Truss's Plan To Bankrupt Britain

Truss has announced her plan to save households from an energy crisis, and, at the same time, to reduce UK inflation, by preventing energy price rises. Well, in fact, not, because she, and the British government, have no means of preventing such rises in global energy prices, and the plan only involves preventing them being passed on into household energy bills. In so doing, it just absorbs the higher cost elsewhere, leading to higher prices just by a more circuitous route. As part of that, it involves astronomical levels of government subsidy to energy distributors, so that they can absorb the higher costs of energy from producers. That means, immediately, much higher UK interest rates, at a time when interest rates are soaring anyway, probably more Bank of England money printing, which means even higher levels of inflation, and eventually, much higher levels of taxation to repay the enormous debts that it involves.

According to ukpublicspending, the UK budget deficit is estimated, currently, to be £42.7 billion, in the year to March 2023. Truss's subsidy plan is estimated as costing up to £230 billion, which would mean a sextupling of the current deficit. Its simply not credible to think that such an increase in debt is possible, without interest rates rising, in a climate when interest rates are already moving higher all round. From a condition where there were $17 trillion of bonds, globally, with negative yields, that figure is down to just $2 trillion, all of them in Japan. Yields are still at historically very low levels, and real yields are still negative, meaning they have much further to go, and, at these kinds of levels, a doubling or tripling is easily possible. Ask anyone with a variable rate mortgage who has seen the rate triple in just the last few months.

Even at these low levels, the interest burden for the UK government was estimated at £83 billion, by the ONS, in March, for the following year. That was equal to around 5.2% of government spending. Since that time, interest rates have risen significantly. In July, for example, the actual interest burden was 63% higher than in July the previous year. On the same day that Truss announced her “plan”, the ECB raised its policy rates by 0.75% points, and the Bank of England is expected to do the same, or even a full 100 basis points, at its next meeting, with the Federal Reserve continuing in the same vein. Interest rates are soaring even without this additional borrowing, and the borrowing now adds even more fuel to that fire. And, the EU is likely to follow a similar idiotic course, meaning that global levels of borrowing are going to soar even higher, leading to even higher global levels of interest rates, with, already, many companies rushing to capital markets to borrow ahead of such rises.

Even the £83 billion of interest payments, forecast by the ONS, represents £1,900 for every household in the country, and about 2.5% of National Income. Increasing the amount of debt six-fold, means a corresponding amount of increased interest, even before the effect of that on rising interest rates is taken into consideration. The £230 billion is over two years, but that would still mean increasing the interest burden to around 6% of National Income, even before any rise in interest rates. If UK interest rates rose, even by 50% from current levels, which seems an extremely conservative estimate, given current conditions, that would mean that its interest burden would rise to around 9-10% of its National Income!

But, its more likely that interest rates are set to double, treble and more, leaving the debt burden at levels that become totally unsustainable from National Income, as with those households that end up trying to cover their current interest payments by borrowing from pay day lenders and loan sharks. The idea this can be dealt with by Britain, because it has “taken back control”, and can simply print more money tokens shows how idiotic the mantra “take back control” is, because, printing money tokens caused the inflation in the first place, and printing more of them, like confetti, simply leads to a Weimar style hyper stagflation. There is no independent national control over the laws of economics and the global market.

The UK economy is beginning to look like a banana monarchy, and, already, in financial markets, its currency is being talked of as resembling that of an emerging market rather than that of a developed economy. At least, now, with a monarch that talks to plants, it might be able to talk to the bananas in the hope of a good crop. The Pound has dropped from around $1.40 before Brexit, to around $1.14, and is headed, in a secular downward direction, towards parity. That, in itself, represents a significant problem, because many globally traded commodities such as energy, primary products and foodstuffs are priced in Dollars, and a collapsing Pound, means that the import prices of all these things rises accordingly. So, Truss's ambition that, by capping household energy prices, she would reduce headline inflation is also forlorn, because the falling Pound means that all of these other prices are going to be rising that much more, whilst businesses and households will face rising costs on their borrowing, alongside continuing rising prices of goods and services.

And, the truth is that Truss has no idea whether the open ended cost of these subsidies will be £230 billion, or £1 trillion, because she has no idea what global energy prices are going to be over the next two years. The latest harebrained scheme of NATO/G7, to impose a price cap on Russian oil and gas sales, will, in fact, lead to global shortages of both, pushing global prices higher still, and so that will mean that the current estimates in Truss's plan will be gross underestimates.

We have not, yet, seen the full debt costs arising from the idiotic lockdowns. Had the rhetoric of lockdowns been actually implemented, so that all production other than the most essential was stopped, then, already, we would have been facing a situation in which large parts of the economy needed massive state bail-outs, making the £2 trillion that Britain paid to bail out the banks and finance houses, after the 2008 crash, look minor. But, in reality, although individuals were locked down, as far as their individual liberty was concerned, the capitalist state made sure that the vast majority of them continued to engage in labour, and so to produce surplus value for capital. It was okay to get on a bus or tube to go to work, but not to go to the pub or theatre; it was okay to engage in a social gathering and booze if it was “work related”, but not if it was just a party; it was okay to sit cheek by jowl with workmates in the workplace, but not on the football terraces, or at a union meeting, and so on.

Some of that cost in additional borrowing, has been disguised by the vast amount of additional money printing undertaken by the Bank of England, which is now feeding into the high levels of inflation, and that will continue to feed through the system, in inflation, for another two years, even if no further increases in liquidity are undertaken. But, rising interest rates mean that all of the zombie companies that were only clinging to existence on the back of unsustainably low levels of interest rates, are now likely to go bust. Its estimated that between 1 in 5 to 1 in 4 companies, or about 1 million companies, in Britain, are zombie companies. That is they can only afford to pay the interest on their debt, not repay the debt itself.

As interest rates rise, huge numbers of them will go bust, and that was coming with or without an energy cost crisis. That simply means it comes faster and harder. That is bad news for the Tories, because, it is all of the small businesses and self-employed who will be the ones destroyed, and it is amongst those sections that the Tories have based themselves, over the last 40 years, and from whom came the support for Brexit. For that reason, the Tories may again try to bail them out, as they have done for the last thirty years, by providing them with subsidies, excusing them from the Minimum Wage, and other minimum standards of decency towards their workers. Its why they wanted Brexit, so as to deny workers those basic rights.

Given the nature of Starmer's Blue Labour, as itself now looking towards that reactionary petty-bourgeoisie for electoral support, and its general petty-bourgeois outlook, the Tories might expect to find support from it, for such policies, no doubt with Starmer, however, seeking to bolster it with further reactionary petty-bourgeois policies such as financing the subsidies by taxes on the larger, more progressive forms of capital.  The demise of all those zombie companies would be historically progressive, however. The rise in the social weight of the petty-bourgeoisie, since the 1980's, meant a corresponding fall in the social weight of large-scale socialised capital, and of the working-class that is both its collective owner, and employed by it, in large collectives.

It is that change in the balance of social forces that led to the Tory Party going from being a predominantly conservative social-democratic party, in which the petty-bourgeoisie had to accept the role of being foot soldier – or to enter the ranks of the NF, BNP, and then UKIP etc. - to it being a predominantly petty-bourgeois, reactionary, English Nationalist Party, in which the foot soldiers have seized control, and the bourgeois, conservative social democrats had to bite their lip, and bide their time, especially after their protégé Blair failed them in creating a more congenial second home, and the Liberals destroyed themselves by their coalition with the reactionary Tories in 2010. That day was disastrous for the bourgeoisie.

A large scale clearing out of all of those inefficient, low value, low productivity, zombie companies would free up capital and labour, for larger companies, currently facing labour shortages, and consequent rising wages. Its unlikely that any subsidies provided by the Tories or Starmer's Blue Labour would save them in the conditions now developing. That, in itself, creates further problems for Truss. The increased social weight of the petty-bourgeoisie, over the last 30 years, meant that, in large parts of the economy, it was impossible for workers to organise. Small employers can simply sack a few workers, and replace all of them, whereas a large firm employing several hundred workers cannot. The small firm encourages all of those ideas of individualism and so on that have expanded in the last 40 years, and which the Tories depend on for their electoral support. Now that is reversing. Its not just that large concentrations of workers, in all the usual places, are taking industrial action for higher wages, but workers, even in smaller companies, are beginning to unionise too.

In fact, Truss's plan will have consequences she does not intend. One plank of the strategy of states, facing rising economic activity, rising wages squeezing profits, and rising demand for capital causing interest rates to rise, has been to physically restrain that growth. After 2010, fiscal austerity achieved that, whilst QE diverted money into gambling on financial markets, and away from the real economy. Lockdowns after 2020 did it, more brutally, but were a double edged sword once the lockdowns had to be removed. The problem is highlighted perfectly by the experience in China, where the state fears allowing the economy to operate normally, for fear of it leading to sharply rising wages and interest rates, and a collapse of its serial asset price bubbles, and so where it has to continually impose lockdowns of millions of people, in its cities, as part of an otherwise inexplicable zero-COVID strategy.

Another element of this strategy, in recent months, as economies throughout the globe were growing rampantly, and workers demanded higher wages, was to appeal to animal spirits, invoked by fear of war in Ukraine, along with the fear of job losses (which never materialised as labour markets continued to strengthen), and projections of massively falling living standards and consumption, as rising energy and food prices ate into household disposable incomes. In the US, not only did recent job figures come in strong again, but the last ISM numbers showed continued strong demand in the economy, and firms responding to it. Part of the reason that the numbers came in so strong, it has been suggested, is that the actions of Biden to release oil from the US Strategic Reserve, which has helped reduce US gasoline prices, fed into household disposable incomes, so that they could again increase spending on other goods and services.

By capping average energy bills in the UK at £2,500, although this represents a hit of around £1,000 a year, to most households, it is a big reduction compared to the £6,000 bills that were being predicted, leaving households with around £3,000 of disposable income they thought they would not have. On the one hand, it means they will have no incentive to reduce their energy demand, so acting to keep energy prices high (ironically, again, benefiting Putin, thereby), but it is also likely to feed into additional consumer demand for all goods and services, especially as it goes along with rising wages, pensions and benefits, as they all respond to past inflation. In terms of pensions, pensioners have an incentive to support striking workers, because, if workers get wage rises ahead of inflation, so will pensioners under the triple lock guarantee!

Of course, as described above, the suggestions of Starmer's reactionary, petty-bourgeois, Blue Labour are no better, and, indeed worse. The idea of a price cap was one put forward by Blue Labour, though they were, as usual, late in putting forward any solution, and simply copied what the Liberals had said. Blue Labour would supplement it with a windfall tax on big energy companies. Presumably they mean the energy producers, i.e. gas and oil producers, not the energy distributors and retailers, who have to buy in these supplies at the high prices, before they can sell them on. Either way its idiotic, as I have set out before.

Britain obtains only around 50% of its gas from the North Sea, and that production is declining, as reserves run out. There are, of course, large energy producing companies who sell energy in Britain, and who are registered in Britain, and have their shares listed on the London Stock Exchange. But, most of these companies extract oil and gas from other parts of the world, and its from there that they make their profits. Of course, the bourgeoisie and petty-bourgeoisie, and their ideologists like Starmer and Reeves do not understand this, because they think that value is a consequence of exchange not production, and that profits derive from sales to consumers not from the exploitation of wage labour. Whatever they believe, however, it remains the case that a company that produces oil or gas in, say, Algeria, makes its profits there, and only realises those profits, when it sells its products in Britain, or anywhere else.

So, if Britain proposed to impose a windfall tax on the profits of such a company, it would simply be an incentive for that company to move its registered offices from Britain to, say, Algeria, or some other country that did not propose such a tax on its profits. So, then, not only would Britain not get the expected taxes, but it would lose the other tax revenues it currently receives from the company, as well as it resulting in job losses, and other costs to the UK economy, as it shut its administrative operations.

Britain could attempt to extract tax on the basis of its sales in Britain, but, then, as a global company, able to sell its products anywhere in the world, such a company could simply refuse to sell its oil and gas in Britain, which would leave Britain further up the creek. It would, in reality, mean Britain imposing an import tariff on the very energy supplies it needs, and, thereby, increasing their price. The very opposite of the result it seeks, and a replica of what it has already done by boycotting Russian oil and gas, as part of its economic war against Russia and China.

Again, this is where the failure to consider the difference between energy producers, as against distributors and retailers has been ignored in a welter of populist rhetoric. Suppose the energy producer is A, and it sells gas to a British distributor B. A, now based in Algeria, will sell its gas to B, at a price determined by global gas prices. B will forward its payment to A in Algeria, and its, there that A's profits will be realised, secure from the clutches of the British Treasury. B will now pay these much higher global prices.

Its nominal profits might rise, because if, previously, it paid £100 million for gas, with a profit margin of 1%, making, £1 million of profit, now, with a cost of £500 million, even with a profit margin of just 0.5%, it will make £2.5 million profit. But, the fact remains its profit margin has halved, and is hardly a basis for a windfall tax, considering the need to cover future investment and so on.  Its actual rate of profit would fall below the average, encouraging capital to move away from that activity, to some other, and so causing supply to decline, and prices to rise, so as to restore average profit.

That is particularly the case given that, as part of the need to move towards electric vehicles and so on, large-scale investment in charging networks and so on are going to be required, and it will be such energy distributors that already are, and will be, the ones involved in providing it. Now, of course, there is an alternative to that, which is the state could nationalise all such companies, but that is something Starmer is steering a million miles from, and would involve huge amounts of borrowing by the state, then, for such investment. And, of course, if the state did take over such companies, any windfall tax would be a tax on its own profits!

But, the same thing applies to energy producers in the North Sea. Such companies can themselves simply register in some other country, and, if Britain proposed a windfall tax on their profits, realised in sales to Britain, they could simply choose to sell their output to some other country, or into the global spot market, where no such tax/import duty was levied. Britain could, as other oil states do, respond by imposing a rent, but, again, in conditions where you are seeking to increase your gas and oil production so as to support your boycott of Russian oil and gas, that seems a short-sighted move, given that North Sea production is both reaching its final stages, and is some of the most costliest production in the world. Differential rents are only possible on the more fertile production, otherwise the rate of profit falls below the average, and producers move to more profitable/fertile locations.

All of this can be traced back to the idiocy of the NATO economic war against Russia and China. Such economic wars, as well as being the forerunner of actual shooting wars, always impact on the interests of workers. Sanctions, be they those imposed on South Africa, on Israel, or now on Russia/China, never achieve their stated aims, and always impact on workers rather than on those they are nominally stated to be aimed at. Sanctions on Russian oil and gas has simply boosted Russian oil and gas revenues, and filled the coffers of Putin's treasury, raised the value of the Rouble, whilst imposing misery on tens of millions of workers across Europe facing massive energy price rises, and actual blackouts, whilst causing famines in parts of the globe, as not only have they led to an inability to sell Russian grain, but also have massively increased the price of fertiliser.

And, examination of trade flows shows that what always happens has happened again. The oil and most of the gas that Europe boycotted, simply got sold elsewhere at higher prices, and some of it, actually, into Europe itself. It looks as though, China, whose consumption of oil has declined, as it has deliberately slowed its economy via lockdowns, has continued to buy large amounts of Russian oil, which it then turned into refined product, which it then sold into Europe, but now at much higher prices!

But, the other elements of these plans, put forward by Truss and Starmer, whilst unobjectionable in themselves, are irrelevant to the current situation. The same is true of most of the proposals of the EU, which have no chance of implementation inside a decade. Of course, encouraging further production in the North Sea, or from fracking may increase supply, but its not going to produce significant additional supplies for at least a few years, which does not help with an energy crisis this year. The same is true of increased coal production, and its use alongside nuclear for electricity generation.  The same applies to policies to insulate homes, to provide solar panels and so on. Not only do all these take years to produce results, but they imply huge immediate costs, which, if financed by the state, involves even more borrowing, causing interest rates to spike higher still.

And, those higher interest rates pose further problems for the Tories. Over the last 40 years, as well as the increased social weight of the petty-bourgeoisie, the Tories relied on a wider social layer of elderly home-owners who saw the nominal price of their homes rising year on year, giving the illusion that they were becoming wealthier, even as that same process impoverished their children, and made home ownership impossible for them, as well as making it harder and harder for themselves to move into better houses. That delusion was based on the general inflation of asset prices that came from initial falls in interest rates, resulting from a huge rise in the rate and mass of profits in the 1980's, and early 90's, and was subsequently sustained by the actions of central banks.

Mortgage rates have trebled in recent months. Zoopla has made calculations based on mortgage rates at 4%. At that level, Zoopla says, the average first-time buyer, outside London, will need £12,250 additional income to be able to buy a house than they did last year; in London it’s £35,000. But, with interest rates rising at current levels, 4% mortgages look cheap! As I have set out before, its not these rates themselves that lead to house prices crashing. Higher interest rates lead to falling asset prices, and that plays a part, because it affects land prices, and so new build costs, but the main point is that, the amount that buyers can afford to offer, falls significantly, as rates rise. Its not that existing borrowers can't afford to pay their mortgage and become forced sellers – though that does happen, and happened on a large scale in the early 90's – but simply that the houses that get sold, get sold at much lower prices, and the prices of all houses, are then marked down along with them.

So, not only will the Tories see their small business, petty-bourgeois base get hammered, but, as interest rates rise, all of its elderly, home owning supporters will see the price of their houses crash by 40, 50, 60 or 70%, and possibly more, certainly in real terms.

Truss's plan will not prevent energy prices rising, for which an end to NATO sanctions, and attempts to boycott Russian oil and gas supplies is required. The costs of the subsidies suggested will cause UK borrowing to soar unsustainably, causing interest rates to rise to levels that will eviscerate the zombie companies, and crash asset prices, including the prices of the homes of elderly Tory voters, and attempts by the Tories to try to save themselves, electorally, by ever increasing and ever widening measures to bail-out one section of society after another, will simply lead to them bankrupting the country, a country that already, with Brexit, and the other idiocies imposed upon it, looks more and more, not like Singapore on Thames, but a rapidly declining banana monarchy.

High Energy Prices Could Be Ended Overnight

The world, and Europe in particular, is currently obsessed about high energy prices. But, those high energy prices, and their effects on European economies, have been artificially created by the actions of EU governments, under pressure from US imperialism, and its economic war against Russia and China. There is no economic basis for high energy prices, because there is actually a global surplus of cheap energy over supply, as negative oil prices, of -$37 a barrel in April 2020, demonstrated. There is also plenty of cheap gas, and huge amounts of it were due to be pumped into the EU via the new Nordstream 2 pipeline from Russia, until US imperialism pressured Germany to cancel it. There is no shortage of cheap energy, no reason for consumers and business to be paying astronomical prices for it, or for consumers and business in Europe to be facing blackouts over Winter. Cheap and plentiful supplies could resume tomorrow if Germany would simply decide to open Nordstream 2, and the EU agreed to pay for its energy supplies from Russia in Roubles.

Energy prices, like other primary product prices soared after the commencement of the new long wave uptrend in 1999. As with all such long wave cycles, it prompted a massive increase in investment in exploration and development of new mines and so on, as Marx describes in his long wave analysis in Theories of Surplus Value, Chapter 9. It also saw investment in new technologies to extract and utilise energy more efficiently, such as with fracking and so on. The US became a large exporter of energy on the basis of it. When all of this investment led to new supplies from, generally, more fertile sources of supply, as Marx describes, not only did this additional supply reduce market prices that had been elevated, as demand had exceeded supply, it also reduced the price of production of all these primary products, including energy, causing their prices to fall dramatically, in 2014. As I wrote at that time, given all of this additional lower cost production, at the same time that energy was being used more efficiently, and the use of oil was being phased out in favour of renewable energy, electric vehicles and so on, it was unlikely that oil would again rise above $100 a barrel, in 2014 Dollars.

And, that remains true. Even the current artificial increase in oil prices, which will be temporary, has barely raised the price above $100 in 2014 Dollars, given the fall in the value of the Dollar, in the intervening 8 years. But, even that price, as described, is artificially high, and entirely due to the decision of EU governments to boycott Russian oil, as Ed Morse described a while ago, in this interview with Bloomberg.

As Morse describes, it was the decision of Europe, under pressure from US imperialism to boycott Russian Urals oil that caused them to have to look for alternative supplies, which they could only get from the US. That US oil was much more expensive, and, as US oil companies then shipped oil to Europe, at these higher prices, it reduced US supplies causing US gasoline prices to rise sharply. That immediately, began to hit the poll ratings of Biden and the Democrats, whose position was already weak, given the appalling performance of Biden and the Democrats following his election. It caused Biden to open the spigots on the US Strategic Reserve to try to increase supplies and lower prices, as well as going on his knees to the butchers of Saudi Arabia, pleading for assistance.

In fact, across the West, social-democracy has been forced into increasing contradictions, as it has pursued its imperialist ambitions in its economic war against Russia and China, as I predicted would be the case, some time ago. The US Democrats look certain to lose the Senate, and possibly the House, whilst Biden's standing, like that of Macron before, has collapsed. Boris Johnson fell, before Putin, and now looks set to be replaced by an even more right-wing, petty-bourgeois nationalist. Macron scraped though in France, but with massive active abstentions, and then lost control of the Assembly. In Germany, Scholz won a majority, but as with Biden and Macron, has now seen his popularity crushed, with the Social-Democrats being hammered in recent polls, as Germany sees its energy prices rocket, and the potential for its economy to be crushed come the Winter. German producer prices are rising at over 37% a year!! That is unsustainable.

Why did Europe inflict this damage on itself? There are several reasons, much as with the reasons as to why it inflicted the damage of lockdowns on itself, unnecessarily. One reason is hubris, and belief in its own propaganda. In the 1980's, NATO destroyed a collapsing USSR, by, on the one hand, forcing the USSR to try to spend money it did not have competing with expanding NATO arms programmes, as well as having bogged it down in Afghanistan, where NATO provided Osama Bin Laden and the Mujaheddin with lots of advanced weapons, and, on the other hand, undermining the soviet economy, which had become reliant on oil exports, in a climate of high oil prices, by pressing its Gulf allies to increase cheap oil supplies. It thought it could do something similar again.

But, this is not the 1980's, and Ukraine is not Afghanistan. Already, in 2021, as global economies opened up after the lockdowns of 2020, the masses of liquidity that central banks had pumped into circulation, to finance furlough schemes etc., flooded out into consumption, and as firms ramped up production, and people began to travel, money demand for energy rose sharply. With supply bottlenecks, due to the continued effects of lockdowns, oil prices rose sharply, long before any Russian invasion of Ukraine. When also in 2021, NATO began to implement sanctions against Russia, to try to limit its exports, and so its earnings, it again found that this was not the 1980's. Now, there is China and India, both of whom were prepared to buy Russian oil and gas, where Europe tried to boycott it. Its why NATO is now trying to limit the price that Russia can get for its oil and gas exports, which again will not work.

For 40 years, US and NATO imperialism got used to the idea that it could stride the world unchallenged, and send in its troops, be it Britain to the Falklands, the US to Grenada, and then to Serbia, Afghanistan, Iraq, Libya, and Syria, not to mention all of its covert operations using special forces, intelligence services and proxies. It faces a different world, in what some have referred to as the Thucydides Trap. Whatever criticisms there may be of that hypothesis, it certainly appears to be the case that the US is concerned about growing Chinese influence, not only in the Pacific, but also its economic relations in Africa and Latin America, though China also has extensive direct investments in Europe too, where its involved in many large scale infrastructure projects.

In fact, the history of US and British imperialism in actual military conflicts was not that outstanding even in the 20th century. In WWII, the defeat of Germany was almost entirely down to the role of the USSR after 1941. NATO was fought to a standstill in Korea, the US was defeated in Vietnam, and later in Afghanistan and Iraq. In Libya, its involvement led to a failed state, and that would likely have been the result in Syria were it not for the involvement of Russia and Iran. Britain only just won in the Falklands, being on the verge of running out of ammunition, and certainly would lose such a war today, particularly as, following Brexit, there is greater support for Argentina within Europe, in Spain and so on. Yet, we hear Chief Army Warrant Officer, Paul Carney, telling British military families to prepare for their loved ones being sent imminently to fight and die in Ukraine against Russia!

Of course, given the extent that Starmer has wrapped himself in the flag of petty-bourgeois nationalism, and is flanked by the ranks of petty-bourgeois, nationalists and liberals from the so called Left that have collapsed into social-imperialism, its no wonder they feel emboldened to consider such actions that would inevitably lead to nuclear war and the destruction of mankind.

One reason the EU put itself in this mess, then, is that it thought that sanctions against Russia, along with large amounts of weapons sent to Ukraine, whose population would be asked to fight to the last man, on NATO's behalf, supported by NATO covert operations, would quickly lead to Russia backing down. It didn't. They also seem to have believed their own propaganda.

Had Russia actually intended to try to occupy the whole of Ukraine as NATO and Zelensky claimed, it would indeed have bogged itself down, and been destroyed. But, it never had that intention. Russia knew such a venture would be suicidal, and was, in any case, unnecessary. It only ever needed to secure the Donbas, and, if possible, the Southern coastal areas. The fact that it only ever mobilised sufficient forces for that, and less than were mobilised by Ukraine, is evidence of that fact. It followed the same course it had previously done in Abkhazia and South Ossetia, itself following the same tactics, and using the same arguments as used by NATO in Kosovo.

The fact that NATO's strategy is in tatters was shown by the fact that it quickly reversed its propaganda, earlier in the year, within a matter of days of claiming that Russia was on the verge of defeat, and Putin was about to be toppled! As Russia has simply settled in to the Donbas, and Southern Ukraine, consolidating its position, as it previously did in Abkhazia, South Ossetia and Crimea, the chances of its defeat at the hands of Ukraine, even with the massive amounts of advanced weaponry provided, looks increasingly remote. Indeed, all of those further advanced weapons – which in large part Russia can take out with its bombers and missiles, even before they are deployed – is evidence of the fact that its NATO that has got itself bogged down, at least as much as Russia. The attacks on Crimea, and the recent car bombing of Darya Dugina were almost certainly undertaken with the assistance of NATO special forces, as acts of desperation.

Of course, this does not matter to US imperialism. Its economy is not going to be thrown into recession as a result of energy blackouts. It sells higher priced energy to Europe. Moreover, that is beneficial to US imperialism, because although China is a rising power, it is the EU that continues to be the world's largest economy, and main competitor to US imperialism. Having EU imperialism damage itself in this way, is highly beneficial to US imperialism, rather like SPECTRE, in From Russia With Love, having two of its opponents taking lumps out of each other. The EU adopted its policy of self-inflicted injury, under pressure from US imperialism, no doubt because it thought that it would be over long before it faced the potential of energy blackouts over Winter, but its unlikely that its going to be able to persist with its attempts to boycott Russian gas, even if it finds replacements for Russian oil, as the consequences of that play out in the coming months.

Another reason it adopted this strategy is that, as all of the liquidity pumped out during lockdowns led to inflation, and as economic activity and employment soared, so labour shortages were creating rising wages. The demand for capital, led to rising interest rates, which meant that asset prices started to fall. The ruling class owns all its wealth in the form of these paper assets – fictitious capital, and in the last 30 years has seen its wealth and power reside in their continual appreciation, and capital gains. 

As with lockdowns, the way to avoid such rapid economic expansion, rising rates, and falling asset prices, is to physically limit it. The most obvious and blatant example of that is the actions of the Chinese state in using its zero-Covid policy to repeatedly slow economic activity, as it faces a collapse of its serial asset price bubbles, which it continues to try to inflate by further monetary injections, and which look set to still result in a financial collapse, combined with a period of hyper inflation.

A period of very high energy prices acted in the same way, because they drained household incomes, leaving little left over for additional consumption spending. But, that has failed too. Many households, as a result of furlough payments and so on, built up money reserves, which have been used as lockdowns have ended. So, consumption spending has continued at high levels though it has shifted from the “inside economy” to the “outside economy”. It is seen in the fact that, employment levels have continued to rise, as firms responding to this continued demand have had to employ additional labour. But, also, not only have labour shortages led to rising wages in various sectors, as well as a series of bonuses and recruitment and retention payments, but, as workers have sensed this stronger economic condition, they have also joined unions, and started industrial action to demand compensating wage rises. That again is something that has not happened for forty years, showing that this is not the 1980's.

Rather than high energy prices acting to slow consumer spending, it is just spurring higher wage demands, and industrial militancy. It means that, as consumer spending continues, firms will still need to expand, or lose market share, and that means they demand more capital, especially as they face higher prices for constant capital/energy, along with higher wages. It creates the tie-up of capital being manifest as lower GDP.  That means higher interest rates, and as central banks increase liquidity to enable firms to raise prices to cover these higher costs, so that feeds through into even more inflation, which then prompts the need for higher nominal bank rates, which will cause asset prices to fall further.

So, the strategy of imperialism, and the attempts of social-democracy to implement the same strategies it has used for the last 40 years, have failed, because this is not the 1980's, nor the 1970's. Germany is desperately seeking alternative energy supplies so as to continue its boycott of Russian gas. But, its own supplication to the Gulf Monarchies for supplies seems to have fallen on stony ground, and Norway, which has seen its Wealth Fund decimated, as asset prices have crashed, is looking to retain more of its own production, to meet its own requirements, rather than sending it to the rest of Europe. Germany, with its Green component of the government coalition, is looking to burn more coal, as well as returning to nuclear power, illustrating the increasing contradictions, resulting from NATO imperialism's economic war against Russia. The chances of finding adequate alternatives to last through Winter seem impossible to achieve. The threat of blackouts, used not only in Germany, is again intended to try to frighten workers, to create a climate of fear to promote saving rather than spending, and undermine workers' attempts to raise wages.

The lockdowns showed the extent to which the ruling class and its state are prepared to destroy the real economy, in order to hold down wages and the demand for capital, so as to reduce interest rates and inflate asset prices. So destroying the economy by closing it down in response to self-inflicted blackouts is not beyond the realms of possibility either. But, in conditions of rising militancy, its likely that workers across Europe will not sit idly by as their workplaces are shut, and energy to their homes is cut off, especially when they see that it is all totally unnecessary.

The high prices of energy, and the threat of blackouts could be removed today. All that is required is for Germany to open Nordstream 2, for the EU to agree to pay for oil and gas in Roubles, or alternatively to remove the sanctions on Russia, such as its exclusion from the SWIFT payments system, which make payments in Roubles necessary. But, social-democracy and the social imperialists of the Left appear more concerned to press ahead with their support for US imperialism and NATO's war against Russia than they are with the interests of European workers. It shows again the truth of the old mantra of international socialism – The Main Enemy Is At Home.

Biden Turns To More Dictators To Save His Skin

In the 1930's, when social-patriots argued that socialists should form a Popular Front with "democratic imperialism" to fight the greater evil of fascism, Trotsky pointed out that, for imperialism, democracy and fascism are simply two different masks that it adopts or discards according to whichever best met its needs at the time.  Imperialism/capitalism is not committed to democracy, and the wars it fights are never to replace fascism with democracy, which simply gives it a pretext.  Democratic capitalist regimes adopt Bonapartist and dictatorial measures, in the course of wars, and can go from democracy to fascism themselves during the course of wars, and of course, "democratic imperialism" allies with dictatorships and fascism itself to fight others.

NATO has the dictatorship of Erdogan, in Turkey as a permanent member; its members states have close relations with the brutal regime of Duterte in Indonesia, whose goods routinely murder political opponents; they have close economies relations, and military alliances with the feudal Gulf monarchies that stone women for adultery, behead opponents, as well as kidnapping journalists before dismembering them while they are still alive!  In the 1930's, as Trotsky pointed out, the same "democratic imperialism", they claimed it was fighting for freedom and democracy against Hitler and Mussolini, was at the same time, holding millions of colonial slaves captive, deprived of basic human rights.  In more recent times, this hypocrisy was summed up in the mantra used by imperialism, to justify its alliances with all sorts of unsavoury rulers, as "he may be a bastard, but he's our bastard."  Nothing has changed, when it comes to imperialism, and its wars, whether shooting wars or economic wars, as their starter for 10.

The economic war that the US has been waging against Russia and China, and at a lower level against the EU, which is its main competitor and real target, has blowback.  It increases costs, and in an inflationary environment, in which the vast oceans of liquidity - much of it in Dollars as global reserve currency - can simply be sucked into circulation, enabling those higher costs to be translated into higher prices, which then become second round higher costs, wages and so on, which then creates further rounds of inflation, that poses problems for central banks, as well as for states who see their own expenditures rise, meaning their borrowing rises, which puts upward pressure on interest rates, which then causes asset prices to crash.  Given that the global ruling class owns all its wealth in the form of these paper assets, much of it relating to US based paper assets, that is a significant problem.

The immediate problem facing Biden, however, is that his economic war against Russia has pushed up oil and gas prices phenomenally.  Back in 2014, describing the way, the normal process of the long wave was unfolding, as high primary product prices had driven a new round of exploration and development, I said that oil prices would never again go over $100 in 2014 prices.  In the last few days, they have hit $140 and could hit $200 by the end of the month.  But, that is entirely due to Biden's economic war against Russia, which has constricted the supply of oil on to global markets, artificially.  Given the increased capacity for oil production from new technologies, from fracking and so on, together with the more efficient use of oil, due to new technologies, and given that oil is being replaced as a source of energy production in power stations, and in vehicles, the argument that oil should not go above $100 remains valid.  Its current price is entirely down to Biden's economic war.

In the US, petrol prices have hit their highest level ever.  That is bad news in a country where people's views on "freedom", are inextricably linked to their ability to get into their gas guzzling cars, and drive anywhere they choose in the country, whenever they choose.  It is a problem in a country that depends upon goods being transported long distances by truck, and everyone can see, in an election year, that the problem is entirely one created by Biden and his economic war.  He's tried in typical bureaucratic manner to deal with it, in the past, by releasing oil from the US Strategic Reserve, but that barely touched the surface, and simply means storing up the problem for the future.

Now, Biden is responding by pleading with the dictators in Venezuela and Iran to come to the aid of the US economy, by pumping more oil and supplying it, to make up for the oil that the US is trying to stop flowing from Russia!  In other words, in order to implement an economic war (against Russia) whose pretext is the dictatorial nature of the regime and its invasion of Ukraine, Biden is turning to other dictators whose regimes the US has already imposed sanctions, with the promise that if they help him, those sanctions might be lessened.  If ever their was an example of the lunacy of the policy of "lesser-evilism" that might be it, though closely matched by the former US policy of dealing in secret with Iran, in order to raise funds to supply arms to the Contras in Nicragua. 

In terms of dealing with Iran, it is particularly hypocritical, given that one reason the US imposed sanctions on Iran was its role in military interventions in Syria, and other parts of the Middle-East.  So, it deals with Iran, promising to lessen its sanctions in part introduced because of its expansionism, in order to get lower oil prices for the US, that have been caused by Biden's economic war against Russia, taking part on the pretext of Russia's invasion of Ukraine!  But, more than that, however, you describe the kleptocratic regime of Putin, in Russia, it is one based upon capitalist production, and the rule of the bourgeoisie.  It is modernist in outlook.  But, the same cannot be said about the regime in Iran.  It is not modernist in outlook, but decidedly mediaevalist, based upon the clergy and landlords.  Yes, it has large-scale capitalist production, as its forced to do, in a world where such production dominates, but that simply illustrates the contradiction residing at the heart of the regime.  In terms of a class analysis of the state, Iran would have to be described as reactionary as against Russia, or any other bourgeois state.

Yet, Biden is prepared to deal with that reactionary state, and, thereby, to facilitate its survival, simply in order to obtain some very short term benefit, in reducing petrol prices in the US, whose current levels are likely to cause Democrat candidates to get slammed in this year's elections, opening the door once again to the Trump Party.  This is the deplorable state that social-democracy has sunk into, and unfortunately, significant sections of the Left have sunk along with it. 

Oil Price Goes Above $70

The price of a barrel of Brent Crude, today, went above $70.  It is another indication of rising global inflation, fuelled by oceans of liquidity that central banks have pumped into circulation over previous decades, and notably over the last year.  The previous liquidity injections were deliberate measures to inflate asset prices, and combined with fiscal austerity, to hold back economic growth, and so hold back increases in wages and interest rates, to the same end.  But, over the last year, the liquidity has been used to feed directly into consumers pockets as replacement incomes, as governments deliberately cratered economies with measures of lockout and lockdown.  The liquidity injections went along with huge fiscal stimulus into the economy, which itself brought an astronomical increase in debt, that will lead to sharply rising interest rates, and collapsing asset prices.

The rising price of oil is occurring, because all of that liquidity, and fiscal stimulus is now joining with the opening up of economies, as the lockouts and lockdowns are lifted.  Demand would have increased on that basis anyway, but now it is put on steroids by all of the liquidity, and fiscal stimulus that has been given to consumers, which has built up as a wall of cash waiting to be spent.  Households reduced their debt levels, in conditions where they were given these cash injections but has reduced opportunities to spend, but the consequence of that, is likely to be that as they now find themselves able to spend again, they will quickly run up those debt levels to at least their previous levels.  As they see inflation rising by the week, they are even more likely to want to buy now and pay later, so as to avoid having to buy at higher prices down the road.

Oil prices were particularly constrained because government imposed lockouts and lockdowns meant that not only car travel, but air travel was severely restricted, thereby reducing global demand for oil significantly.  But, OPEC plus Russia, were able to join together to restrict supply so as to prevent the oil price falling too far.  Now, demand is rising sharply, pushing the price up with it, even though OPEC+ are now likely to increase supply, and Iran is likely to bring additional supplies to market.  But, these measures, are only likely to prevent the price rising too fast, as global demand increases again.  As I wrote several years ago, the price is not likely to ever go above $100 (2015 Dollars), because although global demand is likely to continue to rise, the increase in demand will be limited as the world moves from fossil fuels to alternative energy, for example, the rapid replacement of petrol engine with electric, and because new supplies of oil, such as from shale, put a cap on the price.

Oil Prices 1960-2021

But, $100 still represents nearly 50% more on the price from here.  A move upwards from $70 to $80 looks quite possible in the coming months.  Oil still plays into large areas of the economy, not just in terms of transport costs that affect the prices of all commodities, but also in the production of petrochemicals, plastics, fertilisers and so on.  The increases in consumer price inflation over recent weeks, besides being understated, were also subdued because of lower energy prices in the period, but now that is reversing too, giving a further boost to costs that firms will pass on, given that all of the excess liquidity has provided a boost to monetary demand, giving them headroom to raise prices.  As central banks continue to pump liquidity into economies, and will do so so that firms can continue to raise prices, so as to protect their profit margins, the basis of the kind of price-wage spiral of the 1970's is again being created, but this time in the even more febrile conditions of a strongly growing global economy, bursting out of the hibernation of the long wave cycle that the measures taken after 2010 had placed it in.

That means that the inflation is likely to rise faster, and become entrenched far more readily than it did in the 1970's.  Oil is just one indication of that.

We Will Never See $100 Oil Again

Back in 2014 , I predicted that oil prices would spike down to $25 a barrel. They actually fell to $26 a barrel. I predicted that they would be limited in their recovery, because there was a lot of excess supply to absorb, and because, once prices rose to around $50-60 per barrel, large amounts of US shale oil would again come into the market, increasing supply and depressing prices. Again that was what happened. When prices spiked down to $25 a barrel, shale oil producers shut down rigs, but as prices steadily rose back above $40, some of the more efficient shale producers came back on stream. The shale producers also found ways of reducing their own production costs. I argued that oil prices would rise to a range between $40-$70, a barrel by the end of 2016, with a long run price of production around $80 per barrel. In fact, I now doubt we will see any prolonged period of oil prices above $80, and we will never see $100 oil (in 2017 Dollars) again.

In the last year, as I had predicted, oil prices did climb steadily higher, staying sustainably above $40 per barrel. But, $40 per barrel is crucifying for those oil states dependent on oil rents for their economies. Saudi Arabia, is probably the lowest cost oil producer. It can make profit on oil even at around $7-10 per barrel. However, the Saudi state requires oil at around $100 per barrel, in order to obtain the rents and taxes required to cover its state expenditure. Even with oil at prices around $50-60 per barrel, Saudi Arabia has gone from being a major source of loanable money-capital into global capital markets, to becoming a source of demand for loanable money-capital, in those markets. It has issued sovereign bonds to raise money to cover state spending, and it is selling off hundreds of billions of Dollars of shares in Saudi Aramco, to raise money to cover its budget deficit.

The same continued period of low oil prices has caused similar problems for the Norwegian sovereign wealth fund, which relied on North Sea oil and gas revenues. Russia has suffered from the same causes, and Venezuela which based its economic polices on high oil prices, rather than developing and diversifying its production, has suffered catastrophically, thereby undermining the bourgeois nationalist regime of Maduro. Not surprisingly, it has been those low oil prices that have prompted Russia to join with OPEC producers in setting output limits, so as to try to rebalance global markets, and lift the market price of oil. It is not that global oil demand has been falling. There is not a problem of underconsumption. Global oil demand has continued to rise by around 2% p.a. The crisis is a crisis of overproduction, as years of high prices encouraged exploration and development of new oil fields, along with the development of new technologies, such as fracking, to be able to extract greater quantities of oil.

But, that will not be the case in coming years. Where a few years ago, the talk was of “Peak Oil”, meaning that the potential to increase annual oil production had reached its limits, now it is more likely that we are near a point of peak oil consumption. Its not that demands for environmentally friendly energy production will have created that condition, but that alternative forms of energy production will simply have become more efficient, and lower cost. Some years ago, I reported on the comments of legendary USA oil man, T. Boone Pickens, who was campaigning for US truck and bus producers, to convert engines to LPG. The US had lots of gas, he argued, as shale gas production increased, and gas prices fell by around 80%, and that meant the cost of conversion would be quickly recovered, and the US dependence on Gulf oil producers would be removed.

In fact, there has been no real move to undertake such conversion, but there has been a shift in US energy production away from the use of oil to the use of gas, in power stations. That is one reason, the US was able to quickly reduce its carbon emissions. But, another reason has been that the US has also developed alternative energy production on a significant scale, not just in wind-power, but also in solar, where the development of technology has year on year reduced the cost of producing solar cells, and increased their efficiency. However much Trump seeks to reintroduce coal production in the US, he is fighting a losing battle, because US coal is losing out to US alternative energy producers, not to foreign energy producers. It is losing out, because these alternative energy sources are not just cleaner, but they are increasingly cheaper and more efficient.

In discussing, the diesel emissions scandal, that hit VW in 2015, I also pointed out that part of the reason for VW, and as we now know other European diesel engine producers spending money on trying to fiddle the emissions data was because they have spent decades investing in diesel engine production, and very little on the development of electric motor and battery powered cars, compared to Japanese producers, or US producers such as Tesla. I was recently looking at buying a hybrid car, which is the closest that European producers have come to moving towards electric cars. I was shocked at how bad they actually are, in terms of efficiency, because, of course, they end up falling between two stools. The range of just the electric battery is only around 30 miles, whilst, because they have to carry around an electric motor and batteries, as well as a conventional engine and fuel tank, they handle badly, and suffer higher fuel consumption, averaging only around 30 mpg when using the internal combustion engine. A Tesla, by comparison, can go between 350-400 miles on a full charge, and the cost of charging the battery is only around £3.

The German and French governments have said that they will ban the sale of internal combustion engined cars by 2040. That means they know that car producers will actually have stopped such production long before then. Volvo, now owned by the Chinese Geely Group, has said it will not produce any new solely petrol or diesel engined cars after 2020. China is now investing heavily in new battery technologies.  That still leaves Volvo the option of continuing production of its existing ranges, and of producing hybrids, after 2020. Other producers have been moving in a similar way, but a move directly from internal combustion to electric now seems to be the most likely transition. Its why BMW have only committed to building the existing body shell of the Mini at Cowley, whilst focussing on the development of their battery technology, and electric motor technology in Germany, If you are only going to travel short distances, and so use only the electric motor of a hybrid, you may as well just have an electric and charge it at the end of each short journey, and if you do longer journeys, the lower fuel efficiency of a hybrid makes a conventional engine a better bet.

According to one industry source recently, battery technology is developing at around 30% p.a. in terms of efficiency and cost, so that, by 2020, an electrically powered car will be cheaper to buy than a petrol/diesel engined car. The main problem at the moment is the lack of charging points, but again, one provider of fast charging service stations is already offering a full charge in around 15 minutes. An Israeli company has also been working on a system whereby batteries can be simply dropped out and replaced in a matter of seconds. Other options include the potential for charging cars while they are on the move from underground power loops, via wireless transmission, in the same way that mobile phones can now be charged, and of developing actual solar cells built into roads.

The potential to roll out an extensive charging network at existing service stations etc. could be done in fairly short order, if the will were there to do it, and at that point, electric cars will take off, spelling the death of the internal combustion engine, and thereby decimating future demand for oil. That appears now to be only 5-10 years into the future, and it is unlikely that oil demand from other sources will rise sufficiently to soak up the existing levels of supply, so as to push oil prices higher. As demand contracts, or at first fails to rise by historic averages, supply from the more expensive fields will become unprofitable and be shut down. That means North Sea Oil, which is only profitable at prices around $60 per barrel will close down. As the more expensive oilfields are removed, so that supply comes from the more efficient fields, then, as Marx describes in his analysis of primary product prices of production, market values, and rents, the market value of oil will fall, and the rents obtained from oil production will also thereby fall.

Its not just the imminent move to electric cars that is at hand. Over recent years we have seen the development of a sharing economy, particularly in relation to cars. The development of the Internet of things, and of mobile phone technology, means that alongside the development of driverless vehicles, the need to own a car, for many people, will become redundant. My son was recently involved in making a video for the Chinese company that produce Mobikes, which have been rolled out in Manchester. But, already there are companies offering a similar service with electrically powered scooters. The logical step, with driverless electric vehicles is to enable people to summon one via their smart phone, whenever, and wherever it is required, and to leave it when they have reached their destination. That would make vehicle usage enormously more efficient, given that today, most cars stand in one place for the vast majority of the day.

And, last week also saw the first successful test of the hyperloop in the US, another investment in real capital that has been supported by Elon Musk.  The hyper loop, which uses the same technology that some of us remember from our childhood that sent messages in department stores via vacuum tubes, offers the potential of travel, over long distances, at near supersonic speeds. It is another example, of the vast areas of new products and services that technology has opened up, and the potential, thereby of huge markets, and profits when, like Musk, other capitalists put money to work in actual capital, rather than in simply financial speculation on stock, bond and property markets.

As I wrote back in 2014/15, as oil prices fall, and the huge oil rents of the Gulf states and other large oil producers disappear, that will also remove a large element of the revenues that have been fuelling that financial speculation. Falling asset prices will create a big incentive for others to follow Musk in turning once more to a search for profits, rather than paper capital gains. The world will change greatly in the next five years.

Oil and Equities

At the end of 2014, and start of 2015, I set out, in a series of posts, the causes of the slump in oil prices, and the prices of other primary products, and the effects these price falls would have on the global economy, and on financial markets. Despite all of the media punditry claiming that these price falls are the consequence of slowing global growth causing a fall in demand, the fact is that the global demand for and consumption of oil has continued to rise by around 2% a year. The same is true for most other primary products such as copper. Even where demand for some of these primary products has now fallen, the reduction in demand is slight compared to the fall in price. The price falls are not the result of falling demand, but of massively increased supply, as past investment, spurred by the high prices generated after 1999, led to overproduction.

In those posts, I described the way the fall in oil prices would be good for the global economy, but very bad for financial markets. Again, if you listened to the various financial and media pundits, such a dichotomy would seem incomprehensible, because they make no distinction between the two. As John Weeks, wrote recently,

“The pervasive control of the UK economy reveals itself in what passes as economic news, more correctly named “speculation news”. Since the beginning of 2016 the media’s reporting of the movement in stock markets has reached the point of obsession. Each day’s business news headlines focus on whether these market indices fall or rise. Commentators present a fall as a harbinger of disaster, with a rise provoking optimistic cheers that we escaped disaster.” 

And yet, as I have described previously, there is an inverse relation between economic growth and financial markets. In the periods of long economic upswing, financial markets and financial assets tend to rise more slowly, whilst during the long periods of slower economic growth, financial markets rise more rapidly. Between 1950 and 1980, US GDP rose by 850%, whilst the Dow Jones Index rose by 312%. But, between 1980 and 2000, the US economy grew by just 260% whilst the Dow Jones rose by an astronomical 1300%! A similar rise could be seen for the S&P 500 Index, and for the stock market indices of other countries. 

The reason there is this inverse relation is quite simple. Typically, during periods of long wave boom, available money-capital, realised from a growing mass of profit, gets invested in real productive-capital, causing the economy to grow faster. Although, as Marx described in relation to the long wave boom that began around 1843, this mass of profit may be so great that it can't all be invested productively, immediately, and so leads to money-capital pressing down on interest rates, and fuelling speculation, these bubbles burst, allowing the economic growth to continue. As this economic growth continues, the demand for money-capital begins to outstrip the supply – which may be due to the demand rising more quickly, or the supply falling, or a combination of the two.

In either case, during such periods, typically a greater proportion of realised profits will go into productive investment. As the demand for this money-capital begins to outstrip the supply, the average rate of interest begins to rise, and this causes the prices of fictitious capital to fall, as a consequence of the process of capitalisation. That consequence is even more apparent during the Autumn phase of the long wave cycle. During the earlier part of that phase, in particular, rising wages, as labour supplies become tight, and productivity falls, cause profits to get squeezed. 

As Marx describes in Capital III, examining the relation of the interest rate cycle to the economic cycle, interest rates during this period reach their peak, because businesses demand money-capital now not to invest in additional capacity, but simply to be able to stay afloat, to pay their bills. As Marx describes, the lenders of money-capital are not at all concerned that those who borrow their money-capital do so to actually use it as capital. It is all the same to them, whether it is used productively or to finance a lavish lifestyle, or simply for a business to pay its bills. For the owner of the money-capital, they seek to obtain its market price, the average rate of interest, whatever the borrower's requirement might be.

And, that can be seen today. A country like Saudi Arabia, for the last thirty years and more has been a huge supplier of money-capital into the global money markets. It was able to do so, because high oil prices provided it with rent from surplus profits. Very little of Saudi's oil revenues went into productive investment. A large part went into keeping its population pacified, and the rest went into financial speculation, helping to boost the stock markets in London and New York, as well as making available the money-capital to buy up their government bonds, and provide money-capital to increase the growing mass of credit that kept the mass of household debt in the UK and US soaring.

Saudi and the other Gulf oil producers were not alone. Other oil states, like Norway, had huge excesses of revenues from oil rents, which they pumped into the development of sovereign wealth funds that bought up the existing stock of shares and bonds in global financial markets, pushing their prices ever higher. As the prices of other primary products soared after 1999, when the new long wave boom massively increased the demand for those products, countries supplying those products also found themselves with loanable money-capital available to speculate in global financial markets. One of the most visible, in that regard has been the influx of Russian oligarch's into London. And finally, of course, there was China whose vast treasure chest of loanable money-capital came not from such rents, but from its ever increasing volume of exports.

Over the last few weeks, there has been an almost perfect correlation between oil prices, and stock markets. Whenever, oil prices have fallen, stock markets have dropped, and vice versa. One reason for that is that in the US and UK, the stock markets are heavily weighted in favour of oil companies. The UK FTSE is dominated by large oil and mining companies. The Dow Jones is also heavily influenced by the US oil giants, and with the growth of US oil production due to shale, the sharp drop in oil prices has badly affected those producers, as well as the suppliers of capital equipment to them. It also means that a very large amount of junk bonds, used to finance those shale producers, are now in danger of default, which could have a cascading effect through debt markets. In fact, there were some suggestions last week that even some of the large oil companies could now be facing problems covering the interest payments on their debt. At the same time, some of those companies have insisted that they will keep paying out the same level of dividends to shareholders, even if they have to borrow money to do so!

The falls in stock markets are then both a consequence of the direct effect on oil companies, which have a large weighting in some of these stock markets, but also of the fact that what were once providers of huge sums of loanable money-capital, have overnight become borrowers. That has the effect of pushing up global interest rates, which then, via the process of capitalisation, causes the prices of these financial assets to drop.

At the same time, the beneficial effects from the drop in oil and other primary product prices are not so immediately apparent. The fall in these prices acts to both release capital, and to raise the rate of profit.

“Other conditions being equal, the rate of profit, therefore, falls and rises inversely to the price of raw material. This shows, among other things, how important the low price of raw material is for industrial countries, even if fluctuations in the price of raw materials are not accompanied by variations in the sales sphere of the product, and thus quite aside from the relation of demand to supply.”

(Capital III, Chapter 6) 

When the drop in oil prices began in 2014, that coincided with the onset of the three year cyclical slowdown, which began at the end of 2014, and ran through to the end of 2015, which thereby disguised some of the effect of the oil price falls, but also, with huge amounts of household debt, it is not surprising, as I suggested more than a year ago, that consumers would use some of the reduction in their necessary spending to reduce those debts. In the longer term, that is still beneficial, because as consumers reduce their debt, they also reduce their future debt servicing costs, which leaves them income available for actually buying commodities. As Marx says above, however, even without this effect in increasing demand, the lower cost of raw materials for the vast majority of businesses, leads to a rise in the average rate of profit.

But, as I suggested, nearly three years ago, the conjunctural changes we are seeing in the global economy currently, have other consequences. For the last four years, the US economy has been creating nearly twice as many new jobs as are required to absorb the increase in its working population. That has caused its unemployment rate now to fall below 5%. One of the consequences of this has been mentioned above, which is that as supplies of labour-power get used up, wages are pushed higher, and profits are squeezed, and that is exacerbated as productivity growth is slowed.

“Given the necessary means of production, i.e. , a sufficient accumulation of capital, the creation of surplus-value is only limited by the labouring population if the rate of surplus-value, i.e. , the intensity of exploitation, is given; and no other limit but the intensity of exploitation if the labouring population is given.”

(Capital III, Chapter 15)

The consequence of these structural changes is that as wages rise, as a proportion of national income – both because more workers are employed, and because wages rise – this leads to a corresponding change in the structure of the national product itself, as demand for wage goods rises.

“If the surplus wages were spent upon articles formerly not entering into the consumption of the working men, the real increase of their purchasing power would need no proof. Being, however, only derived from an advance of wages, that increase of their purchasing power must exactly correspond to the decrease of the purchasing power of the capitalists. The aggregate demand for commodities would, therefore, not increase, but the constituent parts of that demand would change. The increasing demand on the one side would be counterbalanced by the decreasing demand on the other side.”

(Value, Price and Profit, Chapter 2)

Although its true that a general sharp increase in the rate of profit may lead to a rise in capital investment, and vice versa, there is no mechanical relation between the two. For one thing profits may rise too quickly to be immediately accumulated in productive capital. Especially, as the minimum efficient technical size of investments continually rises, that becomes more so the case. In fact, its far more likely that any increase in profits after a period of large scale fixed capital investment, will take the form not of further investment in fixed capital, but in additional circulating capital, i.e. additional materials, and labour-power to process it, because as Marx says, capital becomes very elastic in its ability to expand output without such additional investment in fixed capital. A look at the continued expansion of employment over the last few years, indicates precisely such an accumulation of circulating capital rather than fixed capital.

But, similarly, a fall in the rate of profit may not at all be a cause for a reduction in investment. For one thing, firms may invest to try to boost their profits either by improving their competitiveness, or simply in the hope of capturing a larger market share. That is particularly the case where demand may be rising. In discussing the theory of rent, Marx criticised Ricardo for the view that it is only when prices, and profits are rising that a cause for additional investment is provided. Marx points out that as population grows this leads automatically to a rise in demand, and so it is natural for additional capital to be accumulated to increase supply so as to meet it. Indeed, a general precept of every business is that it will need to continually increase its supply so as to meet the requirements of a growing market.

In conditions where employment and wages are growing – US hourly wages grew by 0.5% last month – this means an expansion of demand for wage goods, which individual capitals will have an incentive to meet. In the US, that may be particularly marked, because a large part of the rise in hourly wages appears due to the rise in the minimum wage. That means lower paid workers have more to spend, and the marginal propensity to consume increases at these lower income levels. But, last week has also seen proposals for new taxes on oil to pay for much needed spending on repairing and renewing US infrastructure. Whether these taxes are implemented or not, the fact remains that the US does need to spend money on its infrastructure, if US capital is to have an adequate framework within which to operate efficiently. Moreover, its not alone. Similar expenditure is required across Europe. The consequence is that increasing amounts of money-capital are required to cover such investment, and spending.

Once again, this means that the demand for money-capital rises relative to the supply, pushing interest rates higher, with a consequent depressing effect on capitalised asset prices. The financial and media pundits continue to talk about the current market sell-offs being a harbinger of recession ahead. In large part that is them talking their own book, attempting to convince central banks to keep providing the money drugs, in the hope of preventing bubbles from bursting. But, it also reflects the misunderstanding referred to above, which equates speculation with investment. As US economist Paul Samuelson, once wrote, “The US stock market has predicted nine of the last five US recessions!”

CNBC's, Steve Liesman, last week examined the record, and found that indeed that relation between bear markets and subsequent recessions was about right. Of course, as Marx explains there is no reason why a purely financial crisis should affect the real economy. It can, in fact, be beneficial. Its only if such a financial panic causes a general dislocation, as happened in 1847, and 2008, for example, that it need impact the real economy. In reality, it has been the role of central banks in continually pumping liquidity into markets to stop the collapse of asset price bubbles, and subsequently to reflate them, which has been a major drag on recoveries, because it has meant that money-capital has continued to flow into those financial assets, in search of guaranteed, fast and significant capital gains, rather than into productive investment.

But, in the end, as Marx describes, the economic laws will impose themselves. A lack of productive investment, as resources are diverted to speculation will simply lead to yields on financial assets getting smaller and smaller. We now have the ridiculous situation of negative interest rates, for example. The replacement of yield with speculative capital gain can also only go on for so long. In the UK, most clearly, the majority now cannot afford to buy a house, and many of those with houses cannot afford to move up to a better one. The majority of mortgages are going to Buy To Let Landlords, whose rental yields are also getting squeezed, as the prices they have to pay for properties gets pushed higher, as they compete against each other, whilst tenants are unable to pay higher rents, especially as Housing Benefit is restricted or withdrawn.

There comes a point at which buying a property nominally to rent, but really in the expectation of making a capital gain, is not a wise bet, because at some point, there are no bigger fools around to bid those prices higher, and at those points the prices tend to simply collapse. But, the same applies to stock and bond markets. The reality today, as it has been for the last two or three years, is that the real threat to financial markets comes not from a recession, but from stronger economic growth, as it pushes wages higher, squeezes profits, leads to an increased demand for capital, and pushes interest rates higher.