour, driving wages higher, and, in certain sections of specific shortage, considerably higher.
At first that took the form of a rise in the Quits Rate, as, particularly, unskilled workers were able to move from one unskilled job to another that paid more. The average pay increase from moving jobs has been around 14%, as against average private sector pay rises of around 7%. Subsequently, it has resulted in a higher level of unionisation, and strikes by workers for higher pay, pretty much identical to the processes set out by Marx in Value, Price and Profit.
As inflation fell, in conditions of rising nominal wages, that meant real wage increases. Together with the fact that rising employment meant that individual workers had higher incomes simply as a result of working additional hours, and households had higher incomes as a result of more of their members being in employment, even with only modest real wage increases, this provides a basis for increased household spending.
It should be noted, here, that, when looking at the aggregate data for earnings growth, the worst affected by this have been not wage-workers, but that large body of the petty-bourgeoisie, of the self-employed. That is the start of a return to the normal conditions over the last 200 years, in which that petty-bourgeoisie sees its already miserable condition squeezed further, as, on the one hand, it cannot compete with larger capitals, and, on the other, cannot simply benefit from higher wages, in conditions where labour is in relative short supply. Indeed, to the extent it employs the odd additional worker, itself, it is forced to sweat them even more, which is why it has been so keen to pursue the removal of protections for workers, manifest in its pursuit of Brexit, and parties such as the Trumpists, Tories, Le Pen and so on.
Truss was forced from government by the global ruling class, as it inevitably attacked the Pound, and sent UK borrowing costs soaring, in response to her 2022, mini-Budget, designed to pursue that petty-bourgeois agenda. Despite that providing an easy political target for Blue Labour, the reality was that, after Truss's removal, the effects on the UK economy quickly dissipated, but that simply restored the underlying trend of rising interest rates that preceded it, so that, by the time Blue Labour won the election, UK bond yields were back to the level of that Truss period.
Now, we have Blue Labour announcing further spending, and borrowing to cover it, rather than raising taxes, and, inevitably, borrowing costs have risen again, though not as sharply as with the Truss mini-budget. To bridge the gap, Blue Labour is, now, proposing to effectively steal public sector workers pensions, in order to use them for high risk investments to fund its utopian plans for economic growth.
The plans borrow a lot from the ideas that underpinned the development of Mortgage Backed Securities, in conditions where, defaults on mortgages brought down the supposed safe components of such securities, and led into the global financial crash of 2008. Of course workers are not to be given any control over these proposed mega funds (which in themselves would be a sensible development) and its unlikely that the government will provide any worthwhile guarantee to underwrite any losses the funds sustain from the required higher risk investments they are being asked to finance. Workers should resist any such development, or themselves risk seeing their future pension payments again going up in smoke, as the next financial crisis wipes them out.
Continued wage growth during the year, therefore, led central banks to ensure that liquidity was sufficient to enable firms to raise prices, to compensate to avoid profits being squeezed, and so the basis of a return of inflation has been put in place. Higher household incomes, together with periodic falls in mortgage rates, as bond yields fell in anticipation of central bank rate cuts, put a floor under property prices, but they have, on average, not exceeded the rise in consumer prices, or wages, meaning a fall in real terms.
House prices are more sticky than land prices, for the simple reason that people buy them as somewhere to live. They have been encouraged to, also, see them, wrongly, as “an investment”, i.e. as the source of a potential capital gain, or at least, in terms of a fear of missing out, not making a capital loss, by not buying when prices were lower. But, fundamentally, people need houses as somewhere to live. If mortgage rates rise, potential buyers see the amount they can pay for a house, decline, but potential sellers need not sell to them at the lower price. They can simply sit on their existing house, although that, also, then, frustrates their own desire to move, and depresses demand for houses. Large builders, can simply sit on building land, in anticipation of a future recovery in prices. Small builders, however, who build speculatively, in the hope of turning their capital over quickly, do have to sell, for that very reason, and so, are more affected by the lower bids that potential buyers submit.
Land prices, as I have set out elsewhere, are determined by rents and by interest rates, i.e. by the process of capitalisation. Higher rates of interest cause land prices to fall, as with any other revenue producing asset. But, that can be countered by rising rents, and part of the determination of rent, is also now, any surplus profit that a builder can obtain from inflated house prices/property prices.
If the cost of production of a new house, excluding the land, is £60,000, and the average industrial rate of profit is 33.3%, average profit is, then, £20,000, giving a price of production of £80,000. However, if the current market price of equivalent existing houses is £300,000, the builder will, also, sell their new houses for that price, obtaining a surplus profit (rent) of £220,000, and the owner of the land, will demand this amount as rent, which is reflected in the land price. It means that the cost of land is then around 70% of the cost of the house (which it currently is in the UK), as against around 10%, in the post-war period. It is why key to reducing house prices, is reducing building land prices, and key to reducing building land prices is bursting the bubble in existing house prices, which requires higher interest rates, and removal of existing subsidies and schemes to artificially boost demand for houses.
The slow grind upwards of the long wave expansion, despite the attempts by the state and central banks to suppress it, continues to push interest rates higher, as the demand for capital rises relative to supply, and that means that slowly that bubble in all asset prices, including house prices, will be deflated. Its easy to see why central banks, as the centralisation of the interests of all other banks and financial institutions, are keen to avoid that erupting again in a property price crash such as that which occurred in 1990, in Japan, where property prices crashed by up to 90%, or in Britain, where house prices crashed by 40%, or as in 2007, and after, where house prices crashed in the US, and parts of Europe by around 60%, prior to intervention by the state. In the last couple of decades, commercial banks have focused the vast majority of their lending on mortgages and loans linked to property. A crash in property prices, as in 2008, would, again, expose the fantasy of many of their balance sheets, just as happened in 2023, when higher interest rates had that effect in the US.
We have now had several months of central banks cutting policy rates, as inflation has fallen, and yet, in the US, bond yields are again, now rising once more, with the 10 Year Bond sitting at around 4.30% and rising, as also, the period of inverted yield curves seems to have ended, without any sign of the recession that such events are said to predict.
The fact that yields are rising, whilst inflation is falling, means that real yields are rising, and are doing so, despite, also, central banks reducing their policy rates, and again, slowing the process of quantitative tightening. Stock markets have risen, partly because hot money that flows out of bonds, is most easily transferred by financial institutions, and large private speculators into them. In part, it is also a gambling frenzy (seen also in the ludicrous rise of Bitcoin to over $100,000), in the US, that a Trump Presidency will, again, cut taxes on the super rich, and on the proceeds of such gambling. Asset markets are always driven by such sentiment and emotion, as the Tulipmania, Railway Mania, South Sea Bubble, and Tech Mania illustrated. But, as Minsky saw, that sentiment is ultimately confronted with reality, and quickly, then, the sentiment turns in the opposite direction, and crashes result.
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