Brexit Britain's Bridge To Nowhere - Part 15 of 27

Blue Labour, and its isolationist Brexit adventure, offers no way forward either for British capital, or for workers in Britain. That the delusional ideas of Brexit are now propounded by a reactionary, petty-bourgeois nationalist, Blue Labour government, dependent politically on Trump, and on US imperialism, militarily and strategically, does not change that reality. Far from it, because the US, in its own Quixotic attempt to rewind history, by Trump, is only playing out the same course as Brexit, simply delayed and prolonged, given the nature of US imperialism, compared to that in Britain. The contradictions in that are correspondingly more pronounced, and the consequences, seen in the dramatic falls in global financial markets, and other assets, reflect it, and that is far from over.

As I set out recently, the effects of tariffs will be to raise costs of production, but, in conditions of still tight labour markets, workers, particularly in the US, and increasingly in China, Asia, and the EU, as governments engage in fiscal expansion, as they respond to US trade wars, will continue to spend, and will respond to the higher prices of wage goods/services by simply demanding higher wages. This is not the 1980's or 90's. The effect of the rising costs, leading to higher wages/value of labour-power, will be manifest, not in a recession – though growth may well be less than it would have been – but in reduced profits. In other words, a reversal of what happened as global costs of production were reduced by globalisation, and, as happened, described by Marx and Engels, resulting from the Repeal of the Corn Laws.

Faced with that squeeze on profits, as relative wages rise, the consequence, as in the period of the 1960's/70's, will not be, as Michael Roberts claims, a reduction in capital investment, as the basis of his perennial prediction of slump, but will be that firms have to finance that investment from retained profits – reducing the amount they pay in dividends, and so also reducing share prices – or by additional borrowing from banks, additional bond and share offerings, and so on, again reducing share and bond prices. Rising global interest rates will cause all asset prices to fall, in real terms, as happened between 1965-85.

Financial analysts are currently assuming that company earnings in the US will fall by around 10%, as a result of Trump's trade war, causing a slow down in growth. But, as set out above, even if growth does not slow by that amount, company earnings, i.e. their profits, will fall, as workers wages rise to compensate for higher prices. Company revenues, i.e. sales may rise – especially if increased credit, or liquidity injected by central banks to counter a squeeze on profits leads to renewed inflation – whilst earnings/profits fall in real terms. Certainly, under such conditions, the rate of surplus value would be reduced, and that, along with a higher cost for constant capital, will reduce the rate of profit. If the amount paid out as interest/dividends is checked, as more has to go to finance capital accumulation, whilst this same process raises the demand for money-capital, causing the rate of interest to rise, the inevitable consequence of that is a fall in share, bond and other asset prices, so that the yield on those assets rises accordingly.

If US corporate earnings are reduced by 10%, and this new environment of falling asset prices brings back some semblance of normality, and a reversion to the mean, the current astronomical price-earnings ratios will also crater. Even the pessimistic forecasts for the S&P 500, continue to foresee a p/e ratio of around 18, itself considerably lower than current levels. But, historically, in a bear market, that ratio has fallen to around 8, or less than half the current most pessimistic estimates. On that basis, the S&P 500 could be expected to fall to around 2,000 or less, compared to its current level of 5000. Other asset prices would follow suit. A look at the gyrations of US government bonds over the last couple of weeks illustrates the point. As US stock markets sold off heavily, the money flowed from stocks to bonds, reducing bond yields, but, within days, bonds also sold off, causing yields to rise. There has been a marked steepening of the yield curve as longer dated bonds sold off more aggressively, on the basis that the Federal Reserve has greater influence on short dated bonds, via its policy rates.

Across the globe, yields have surged, as bonds have sold off along with stocks, whilst gold continues to play its role as a long term store of value. By contrast, crypto-currencies such as Bitcoin, which have no value whatsoever, have fallen by more than 20%. All of that compounds the problem of Blue Labour and Brexit Britain in trying to resolve its problems based upon the policy of wishful-thinking that was behind its plans for growth, at the same time as implementing austerity, and isolating itself further from its largest trading partner, via the continued pursuit of Brexit, and support for Trump. It is losing £40 billion a year in taxes as a result of being outside the EU, and its attempts to cuddle up to Trump to get a trade deal based on Trump's desire to sell genetically modified crops, chlorine washed chicken, and meat stuffed with antibiotics, growth hormone and other stuff, will only isolate Brexit Britain even further from the EU.

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